Equipment Cost Details

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Energy Sector Management Assistance Program

ESMAP Technical Paper 122/09

Study of Equipment Pricesin the Power Sector


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Energy Sector Management Assistance Program

ESMAP Technical Paper 122/09

Study of EquipmentPrices in thePower Sector

Dirk Pauschert


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Copyright 2009The International Bank for Reconstructionand Development/THE WORLD BANK GROUP1818 H Street, NWWashington, D.C. 20433, U.S.A.

All rights reserved

Produced in the United States of America.First Printing December 2009

ESMAP Reports are published to communicate the results of ESMAPs work to the development community.Some sources cited in this paper may be informal documents that are not readily available.

The ndings, interpretations, and conclusions expressed in this report are entirely those of the author(s) andshould not be attributed in any manner to the World Bank, or its afliated organizations, or to members of its board of executive directors or the countries they represent. The World Bank does not guarantee the accuracyof the data included in this publication and accepts no responsibility whatsoever for any consequence of theiruse. The boundaries, colors, denominations, other information shown on any map in this volume do not implyon the part of the World Bank Group any judgment on the legal status of any territory or the endorsement oracceptance of such boundaries.

The material in this publication is copyrighted. Requests for permission to reproduce portions of it should besent to the ESMAP manager at the address shown in the copyright notice. ESMAP encourages disseminationof its work and will normally give permission promptly and, when the reproduction is for noncommercialpurposes, without asking a fee.

The prices in the report are estimates and may not be an accurate reection of market prices, which may changedepending on the evolving manufacturer supply and market demand conditions for such equipment. Thereforethe report should not be used as a basis for bidding or bid evaluation. Papers in the ESMAP Technical Seriesare discussion documents, not nal project reports. They are subject to the same copyright as other ESMAPPublications.


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Abbreviations and Acronyms vii

Units of Measure ix

Executive Summary xiBackground xiStudy FindingsEscalation and Market Pricing xiStudy FindingsPlant Cost Estimates xiiiStudy FindingsGlobal Marketplace xiv

1. Project Approach Methodology 1

2. Price Escalation, Cost Factors, and Market Pricing 3Worldwide Growth and Its Inuence on Escalation from 2004 to 2007 3Projections of Escalation in the United States, India, and Romania 6Cost Increases Not Explained by Escalation Indexes 7Impacts of the International Marketplace 8Impact of Plant Size on Technology Cost 9

3. Assessment of Price Trends for Generation Plant Equipment 13Impacts of Increase in Heavy Construction Projects in the United States and Overseas 13U.S. Trends in Cost Indexes for Power Plant Equipment and Materials 15Trends in Escalation for Power Plant-Related Items in India and Romania 16Other Assessments and Items Related to Escalation 18Evolution of the International MarketplaceMajor Equipment Suppliers 19

4. Impact of Plant Size on Cost 23Impact of Size on Cost for Simple Cycle Gas Turbines 23Impact of Size on Cost for Gas Turbine/Combined Cycle 24Impact of Size on Cost for Wind Farms 27

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Contents


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CONTENTS

5. Cost Estimates for Power Plants in the United States, India, and Romania 29Gas Turbine Simple Cycle 29Gas Turbine Combined Cycle 35Coal-Fired Steam Plant 39Oil-Fired Steam Plant 45Natural Gas-Fired Steam Plant 47Diesel-Generator Plant 48Onshore Wind Farms 51Photovoltaic Array 56Solar Thermal Array 60

Annex 1. Design Basis 63Brief Descriptions of Major Generation Options 64Generation Plant Cost Estimates 65Cost Estimate Breakdown for the Generation Technologies 68Size Classication of Generation Plants 69Summary of Sizes for Generation Plant Cost Estimates 70Other Generation-Related Criteria 70

Annex 2. Cost Indexes from U.S. Bureau of Labor Statistics(Graphs of Cost Indexes for Equipment and Materials) 75

Cost Indexes for Power Plant Equipment and Materials in the United States 75

Annex 3. OEMs in Romania 87Coal-Fired Boilers 87Steam Turbines 90Combustion Turbines 92Stationary Diesel Engine Turbines 92

Annex 4. OEMs in India 95

List of Technical Reports 97Figures

2.1: Average Price of Crude Oil Worldwide 42.2: Effect of Size on Cost of Gas Turbine Combined Cycle Units 102.3: Effect of Size on Cost of Pulverized Coal-Fired Plants 113.1: Cost Indexes for 316 Stainless Steel, Nickel, and Chrome 194.1: Impact of Size on OEM Cost for Simple Cycle Units 234.2: Change in OEM Prices for Simple Cycle Aeroderivative Gas Turbine Units 244.3: Change in OEM Prices for Simple Cycle Heavy-Frame Gas Turbine Units 254.4: Impact of Size on OEM Costs for Combined Cycle Units 254.5: Change in OEM Prices for Combined Cycle Units 26

4.6: Installed Cost of Wind Projects as a Function of Project Size: U.S. Projects 20032006 275.1: Year-to-Year Change in Average Price of Heavy-Frame Simple Cycle Units 345.2: Year-to-Year Change in Average Price of Aero and Heavy Simple Cycle Units 345.3: Year-to-Year Change in Average Price of Combined Cycle Units 395.4: Prole of Worldwide Stationary Reciprocating Engine Sales 495.5: Manufacturing Experience and Average Turbine Size 525.6: Projections of Long-Term Trends in Wind Turbine Costs in Europe 565.7: Reported U.S. Wind Turbine Transaction Prices 57A2.1: Cost Index for Ready-Mix Concrete 76A2.2: Cost Index for Large Centrifugal Pumps 76

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Contents

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A2.3: Cost Index for Large Centrifugal Fans 77A2.4: Cost Index for Bulk Material Handling Conveyors 77A2.5: Cost Index for Pneumatic Conveyors 78A2.6: Cost Index for Crushing, Pulverizing, and Screening Machines 78A2.7: Cost Index for Integral Horsepower Motors 79

A2.8: Cost Index for Fabricated Steel Plates 79A2.9: Cost Index for Structural Steel 80A2.10: Cost Index for Carbon Steel Pipe and Tubing 80A2.11: Cost Index for Field Erected Steel Tanks 81A2.12: Cost Index for Heat Exchangers and Condensers 81A2.13: Cost Index for Fin-Tube Heat Exchangers 82A2.14: Cost Index for Industrial Mineral Wool 82A2.15: Cost Index for Refractories, Non-Clay 83A2.16: Cost Index for Power and Distribution Transformers 83A2.17: Cost Index for Electric Wire and Cable 84A2.18: Cost Index for Copper Wire and Cable 84A2.19: Cost Index for Industrial Process Control Instrument 85

TablesES1: Historical Average Annual Compound Escalation xiiES2: Projected Future Average Annual Compound Escalation xiiiES3: Class 5 Pricing Estimates for Selected Generation Technologies xiv2.1: Historical Average Annual Compound Escalation 52.2: Projected Average Annual Compound Escalation for Plant Equipment and Materials,

20082012 62.3: Estimated Costs of Major Equipment 122.4: Class 5 Plant Pricing Estimates for Generation Technologies 123.1: Average Annual Compound Escalation for Plant Equipment and MaterialsUnited States 153.2: Power Plant Equipment and Materials Included in the India and Romania Escalation Data 173.3: IndiaAverage Annual Compound Escalation for Plant Equipment and Materials 173.4: RomaniaAverage Annual Compound Escalation for Plant Equipment and Materials 185.1: 5-MW Simple Cycle PlantAeroderivative Gas Turbine 315.2: 25-MW Simple Cycle PlantAeroderivative Gas Turbine 325.3: 150-MW Simple Cycle PlantHeavy-Frame Gas Turbine 335.4: 140-MW Combined Cycle PlantHeavy-Frame Gas Turbine 375.5: 580-MW Combined Cycle PlantHeavy-Frame Gas Turbine 385.6: 300-MW Pulverized Coal Power PlantCosts for 1 300 MW Subcritical Pulverized

Coal-Fired Plant 415.7: 500-MW Pulverized Coal Power PlantCosts for 1 500 MW Subcritical Pulverized

Coal-Fired Plant 425.8: 800-MW Pulverized Coal Power PlantCosts for 1 800 MW Subcritical Pulverized

Coal-Fired Plant 435.9: 300-MW Oil-Fired Power PlantCosts for 1 300 MW Subcritical Oil-Fired Plant 465.10: 300-MW Natural Gas-Fired Power PlantCosts for 1 300 MW Subcritical Natural

Gas-Fired Plant 485.11: Diesel Engine Information 505.12: Total Plant Prices for Diesel Engine-Generator Plants in India, Romania,

and the United States 505.13: Wind FarmCost Estimate Summary, United States 545.14: Cost Estimate Summary per 1-MW Wind Turbine 100-MW Wind Farm in India,

Romania, and the United States 555.15: Cost Breakdown for a Small PV Grid-Connected System 595.16: Cost Estimate for a 5-MW Photovoltaic System in India, Romania, and the United States 59


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CONTENTS

A1.1: British to Metric Conversion Factors 63A1.2: Size Classications for Cost Estimate 70A1.3: Emission Standards or Guidelines 71A1.4: Emission Standards for Large Combustion Plant Directive (LCPD)Applicable

to Romania 71

A1.5: Anticipated Emission Control Processes 72A1.6: Romanian Coal AnalysisRomanian Lignite 72A1.7: Indian Coal AnalysisAustralian Coal 72A1.8: U.S. Coal AnalysisPowder River Basin (PRB) Subbituminous Coal 73A1.9: Cost and Site Criteria Applicable to Cost Estimates 73A4.1 Partial List of OEMs in India 95


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AACE American Association of Cost EngineersABMA American Boiler Manufacturers AssociationAC alternating currentACAR aluminum conductor with aluminum alloy reinforced strandsACF actual cubic feet

ACFM actual cubic feet per minuteACSR aluminum conductor with steel reinforced strandsAEP annual energy productionASTM American Society for Testing and Materials (now known as ASTM International)BLS Bureau of Labor StatisticsBtu/kWh British thermal units per kilowatt-hourBOP balance of plantC degrees CentigradeCF capacity factorCT combustion turbineDC direct currentDCSF dry standard cubic footEPA Environmental Protection AgencyESP electrostatic precipitatorEU European UnionF degrees FahrenheitFGD ue gas desulfurizationFOB at point of productionGDP gross domestic productGE General ElectricGT gas turbineGTCC gas turbine combined cycleGTW Gas Turbine World

GW gigawattg/kWh grams per kilowatt-hourHHV higher heating valueHP horsepowerHRSG heat recovery steam generatorHZ HertzI&C instruments and controlsID induced draftin. Hg inches of mercury

Abbreviationsand Acronyms


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STUDY OF EQUIPMENT PRICES IN THE POWER SECTOR

ISCCS integrated solar combined cycle systemISO international Standards Organization J jouleKcmil thousand circular milsKg kilogramkV kilovoltkW kilowattkWh kilowatt-hourLHV lower heating valueMCR maximum continuous ratingMils (measure) one-thousandth of one inchMils (monetary) one-thousandth of one dollarMg/Nm 3 milligrams per normal cubic meterMMBtu million British thermal unitsMPa megapascalMW megawattMWp peak megawatt outputNA not AvailableNETL National Energy Technology Laboratoryng/J nanograms per jouleNm3 normal cubic meterNO x nitrogen oxidesNSPS New Source Performance StandardsOEM original equipment manufacturerPC pulverized coalPPI Produce Price IndexPRB Powder River Basin Coal Wyoming

PTC production tax creditPV photovoltaicR&D research and developmentROW right-of-wayRS rupeesSCR selective catalytic reductionSO2 sulfur dioxideSS stainless steelST steam turbineSTG steam turbine-generatorSW southwestTBD to be determinedTCR total capital requirementTPC total plant cost (also known as total installed cost)TPY tons per yearUK United KingdomUS/USA United States of Americaw.g. water gaugeWp Watts peak


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F fahrenheitGW gigawattKg kilogramkV kilovoltkW kilowatt

kWh kilowatt-hourMW megawattRs rupeesUS$ U.S. dollar

Units of Measure


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BackgroundGlobal economic growth, particularly from2004 to 20071, has fueled an expansion in theconstruction of industrial, power plant, andmanufacturing facilities in the United Statesand a dramatic escalation in the constructionof these types of heavy construction projectsoverseas. In addition, the increase in demand foroil by rapidly growing countries such as Chinaand India and the falling value of the dollar hasresulted in an unprecedented rise in the priceof oil. This has significantly accelerated oilexploration and resulted in capacity-expansionprojects at existing oil reneries. The combinationof power plant, infrastructure, and oil-relatedprojects has resulted in signicant growth indemand for boilers, rotating equipment, piping,structural steel, concrete, electrical components,and electric wiring.

In the past four years, global demand hasled to substantial increases in equipment andmaterial prices in the power sector. This is mainlydue to signicant increases in the demand forraw materials and labor associated with themanufacture and fabrication of equipment. From2006 to 2008 alone, energy projects nanced by the World Bank experienced 3050 percent

increases above the original cost estimates,requiring additional nancing, a reduction inscope of the project, or schedule delays. Thesedelays are costly to the Banks clients becausethey depend on timely completion of projectsto meet growing demands for energy.

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Executive Summary

1 The work preceding the publishing of this report was completed in 2008. Internal, as well as external reviews were conducted throughthe end of 2009, prior to nal clearance by the author and the publishing unit. It is the intention of the author that you nd this materialinteresting and insightful.

Against this backdrop, this report wasdeveloped with the following objectives:

Identify the current costs of generationoptions;

Dene the most signicant contributors toprice increases;

Provide projections of future escalation rates;and

Identify the underlying factors driving thesignicant increase in project prices.

Understanding of these factors will allow theBank to better anticipate the price increases itcan expect in the near future.

Study FindingsEscalationand Market PricingTable 1 provides a summary of the historicalannual average compound escalation for specicpower plant-related equipment and materialsfor the United States, India, and Romania. Thetable shows two periods:

January 1996 through December 2003; and January 2004 through December 2007.

These periods roughly reflect the time before and the time after: (1) the signicantincrease in heavy construction projects; and(2) the accelerated increase in the price of oil.A comparison of the two time periods showsthat the spike in escalation is common to all


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of the power-plant-related equipment and

materials.Using the escalation rates from January 2004through December 2007 and calculating thecumulative increase, the most important driversof power plant cost have been:

Fabricated steel shapes: steel plates47 percent of the cost; structural steel36 percent; and steel pipe31 percent;

Centrifugal pumps20 percent; and Electrical items: copper wire69 percent;

transformers68 percent.

The tabulation in chapter 3 provides additionalcategories and further details on escalation ofequipment and materials.

Table 2 provides the projections of escalationfrom 2008 to 2012. The projected escalation ratesare lower than they were for the past three yearsdue to the slowdown in the U.S. economy. Thisslowdown is forecast to continue through 2010,and during this period the economy will be

characterized by reduced consumer spending,

impacting the import of overseas goods andservices into the United States. This in turn willtranslate into lower rates of escalation in theoverseas countries that supply the United States.

In addition to the escalation in the cost ofequipment and materials, increases in the costof craft labor are contributing to the overall priceincreases for constructing generating facilities inthe United States. It should be noted that in thelast four to ve years, labor has been escalatingat about 5 percent per year, compared to about3 percent per year prior to 2003. Proportionately,labor does not contribute as much to the plantcost increases as equipment and materials, sincelabor is typically responsible for only 3040percent of the total installed cost of power plants.

However, the escalation of equipment andmaterials costs is not the only contributor to thesignicant increases in power plant costs. Theother aspect responsible for price increases ismarket demand pricing. In other words, in the lastfew years the global market has been in a situation

Table ES1 Historical Average Annual Compound Escalation

Ranking Plant Equipment and MaterialsJan. 1996Dec. 2003,

% per yearJan. 2004Dec. 2007,

% per yearUnited States

Fabricated Steel Plates 0.3 10.1Steel Pipe and Tubing NA 7.0Centrifugal Pumps 2.0 4.7

Copper Wire and Cable 0.8 18.7Power and Distribution Transformers NA 13.8

IndiaFabricated Metal (Structural Steel/Plate) NA 7Steel Pipe and Tubing NA 6

Mechanical Equipment NA 6Electric Wire and Cable NA 20

Electric Equipment NA 7Romania

Fabricated Metal (Structural Steel/Plate) NA 7Steel Pipe and Tubing NA 5Mechanical Equipment NA 3

Source: U.S. Bureau of Labor Statistics Producers Price Indexes.

NANot available.


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xiii

Executive Summary

where demand for power plant equipment andservices (and infrastructure in general) has beenhigher than the manufacturing and engineeringrm capacity. Under these conditions, the pricingof equipment and services is often based on whatthe market will bear rather than on the actualcost of production plus industry prot margins.In response to the unprecedented demand,original equipment manufacturers (OEMs) arepricing equipment above the increase in costs ofraw materials and labor costs, and above theirtypical prot margins.

An important statement that supports this nding came in March 2008 from a large companythat produces mining equipment, when a companyspokesperson asserted Favorable mining fundamentalscontinue to drive order growth, while stretched leadtimes afford considerable pricing power.(Joy Global,Bloomberg.com, March 6, 2008)

In light of this nding, this study compared thecost of power plants without market demand to theactual costs incurred in constructing power plants.

The results indicate that owners are purchasingplants in a sellers market, where unprecedenteddemand has resulted in market price premiums inthe range of 15 percentage points above material,equipment, and labor escalation.

Study FindingsPlantCost EstimatesThe country-level generation technology costestimates were based on installations locatedin the United States, India, and Romania. TheUnited States was included as the benchmark.India was selected as representative of Asia and because it is second only to China in additionof new power plants and growth of grossdomestic product (GDP). Romania was selectedas representative of Eastern Europe.

The plant cost estimates are based on budgetquotes for major equipment from OEMs and aproject cost database of recent projects. Major

Table ES2 Projected Future Average Annual Compound Escalation

Plant Equipment and MaterialsProjected, 20082012,

% per yearUnited States

Fabricated Steel Plates 0 to 2Structural Steel 2 to 3Steel Pipe and Tubing 2 to 4

Centrifugal Fans 1 to 3Electric Wire and Cable 1 to 2

Power and Distribution Transformers 1 to 3IndiaFabricated Metal (Structural Steel and Plate) 6 to 8

Steel Pipe and Tubing 8 to 9Mechanical Equipment 3 to 4

Electric Wire and Cable 1 to 3Electric Equipment 2 to 4

RomaniaFabricated Metal (Structural Steel and Plate) 2 to 3Mechanical Equipment 2 to 3

Steel Pipe and Tubing 2 to 4

Source: URS Washington Division.Note: Values based on a variety of URS Washington Division in-house sources and analyses.


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equipment costs reect market pricing conditionsas of January 2008. In addition, piping, electrical,concrete, and all other items reect market pricing because they were based on the in-house biddatabases for actual recent projects. All plantcost estimates are based on grid-connectedconfigurations. Moreover, the equipment,structural steel, piping, concrete, labor, and otherplant items reect costs specic to the respectivecountries. Table 3 provides the total plant market- based pricing for selected generation technologies

in the United States, India, and Romania.A summary of total plant pricing for all ofthe study technologies is provided in Chapter 3.In addition, a complete list of the items includedin and excluded from the cost estimates for eachgeneration technology can be found later on inthis report.

Study FindingsGlobal MarketplaceRegardless of the countrys location, power plantequipment is now being purchased in the globalmarketplace. While regional markets still retainsome unique characteristics, regional differencesare being reduced or eliminated. For example,most large Japanese suppliers have establishedofces in the United States and are getting asignicant market share of new power plantequipment. Another aspect of the internationalpower plant market is the entry of new suppliers,in particular suppliers from China.

Within China power plants are being builtfor one-third to one-half of the internationalprices for similar plants. It is not clear whetherthese prices are being subsidized or whetherthere are other unique market factors. The factthat these prices have stayed at the same levelwhile international commodity prices haveexperienced substantial increases in the lasttwo to four years raises questions regardingtheir pricing structure. It is certain that laborcosts alone provide China with a competitive

advantage, which may be reected in its 2040percent lower production costs.The most likely focus of Chinese suppliers in

the next two to ve years is Asia and Africa. Recentprojects in these regions suggest that the Chinesesuppliers are bidding lower than internationalprices, but not as low as their domestic market.In India, their pricing is more aggressive (biddinglower than suppliers from other countries). TheChinese market entry strategy is most likelyinuenced by a strong domestic supplier with anear monopoly in the market.

In general, the potential impact of Chinesesuppliers on global power plant prices is likely to be positive, potentially resulting in moderate-to-substantial price reduction in some markets andless in others. Over the long term, the price gap between Chinese suppliers and other suppliersis likely to reach pricing equilibrium (below thelevel without their presence, but at some pricelevel between their prices and the prices of allother competitors).

Table ES3 Class 5 Pricing Estimates for Selected Generation Technologies (2008 US$), US$/kW netGeneration PlantTotal Plant Cost U.S. India Romania

Gas Turbine Combined Cycle Plant, 140 MW 1,410 1,170 1,140Gas Turbine Simple Cycle Plant, 580 MW 860 720 710Coal-Fired Steam Plant (sub), 300 MW net 2,730 1,690 2,920

Coal-Fired Steam Plant (sub), 500 MW net 2,290 1,440 2,530Coal-Fired Steam Plant (super), 800 MW net 1,960 1,290 2,250

Oil-Fired Steam Plant (sub), 300 MW net 1,540 1,180 1,420Gas-Fired Steam Plant (sub), 300 MW net 1,360 1,040 1,110

Diesel Engine-Generator Plant, 1 MW 540 470 490Diesel Engine-Generator Plant, 5 MW 630 590 600

Source: Authors calculations.


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This study was focused on selected generationtechnologies options located in three countries.The objectives were to: (1) collect and updateexisting price data on equipment in the powersector; and (2) analyze and report on the

underlying reasons and correlations for currentprice uctuations. These data were assembledto provide a better understanding of pricefluctuations for energy equipment withinspecic country contexts.

For this study, data on prices for energygeneration technologies were collected accordingto the cost classification system defined insubsequent chapters of this document. In orderto collect the necessary data, project documentswere reviewed, and major equipment suppliers(OEMs) in the United States, Eastern Europe,and India were contacted. As part of the data

1

Project ApproachMethodology1

collection process, major suppliers around theworld were identified. The amount of dataobtained from suppliers was subject to thedegree of their cooperation. Past experience wasfound to prevail on this projectmany suppliers

did not provide data for this study due to theircurrent workloads.The price of equipment depends, in part,

on the backlogs of suppliers productionfacilities. The study considers the impactof the respective backlogs of gas turbine,steam turbine, boiler, diesel generator, windturbine, solar technology, and major electricalequipment manufacturers. Assessments of theimpact of industry backlogs on escalation andplant pricing were based on market reportsand generalized conclusions. All plant costsreect market-based pricing.


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Worldwide Growth and ItsInuence on Escalationfrom 2004 to 2007In the period from 2004 through 2007, therewere substantial increases in escalation of theraw materials used to manufacture equipmentfor power plants. This includes raw materialsor intermediate products used to manufacture boilers, gas turbines, steam turbines, windturbines, and motors and generators. From January 2005 to December 2006, some signicantexamples of price increases are the following:condensers and heat exchangers, 18 percent;electric wire and cable, 23 percent; powertransformers, 32 percent; and copper wire and

cable, 84 percent.Global economic growth in the past threeyears, particularly in China and India, hascontributed to a worldwide increase in theconstruction of industrial, power plant, andmanufacturing facilities and the resultingincrease in demand for raw materials andintermediate manufacturing products. This hasled to a signicant increase in demand for suchitems as industrial equipment, power plantequipment, piping, structural steel, concrete,electrical components, and electric wiring. Inaddition, the economic growth has resultedin a substantial increase in the demand foroil, signicantly accelerating exploration andthe expansion of the existing capacity of oilreneries.

The dramatic scale of overseas activity istypied by the signicant number of heavyconstruction projects in India and China. Of

3

Price Escalation, CostFactors, and Market Pricing2

all overseas countries, China has seen the mostsubstantial growth. The scale of constructionof coal-red electric generating stations is justone indicator: currently, China is building theequivalent of two 500-MW coal-red electric

generating units each week, which is roughlyequivalent to building the entire electricalproduction capacity of the United Kingdomeach year! Another indicator of Chinas growthis GDP. China experienced increases in GDP ofabout 10 percent in 2004, 2005, and 2006, andabout 11 percent in 2007.

From 2004 to 2007, the combination ofsignicant increases in demand for materials forheavy construction and the historic accelerationin demand and resulting high price of oil hasfurther contributed to dramatic increases in theescalation of costs of major equipment and plantconstruction materials. As shown in Figure 2.1,the price of oil ranged from US$10/barrel toUS$30/barrel from January 1989 to January2004 and then began climbing at accelerated andhistoric rates to US$106/barrel in March 2008.

Table 2.1 shows the historical annual averagecompound escalation for specic power-plant-related equipment and materials for the UnitedStates, India, and Romania. The table showstwo periods:

January 1996 through December 2003; and January 2004 through December 2007.

These periods reflect the time beforeand after the significant increase in heavyconstruction projects and the acceleratedescalation in the prices of crude oil and renedpetroleum products. A comparison of the two


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periods shows the striking difference in annualescalation.

The rightmost column in the table shows thecumulative percentage increase in the cost ofequipment and materials over the period from January 2004 through December 2007.

The increase in escalation rates from January 2004 through December 2007 provides

quantitative explanation for the 3050 percentincrease between original project estimatesto bids actually received. The other driverof price increases is market-demand pricing.In other words, in the last few years, theglobal market has been in a situation wheredemand for power plant and infrastructureequipment and services has been higherthan the manufacturers capability to meetthe demand. The situation has resulted inequipment and engineering service pricing

based on what the market will bear rather thanon the actual cost of production (which consistsof materials and labor costs).

The project team was not able to locate orobtain publicly available information on specicmanufacturer facility loading because in almostall cases this is proprietary information. Researchrms sell publications that contain informationon overall shop capacity and lead times, butthis information is copyrighted and cannot bepublished in any publicly available reports.

However, even without benefit of thesepublications, there is enough evidence thatOEMs are pricing their equipment abovethe increase in the costs of raw materialsand labor costs, and above their typicalprofit margins. OEMs appear to be increasingtheir prices because of the overall increasein demand and the heavy loading of their

production lines.Although not specific to individualmanufacturers, industry news articles andpublications provide market projections thatindicate that price increases in commodities andmaterials will continue. The following are someexamples of contributing factors:

It is predicted that Chinese and Indiandemand for commodities including coal andiron ore will continue at an annual rate of5 percent for the next 10 years.

Chinese oil demand in 2007 was about 1.9 timesits domestic supply. By 2011, it is projectedthat demand will be 2.3 times domesticsupply. This will put increasing demandon the worlds oil supply, contributing tocontinued high prices for rened petroleumproducts. High costs of oil will put upwardpressures on commodities such as iron ore,nickel, and so forth, because of increasedmining and transportation costs.

Figure 2.1 Average Price of Crude Oil Worldwide

100

90

8070

60

50

40

30

20

10

0Jan88

Jan89

Jan98

Jan97

Jan96

Jan95

Jan94

Jan93

Jan92

Jan91

Jan90

Jan08

Jan07

Jan06

Jan05

Jan04

Jan03

Jan02

Jan01

Jan00

Jan99

Jan09

date

P r i c e , U

S $ / b a r r e

l ( N o m

i n a l

U S

$ )

Source: U.S. Energy Information Administration.


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5

Price Escalation, Cost Factors, and Market Pricing

Specialty steel product mills are at capacityand still not able to meet demand. Thissituation will not change until newproduction facilities come on line in 2010.Some specialty steel products will have 18-

to 24-month lead times until new capacity becomes operational.

In 2008, Japan was unsuccessful in renewingits iron ore contract with Australian ironore producing companies, which has

Table 2.1 Historical Average Annual Compound Escalation

Ranking Plant Equipment and Materials

Jan. 1996Dec. 2003,% per year

Jan. 2004Dec. 2007,% per year

Jan. 2004Dec. 2007,% Increasefor Period

United States4 Ready-Mix Concrete 1.9 7.9 36

Centrifugal Pumps 2.0 4.7 20Centrifugal Fans 1.7 4.2 18

Material Handling Conveyors 1.7 4.7 20Pneumatic Conveyors 1.7 3.8 16Crushers and Pulverizers 2.9 4.4 19

Integral Horsepower Motors 0.4 6.4 28Fabricated Steel Plates 0.3 10.1 47

2 Structural Steel 0.9 8.0 36Steel Pipe and Tubing NA 7.0 31

Field Erected Steel Tanks 1.5 5.8 253 Heat Exchangers and Condensers 0.8 7.8 35

Fin Tube Heat Exchangers 1.3 8.4 38

Industrial Mineral Wool 0.4 3.7 16Refractory, Non-Clay 0.4 3.7 16

1 Electric Wire and Cable 1.1 9.1 42Power and Distribution Transformers NA 13.8 68

Copper Wire and Cable 0.8 18.7 98Industrial Process Control Instruments NA 3.0 12India

Fabricated Metal (Structural Steel and Plate) NA 7 31Steel Pipe and Tubing NA 6 26

Mechanical Equipment NA 6 26Electric Wire and Cable NA 20 107Electric Equipment NA 7 31

RomaniaFabricated Metal (Structural Steel and Plate) NA 7 31

Steel Pipe and Tubing NA 5 33Mechanical Equipment NA 3 13

Source: U.S. Bureau of Labor Statistics Producers Price Indexes.

NANot available.


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usually been for about ve years. Iron oreproducers only offered one-year contracts,with a 30 percent escalation clause. Japanhas suspended negotiations. Unless thereis some signicant change in this situation, Japanese steel prices are bound to take asizable jump.

In March 2008, a major Taiwanese steelcompany indicated it had experienced a40 percent increase in raw material costs.As a result, the company raised its pricesfor steel plates, electrical coils, rebar, andgalvanized wire by about 20 percent fordeliveries in the second quarter of 2008.

GDP in India is expected to grow at 9 percentin 2008.

Projections of Escalationin the United States,India, and RomaniaThe impact of the sub-prime mortgage crisis inthe United States has translated into signicantnancial losses for the largest home lenders andprominent banking institutions and a signicantdrop in the U.S. stock market. In addition,

housing starts dropped 25 percent during 2007,with the depressed market forecast to continuethrough 2010. Economists indicate that thisperiod will see reduced consumer consumption,impacting the import of overseas goods and

services into the United States. This in turnshould result in some slowing in the overseaseconomies of countries that supply the UnitedStates.

In the United States, the slowdown isprojected to result in the average annualcompound escalation rate for mechanicalequipment and concrete declining around 2percentage points and 4 percentage points,respectively. Fabricated steel shapes will beabout 5 to 9 percentage points lower in the 2008to 2012 period than in the 2004 to 2007 period.Items containing or made up of aluminum orcopper are projected to see the largest decline,in the range of 7 to 10 percentage points. This isdue to the projected increase in production and

the decline in demand for both raw materials.On the other hand, even though the rate ofexpansion of the economies of India and Chinawill slow, both will have growth above the ratesexperienced in the past. The high price of oil andthe continued expansion in China and India arelikely to maintain upward pressure on the rateof escalation, especially in these countries.

GDP in India will increase at a greaterrate than in the United States. Consequently,projected escalation will slow, but not nearly

as much as in the United States. As shown inTable 2.2, during the 2008 to 2012 period, theannual escalation rates for various items willrange from about 1 to 5 percentage points higherin India than in the United States. In Romania,

Table 2.2 Projected Average Annual Compound Escalation for Plant Equipment and Materials,20082012, %/year

Category, India and RomaniaRomania,%/year

India,%/year Category, United States

U.S.,%/year

Structural Steel and Plate 2 to 3 6 to 8 Structural Steel 2 to 3

Structural Steel and Plate 2 to 3 6 to 8 Fabricated Steel Plates 0 to 2Steel Pipe and Tubing 2 to 4 8 to 9 Steel Pipe and Tubing 2 to 4Mechanical Equipment a 2 to 3 3 to 4 Centrifugal Pumps 2 to 3

Mechanical Equipment a 2 to 3 3 to 4 Centrifugal Fans 1 to 3Mechanical Equipment a 2 to 3 3 to 4 Material Handling Conveyors 1 to 2

Source: URS Washington Division.a Mechanical equipment is a composite that contains many more items than centrifugal pumps, centrifugal fans, and material handlingconveyors. Therefore, this should be considered a partial comparison of the only U.S. equipment projections available.


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the projected rates for comparable items will beonly slightly higher than for those in the UnitedStates. The rate of growth of the Romanian GDPis projected to decline from around 6 percent in2007 to 5 percent in 2010 and 3 percent in 2012.

Proportionally, labor has not contributedas much to the plant cost increases as haveequipment and materials since labor is typicallyresponsible for only 3040 percent of the totalinstalled cost of plants. Even so, labor needs to be considered in relation to the increased cost of building plants.

In the United States, prior to 2003, laborescalated at a rate of about 3 percent per year.However, in the last ve years, craft constructionlabor has escalated at rates closer to 5 percent per

year. This is related to the number of large capitalprojects, the massive rebuilding of the Gulf Coastareas damaged by hurricanes Katrina and Rita,and the aging of the U.S. workforce. Many craftworkers will be retiring over the next 10 years,and the growth in the number of apprentices joining the construction craft ranks each year iscurrently not sufcient to replace the workersthat are projected to retire. This will continueto put upward pressure on the annual rate ofescalation for labor costs in the United States.

In India, labor rates are also escalating,and at a faster pace than those in the UnitedStates. However, wage rates started at a levelthat is equivalent to one-sixth or one-eighthof the current U.S. labor wage rate. However,labor in India is estimated to have one-third ofthe productivity achieved on U.S. constructionprojects. Therefore, the total effective cost forlabor is still less than half of the labor cost inthe United States. This means that the laborcontribution to escalating plant costs in India isalso overshadowed by equipment and materialcost escalation.

Romania joined the European Union in 2007.This has resulted in signicant increases in laborwage rates due to competition for Romanianlabor throughout Europe. Romanians are movingto other European countries seeking higherwages, sometimes two to three times or evenhigher than their previous wage rate. Workersremaining in Romania are seeking a minimum50 percent increase in wages. Although these

labor wage increases are expected to continuein Romania for many years, nevertheless, it isexpected that labor costs will only representone-fourth to one-third of the installed costs ofplants in Romania.

Cost Increases Not Explainedby Escalation IndexesThis subsection provides an illustration ofthe difference between power plant costs andmarket prices. Using the EPRI PCCost program,the 2005 cost for the pulverized coal (PC)reference plant was compared to the plant costin 2008 dollars. For this analysis the program

was run in the total plant cost mode with noaccounting for the market driving forces thathave occurred over the past few years. The2005 total plant cost was escalated to 2008 usingthe 25 different historical escalation rates thatinclude equipment, material, and labor. Thisresulted in a total three-year plant cost increaseof 11 percent.

Another source of power plant cost increasesis the Marshall and Swift (M&S) index. Thisindex indicates an increase of 16 percent in the

composite equipment costs of steam powerplants from 2005 to 2008.The PCCost and M&S indexes were

compared to the IHS/CERA Power Plant CostIndex (PCCI), which reects the market price ofactually building power plants in North America.The PCCI for non-nuclear power plants from2005 to 2008 indicates an increase of about27 percent. Consequently, the PCCI indicatesthat the price of building power plants is 11percentage points above the M&S compositeindex. In addition, the PCCI indicates that theprice of power plants is 16 percentage pointsabove the cost increase estimated by PCCost.This comparison indicates that PCCost resultsand the M&S index are under-predicting theprices owners are paying to build power plants by 11 to 16 percentage points.

The North American market is beinginuenced by the global power sector, includingexpansive construction in the Middle East andAsia, many infrastructure projects worldwide,


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and concurrent expansion of power plantconstruction in the United States. As a resultof all of this activity, lead times for engineeredequipment have increased by up to 50 percentin the last 612 months, impacting prices forsome big ticket items in a way that is not being captured by escalation alone. Worldwidesourcing of many components adds to costpressures because both raw materials andshipping have increased, further compoundingincreases in cost.

The latest increases reect the worldwidemarket demand and the corresponding pricescurrently charged by manufacturers andsuppliers. In this sense, the difference can betermed a market demand charge. The cost

estimates in this report take this demand charge intoaccount and as such are market prices.

Impacts of the InternationalMarketplacePower plant owners all over the world arenow purchasing equipment on a global basis.For instance, owners are purchasing fromU.S. suppliers with a growing number of

overseas shops. Over the past few years,U.S. manufacturers have been more likely tomanufacture pressure parts in South Koreaor Eastern Europe than in the United States.There are still some unique characteristics toregional or country markets (especially China), but regional differences are being reduced oreliminated. For example, most large Japanesesuppliers have established ofces in the UnitedStates and are getting a significant share ofmarket for new power plant equipment.

Currently, Chinese suppliers are starting tomake market inroads into selected countries suchas Botswana, India, Indonesia, Nigeria, Pakistan,the Philippines, and Vietnam. The presence ofChinese manufacturers is related to the growthof the Chinese economy. If this economy slowsfrom its decade-long annual GDP growth of1012 percent, then its manufacturing capacitywill be available to compete in the internationalmarketplace. For this reason, it is important to briey examine the Chinese market and then

assess its current or potential future globalimpacts.

At present, China has an installed coal-red capacity of approximately 400 gigawatts(GW) that is growing by 50120 GW peryear. Before the late 1990s, the Chinese powersector consisted exclusively of subcritical coal-fired plants ranging from a few megawatts(110 megawatts [MW]) to standardized200-MW, 300-MW, and 600-MW units. All ofthese power plants were manufactured withinChina under licensing agreements with foreignsuppliers. These power plants were and are being built for 33 to 50 percent of the internationalcosts for similar plants. Nevertheless, it is notclear whether these prices reect subsidies or

manufacturing costs based on internationalcommodity prices. Approximately one-half ofthe costs are estimated to be material costs.

While international commodity prices haveexperienced the substantial increases describedin this paper, Chinas power plant prices haveremained unchanged. This raises questionsregarding Chinas pricing structure. Aside fromthese questions, it is certain that labor costsprovide China with a competitive advantage(which may be reected in 2040 percent lower

production costs). This is likely to give Chinesesuppliers a competitive advantage in theglobal marketplace (even when internationalcommodity prices are used).

Within the next ve years, the most likelyentry of the Chinese manufacturers into theglobal marketplace will be in Asia and Africa.Recent projects in these regions suggest thatthe Chinese suppliers are bidding lower thaninternational prices, but not as low as theirdomestic market. In India, their pricing ismore aggressive (bidding lower than in othercountries). This market entry strategy is mostlikely due to the fact that they are facing a strongdomestic supplier with a near monopoly in themarket. In other markets, their pricing (e.g., oncirculating uidized bed plants) is slightly belowinternational prices.

In general, the impact of Chinese suppliers onglobal power plant prices is likely to be positive,potentially resulting in moderate-to-substantialprice reductions in some markets and less in


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others. Over the long term, the price gap betweenChinese suppliers and other suppliers is likely toreach price equilibrium (that is, below the levelit would be without their presence, but at someprice level between their prices and the prices ofall other competitors). More detailed discussionof this topic is provided later in the report.

Impact of Plant Sizeon Technology CostThis part of the assessment investigated theimpact of plant size on technology costs in twoways:

1. Impact of plant size on cost for a broad rangeof unit sizes; and 2. Cost estimates for discrete plant sizes in the

United States, India, and Romania.

The objective of the broad-range costevaluation was to provide an overall perspectiveon the impact of size on cost. The broad-spectrum cost evaluations were based on thefollowing technologies:

Aeroderivative simple cycle gas turbineunits,

Heavy-frame simple cycle gas turbine units, Gas turbine combined cycle units, Pulverized coal-red plants, and Wind farms.

The objective of the discrete plant analysiswas to provide country-specic and size-specicconceptual market-price plant cost estimates based on: (1) recent detailed project cost pricingand OEM bid prices; and (2) budget quotes for

major equipment to the extent provided by OEMs(tempered with bid prices from the in-housedatabase). All of the cost estimates were basedon grid-connected congurations. The generationtechnologies and sizes were as follows:

Gas turbine simple cycle: 5 MW, 25 MW, and150 MW

Gas turbine combined cycle: 140 MW and300 MW

Pulverized coal-fired steam plant: 300-MW and 500-MW subcritical and 800-MWsupercritical

Oil-red steam plant: 300 MW Gas-red steam plant: 300 MW Diesel generator plant: 1 MW and 5 MW Wind farm: 12 MW, 50 MW, and 100 MW Photovoltaic array: 5 MW Solar thermal: on hold

The total plant prices are basically forthe same sizes as the respective technologiesincluded in the World Banks ElectrificationStudy 1 (see the grid-connected sizes shown in

Table 2 of the Electrication Study).

Examples of Cost Comparisonsfor a Broad Size RangeThis section provides cost curves for thegas turbine combined cycle and pulverizedcoal-red plant technologies. Cost curves foraeroderivative simple cycle units, heavy-framesimple cycle units, and wind farms are presentedlater in the report.

Figure 2.2 provides the impact of size onthe price of OEM-provided combined cycleunits based on data from the Gas TurbineWorld (GTW) Handbook. The data pointsrepresent nine different manufacturers and69 different configurations of gas turbinecombined cycle units. The combined cycleunits are all 50 Hz and range in size from7 MW to 1,000 MW. The graph includes theOEM scope as noted within the box on thegraph. The price data reected in this curveinclude both aeroderivative-based and heavy-frame-based combined cycle units. The resultsindicate that the OEM prices range from aboutUS$950/kW to US$450/kW as the unit outputsincrease from 7 MW to 1,000 MW.

Figure 2.2 reects the prices as purchasedand supplied by the OEMs. The OEM pricesdo not include earthwork, foundations, structural

1 Technical and Economic Assessment of Off-Grid and Grid Electrication Technologies, Summary Report, The World Bank Group,Energy Unit, Energy Transport & Water Department, September 2006.


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steel, water treatment, gas compressor, buildings,and all other items necessary for a fully operational

and functionally complete plant. The costs forearthwork, foundations, structural steel, andso forth, are added to the OEM price to get thetotal plant price; total plant prices are providedlater in this report.

The cost curve for the pulverized coal-redplant is presented in Figure 2.3. The costs wereestimated by the PCCost program run with themarketplace factors included. This cost-scalecurve shows that total plant costs range fromabout US$2,700/kW for a 300-MW PC plant to

about US$2,000/kW for an 800-MW plant.

Cost Estimates at theCountry LevelThe cost estimates at the country level were based on installations located in the UnitedStates, India, and Romania. The United Stateswas included as the benchmark. India wasselected as representative of Asia and because itis second only to China in addition of new power

plants and growth of GDP. Romania was selectedas representative of Eastern Europe.

The plant cost estimates were calibratedwith budget quotes for major equipment. Budgetquotes were requested from one to three OEMsfor the respective major equipment items. Despitediligent efforts and numerous follow-ups, therewas very limited response. OEMs were forthrightin advising the project team that their workloaddid not permit them to support study work atthis time. (Note: Annex 3 and Annex 4 providea complete list of OEMs for various types ofequipment for Romania and India, respectively).

The quotes obtained consisted of dieselengine, gas turbine, and steam turbine, andone cursory quote for 300-MW coal-red and300-MW gas-fired boilers. Fortunately, theproject team had the in-house project-basedmajor equipment library consisting of multipleOEM bids received within the last 18 months(reecting market prices). To the extent necessary,major equipment bid prices were escalated withaccepted corporate escalation rates specic toeach major piece of equipment, allowing the

Figure 2.2 Effect of Size on Cost of Gas Turbine Combined Cycle Units

1,200

1,000

800

600

400

200

0

Scope of costs: Basic Generator-Set: single-fuel gas turbinegenerator, inlet and outlet exhaust ducts and silencer, fuelsystem (including filters, but excluding natural gas compressor),air filter, standard control and starting systems, and dry lowNOx emission system (as applicable).

net plant output, MW

O E M

p r i c e

f o r

G T C C u n

i t s ,

U S $ / k W

( 2 0 0 8 )

0 200 400 600 800 1,000

OEM combined cycle

curve fit

y = 1763.1x 0.2009R2 = 0.904

Gas-fired combined cycle gas turbine (OEM scope)(50 Hz unitsdata from Gas Turbine World Handbook)

Source: 200708 GTW Handbook, Volume 26, Gas Turbine World, Pequot Publishing, ISBN 0747-7988, 2008.


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prices to reect market conditions as of January2008. In addition, piping, electrical, concrete, andall other items reected market pricing becausethey were based on the respective in-house biddatabases for actual projects.

A summary of major equipment prices isprovided in Table 2.3. This table contains theadjusted pricing from the in-house library of bids, as well as quotes obtained for this study(budget quotes were tempered with actual bids to reect market pricing). The scope ofthe equipment cost estimates is dened in theDesign Basis (located in Annex 1).

The plant cost estimates are based onOEM pricing and a project cost database ofrecent projects. Major equipment, piping,electrical, concrete, and all other plant itemsincorporate recent project data and market

pricing conditions as of January 2008. Moreover,the equipment, structural steel, piping, concrete,labor, and other plant items reect costs specicto the respective countries. Table 2.4 providesa summary of the total plant pricing for thegeneration technologies in the three countries.

A description of the common scope includedin all cost estimates is as follows:

Earthwork Concrete

Figure 2.3 Effect of Size on Cost of Pulverized Coal-Fired Plants

3,000

2,500

2,000

1,500

1,000

500

0 T o t a l p l a n

t c o s t , U

S $ / k W n e t

( J a n , 2

0 0 8 U S $ )

0 100 200 300 400 500 600 700 800 900net plant output, MW

Estimated subcritical PC plant cost (U.S. location)(estimated using EPRI PCCost Program)

Source: URS Washington Division Internal Cost Estimation Database.

Structural steel Plant equipment Piping Electrical Instruments and controls Painting Insulation Buildings and architectural

Complete descriptions of the scope ofthe cost estimates specic to each generationtechnology are provided later in this report.

The general list of items excluded from thegeneration plant costs estimates is:

Switchyard Connection to the grid Pipelines outside the plant fence (as

applicable) Access roads outside the plant fence Raw water acquisition Bonds, taxes, and insurance Project nancing Customs or import duties Owners costs Land

Complete descriptions of the exclusionsspecific to each generation technology areprovided later in this report.


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Table 2.3 Estimated Costs of Major Equipment (2008 US$)

Equipment Item Estimated Cost, US$/kW net

Pulverized Coal Boiler, subcritical, 325-MW gross 300Pulverized Coal Boiler, subcritical, 540-MW gross 270Pulverized Coal Boiler, supercritical, 860-MW gross 250

Steam Turbine, subcritical, 325-MW gross 130Steam Turbine, subcritical, 540-MW gross 120

Steam Turbine, supercritical, 860-MW gross 110Oil-Fired Boiler, subcritical, nominal 300 MW (cursory bid) 200

Gas Turbine (from large simple cycle case), 144 MW 240Gas Turbine (from large combined cycle case), 191 MW 220Diesel Engine-Generator, 1.4 MW 290

Diesel Engine-Generator, 4.8 MW 450

Source: URS Washington Division Internal Cost Estimation Database.

Table 2.4 Class 5 Plant Pricing Estimates for Generation Technologies (2008 US$), US$/kW net

Generation Plant-Total Plant Cost U.S. India Romania

Simple Cycle Plant, 5 MW 1,380 1,190 1,240Gas Turbine Simple Cycle Plant, 25 MW 970 830 870

Gas Turbine Simple Cycle Plant, 150 MW 530 440 480Gas Turbine Combined Cycle Plant, 140 MW 1,410 1,170 1,140

Gas Turbine Simple Cycle Plant, 580 MW 860 720 710

Coal-Fired Steam Plant (sub), 300-MW net 2,730 1,690 2,920Coal-Fired Steam Plant (sub), 500-MW net 2,290 1,440 2,530

Coal-Fired Steam Plant (super), 800-MW net 1,960 1,290 2,250Oil-Fired Steam Plant (sub), 300-MW net 1,540 1,180 1,420

Gas-Fired Steam Plant (sub), 300-MW net 1,360 1,040 1,110Diesel Engine-Generator, 1 MW 540 470 490

Diesel Engine-Generator, 5 MW 630 590 600Wind Farm, 1 MW x 100 = 100 MW 1,630 1,760 1,660Photovoltaic Array, ground mounted, US$/kW (AC) 8,930 7,840 8,200

Source: Authors calculations.


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Impacts of Increase in HeavyConstruction Projects in the

United States and OverseasThe growth in the economies of countries aroundthe world has led to a worldwide increase inthe demand for residential, commercial, andindustrial products. Of the overseas countries,China and India have experienced the mostsubstantial growth in demand for items such as:

Equipment, steel, concrete, and other bulk materials for a resurgence in thegrowth of large industrial, power plant, and

environmental equipment retrot projects inthe United States; Equipment, steel, concrete, and other bulk

materials for a very signicant growth inlarge industrial and power plant projectsoverseas, particularly in China and India;

Building materials and concrete forcommercial buildings and manufacturingfacilities overseas; and

Building materials, concrete, and heavyconstruction equipment for infrastructureprojects worldwide.

The scale of construction of coal-firedelectric generating stations is just one indicatorof Chinas growth. Currently, China is buildingthe equivalent of two 500-MW coal-firedelectric generating units per week, which iscomparable to building the capacity of theentire U.K. power grid each year (McRae,Gregory, testimony at hearing before Clean

13

Assessment of PriceTrends for Generation

Plant Equipment

3

Coal TechnologyScience, Technology, andInnovation, United States Senate Committeeon Commerce, Science, and Transportation,

April 27, 2007). This level of power plantconstruction represents an enormous demandfor steel, rotating equipment, electric wiring,other electrical components, and concrete. Italso results in erce competition for shop spaceat steel fabricators and equipment suppliers.Further, it translates into signicant demandfor the raw materials needed by steel mills,equipment manufacturers, and ready-mixconcrete companies.

Another indicator of the magnitude of

Chinas growth is its GDP. China experiencedyear-to-year increases in GDP in the range of10 percent from 2004 through 2006. In 2007, theGDP increased 11.4 percent. Forecasts indicatea slowing of GDP growth due to the slowing ofthe U.S. economy. However, the year-to-yearincrease in Chinas GDP will still remain highcompared to the rest of the world, with forecastsof 10 percent in 2008 and 9 percent in 2009. Incontrast, the composite increases in year-to-year GDP of all countries in the world were 2 to4 percent from 2004 through 2007 and forecastincreases in GDP of 2 to 3 percent in 2008 and2009. This indicates that economic growth andincreases in demand outside the United Stateshave fueled signicant increases in the escalationof consumer and industrial products in the lastthree to four years. Because of world sourcingand the growth in the global economy in thelast three to four years, the United States hasalso experienced significant increases in the


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escalation of costs for products used in heavyconstruction projects.

Aside from the increase in overseasconstruction, the substantial jump in oil andother fuel prices in the last year has contributedto increases in the costs to produce steel,manufacture heavy equipment, and processthe raw materials needed to make ready-mixconcrete. The high price of oil has also led to adramatic jump in exploration for new U.S. oilelds. In addition, many large oil companieshave or will embark on major expansion projectsat their existing U.S. reneries. A number ofthese projects have estimated costs in the rangeof US$1 to 2 billion, resulting in additionaldemands for piping, vessels, concrete, and

construction labor. Increases in the price of oilhave also led to massive plans for expansionof the tar sands processing plants in northernAlberta, with some estimates putting the totalexpenditures exceeding US$50 billion over thenext ve years.

Additionally, the 2005 Gulf Coast hurricanescontributed to some of the increases in theescalation of certain labor and materials. Theconditions contributing to escalation occurredprimarily in 2005 and 2006 and were a result

of the signicant demand for labor, equipment,and materials to rebuild the infrastructure,industrial facilities, commercial structures, andresidential dwellings damaged or destroyed bythe hurricanes. The rebuilding effort continuesinto 2008.

Added to all of the above is the resurgencein the U.S. construction of new coal-firedunits (announced between 2000 and 2006)and retrots of emissions control systems onexisting coal-fired plants (starting in about2004). As of May 2007, the National EnergyTechnology Laboratory (NETL) was trackinga total of about 150 new coal-based units in allphases of planning and development, or underconstruction. However, by the end of 2007,59 of the proposed plants had been cancelled,abandoned, or put on hold, due in part toconcerns over global warming or because ofthe signicant cost increases described in this

chapter. On the other hand, by the end of 2007,10 of the units were already in operation, with25 others under construction. Although thisnumber of new coal-red power plants is smallin comparison to the numbers being built inChina and India, it still represents competitionfor the shop space of manufacturers of powerplant equipment and materials.

The new overseas and U.S. coal-based and/or coal-fired plants will require significantquantities of concrete, large fans, large pumps,material handling systems, structural steel andsteel plate, piping, electrical wiring and electricalcomponents, material handling systems, turbinegenerators, emission control systems, and othermajor equipment. These materials, systems, and

equipment will be installed at all new coal-redplants throughout the world.

With regard to environmental controlretrofits in the United States, each Flue GasDesulfurization (FGD) system will requiresignificant quantities of structural steel andsteel plate, piping, electrical wiring andelectrical components, large fans, large absorbercirculation pumps, large motors, and other majorequipment. Each Selective Catalytic Reduction(SCR) system will require signicant quantities

of structural steel and steel plate, large amountsof catalyst, large fan upgrades or replacements,and reagent handling and injection systems.

The growth in demand for industrial-scaleequipment and materials in the U.S. powersector is and will continue to be dwarfed by thegrowth in the number of projects in the globalindustrial and power sectors (primarily due tothe expansive growth in China and India). Inaddition, from the early part of the twenty-rstcentury through 2007 the global increase in thenumber of heavy construction projects played amajor role in the growing upward pressure onthe costs of most industrial-scale equipment andcommodities. The dramatic increase in the priceof oil has also contributed to upward pressureon the costs of items used in heavy constructionprojects. However, with the downturn of thehousing market, the U.S. economy is slowingdown. The signicant cost escalation evident


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Assessment of Price Trends for Generation Plant Equipment

in the last few years is projected to moderateworldwide in the near future.

U.S. Trends in CostIndexes for Power PlantEquipment and MaterialsThe U.S. Producer Price Indices (PPIs) providethe historical escalation trends for 19 equipmentand material items associated with utilitygeneration plants and electricity distributionsystems. The historical PPIs cover the periodfrom the beginning of 1996 through the end of2007. These escalation trends are provided in theform of graphs in Annex 2.

Table 3.1 provides a side-by-side summaryof the escalation of the 19 items determinedfrom the graphs of Annex 2. As shown in thelegend boxes on the graphs, the historicalperiod is divided into two parts: (1) January1996 through December 2003; and (2) January2004 through December 2007. These two periodsroughly correspond to the times before andafter the rapid worldwide expansion in theconstruction of large industrial, utility, andmanufacturing projects. The table also containsa third column that provides projected averageannual compound escalation rates from 2008through 2012.

Table 3.1 shows a significant increase inaverage annual compound escalation for the

Table 3.1 Average Annual Compound Escalation for Plant Equipment and MaterialsUnited States

FigureNumber Equipment or Material Item

Jan. 1996Dec. 2003,

%/year

Jan. 2004Dec. 2007,

%/year

Projected,20082012,

%/year1 Ready-Mix Concrete 1.9 7.9 2 to 4

2 Centrifugal Pumps 2.0 4.7 2 to 33 Centrifugal Fans 1.7 4.2 1 to 3

4 Material Handling Conveyors 1.7 4.7 1 to 2

5 Pneumatic Conveyors 1.7 3.8 NA6 Crushers and Pulverizers 2.9 4.4 NA

7 Integral Horsepower Motors 0.4 6.4 NA8 Fabricated Steel Plates 0.3 10.1 0 to 2

9 Structural Steel 0.9 8.0 1 to 310 Steel Pipe and Tubing NA 7.0 2 to 4

11 Field Erected Steel Tanks 1.5 5.8 NA12 Heat Exchangers and Condensers 0.8 7.8 NA13 Fin Tube Heat Exchangers 1.3 8.4 NA

14 Industrial Mineral Wool 0.4 3.7 NA

15 Refractory, Non-Clay 0.4 3.7 NA16 Power and Distribution Transformers NA 13.8 1 to 317 Electric Wire and Cable 1.1 9.1 1 to 2

18 Copper Wire and Cable 0.8 18.7 NA19 Industrial Process Control Instruments NA 3.0 NA

Source: U.S. Bureau of Labor Statistics Producers Price Indexes and URS Washington Division Internal Cost Estimation Database.

NANot available.


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period from January 2004 to the end of 2007compared to the period from January 1996through December 2003. The signicant jumpin escalation common to this diverse group ofpower plant equipment and commodities is astrong indication of the impact of the global building boom that has occurred in the last threeto ve years. This boom transformed the cost ofpower-sector construction from nominal annualcost increases prior to 2004 to signicant annualcost increases after 2004. These historical dataare directly applicable to this study because theitems are included in many of the generationplant or electrical distribution options and arereected in the cost estimates.

For the period from January 2004 through

December 2007, the items most responsible forpower plant cost increases were as follows:

Electrical items: transformers, 68 percent;electric wire, 42 percent; and copper wire,69 percent;

Fabricate d steel shapes: steel plates,47 percent; structural steel, 36 percent; andsteel pipe, 31 percent;

Heat exchangers and condensers, 35 percent; Fin tube heat exchangers, 38 percent; and

Concrete, 36 percent.

Composite cost trends from Marshall &Swift that include the above 19 items (as well asadditional items) exhibit trends similar to thosereected for the equipment and commoditiesin Table 3.1. The composite index for all steampower equipment and commodities indicatesthat steam power plants had an averagecompound escalation rate of about 1 percent peryear for the period 1997 to 2003. Then, similar

to the general trends previously shown, theaverage compound escalation for the compositeof all steam power plant equipment increasedsignicantly at about 6.5 percent per year forthe four-year period from January 2004 throughthe end of 2007.

The third column in Table 3.1 also shows theprojected annual average compound escalationin the United States from 2008 through 2012.The rate of escalation from 2008 through 2012 isprojected to moderate and/or atten compared

to the 2004-through-2007 time period. Theprojections of much lower escalation rates reectthe impact of the sub-prime mortgage crisis,which has resulted in a 100 percent increase inhome foreclosures in the United States. This isreected in signicant nancial losses for thelargest home lenders and prominent bankinginstitutions and a signicant drop in the U.S.stock market indexes. The slowdown in the U.S.economy is also reected in a 25 percent dropin housing starts over the last 12 months. Theprojections of much lower U.S. escalation ratesreect the economic slowdown in the UnitedStates This slowdown is forecast to continuethrough 2010, and during this period will reduceconsumption and impact the import of overseas

goods and services into the United States. Thisin turn will result in some slowing of the rateof escalation in the overseas countries thatsupply the U.S. market. The impact on overseascountries will be discussed in the next chapter.

The housing slump and overall conditionof the U.S. economy will also reduce near-termgrowth of U.S. electrical consumption. All ofthese factors taken together are projected toreduce the rate of escalation of power plantequipment and commodities from the dramatic

increases seen in the last four years to levelssimilar to or slightly above those experienced inthe 1996 to 2003 timeframe.

Trends in Escalation forPower Plant-Related Itemsin India and RomaniaEscalation Trends in IndiaTable 3.2 denes the items for which historicaland projected escalation are available. Thenumber of items in the dataset is not as extensiveas it is for the United States, but it still providesan understanding of the historical escalation andpotential future growth of generation plant costs.

The historical and projected escalation ratesfrom 20042012 are shown in Table 3.3. Starting in2008, except for steel pipe and steel plate, annualescalation in India is predicted to moderatein a manner similar to the trend in the UnitedStates. The most signicant change in escalation


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will be the dramatic attening of escalation forelectrical equipment, wire, and cable. Electricalequipment, wire, and cable are all related to theforecast attening in the price of copper. Although

there will be some slowing in the near term, theIndian economy is expected to continue to growat a rapid pace compared to the United States.India will be impacted by the slowing of the U.S.economy, but not nearly as much as China. This isreected by the real GDP, which in 2006 and 2007was over 9 percent. The GDP in India is expectedto slow modestly to an annual average of 7 to 8percent during the period from 2008 to 2012.

Although the respective escalation rates inIndia will be lower during 20082012 than they

were during 20042007, pipe, steel sheet, andmechanical equipment are still predicted tohave a higher escalation rate than they will inthe United States The average annual escalation

rates for steel pipe, steel sheet, and mechanicalequipment in India are predicted to be about 3, 5,and 1 to 2 percentage points higher, respectively,than in the United States.

Escalation Trends in RomaniaFor Romania, the historical and projectedescalation rates from 2004 to 2012 are shown inTable 3.4. Starting in 2008, except for mechanicalequipment, annual escalation in Romania is

Table 3.2 Power Plant Equipment and Materials Included in the India and Romania Escalation Data

Category Representative Items Included

Pipes and Wires Ferrous PipeFerrous Wire

Steel Sheet Fabricated Steel Plates

Mechanical Equipment Steam TurbinesCombustion Turbines

Industrial PumpsIndustrial Fans

Industrial Material-Handling EquipmentElectric Equipment Power and Distribution Transformers

Switchgear

Motors

Relay and Industrial ControlsElectric Wires and Cables Power Wire and Cable

Building Wire and Cable

Source: Pauschert 2008.

Table 3.3 IndiaAverage Annual Compound Escalation for Plant Equipment and Materials

CategoryJan. 2004

Dec. 2007, %/yrProjected, 2008

2012, %/yrFabricated Metal (Structural Steel and Plate) 7 6 to 8

Steel Pipe and Tubing 6 8 to 9Mechanical Equipment 6 3 to 4Electric Equipment 7 1 to 3

Electric Wire and Cable 20 2 to 4

Source: URS Washington Division.


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predicted to drop in a manner similar to thetrend in the United States. The escalation incost of mechanical equipment in the 20082012 timeframe is expected to slow, but onlymoderately compared to 20042007. In fact,during the 20082012 timeframe, escalation for

the three items in Table 3.4 is projected to be inthe same general range as the respective itemsin the United States.

Other Assessments andItems Related to EscalationIn the United States, the graphs for fabricatedferrous materials (steel plates, structural steel,and carbon steel pipe and tubing) show that aftersteep price increases from late 2003 to mid-2004,

the price escalation subsided to modest levelsthrough the end of 2005. In early 2006, fabricatedmetal prices resumed their cost increases, but notto the extent that had occurred during the rsthalf of 2004. The increases generally continuedthrough 2007. Additional information related tometals is important because: (1) they are useddirectly to make pipe, plate, and structural steel;and (2) they are used to make boilers, pumps,fans, motors, and electrical wiring, and/or area signicant part of many other power plant

components. Information related to assessmentsor forecasts of metals is as follows:

The price of nickel peaked at about US$53,000/ton in May of 2007, dropped to aboutUS$26,000/ton in August 2007, increased toabout US$33,000/ton in October 2007, andended 2007 at about US$26,000/ton.

At the end of January 2007, the price of nickelwas US$26,000/ton and was projected to riseto US$40,000/ton over the next three years

due to unexpected delays in production fromnew mines, according to a mining analystfrom the United Kingdom.

The price of 316 stainless steel stayedrelatively at from January 2005 throughMay 2006, increased by 160 percent from

June 2006 through July 2007, decreased by40 percent from August 2007 through October2007, and increased 11 percent throughDecember 2007. Overall, 316 stainless steelescalated at an average annual escalationrate of 43 percent over the two-year period.The price trends from January 2005 through January 2007 for 316 stainless steel, nickel,and chrome are shown in Figure 3.1.

Forecasts indicate that the price increasesof seamless carbon steel pipe will be 3 to 5percent in the rst quarter of 2008. However,the cost increases of steel pipe are expectedto moderate through the rest of 2008.

Over the ve-year period from January 2003through December 2007, the price of copperincreased from about US$2,100/ton to aboutUS$6,600/ton.

One very large French investment bank hasforecast a worldwide surplus of aluminum of1 percent in 2008. There is excess productioncapacity available and producers continue todeliver aluminum to the market. This willlead to some ups and downs, but aluminumprices will change little in 2008.

For November 2007, shipments by NorthAmerican steel producers were down about8 percent compared to the same month in 2006.

The availabili ty of skilled workers inRomania is a very signicant issue affectinglarge construction projects. After Romania became a member of the European Union(EU) in 2007, skilled workers could go to

Table 3.4 RomaniaAverage Annual Compound Escalation for Plant Equipment and Materials

CategoryJan. 2004-Dec.2007, %/year

Projected, 20082012, %/year

Fabricated Metal (Structural Steel and Plate) 7 2 to 3

Steel Pipe and Tubing 5 2 to 4Mechanical Equipment 3 2 to 3

Source: URS Washington Division.


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Western European countries and make manytimes the hourly wage that they could makein Romania.

The demand for cement in Eastern Europeis so high that a large plant is being builtin Bulgaria and one is being considered forRomania. The supply of cement in EasternEurope is further restricted by EasternEuropean import restrictions.

Construction in the Romanian commercialsector is booming, but construction inthe manufacturing sector is languishing.Manufacturing facilities are old, outdated,and surrounded by the cities populations.Owners are selling their properties tocommercia l developers ins tead ofrefurbishing or rebuilding these facilities.

The demand for Portland cement in the UnitedStates is expected to decrease about 2 percentin 2008 and increase about 3 percent in 2009.

World crude steel consumption is projectedto be 6 percent higher in 2008 than in 2007.Chinas consumption has the largest impacton global steel consumption and is expectedto represent about 60 percent of globalgrowth in 2008.

Crude steel consumption in the EU in 2008is expected to be about the same as it was in2007.

Crude steel consumption in India in 2008 isexpected to be about 10 percent higher thanit was in 2007.

World rened copper production is expectedto be about 6 percent higher in 2008 than itwas in 2007, but global consumption willonly slightly exceed production.

The world rened copper price is expectedto be about 2 percent lower in 2008 than itwas in 2007.

The weak U.S. dollar is making theinternational export market more economicallyattractive to buyers of U.S. industrial equipment.The United States has seen substantial increasesin the export of fabricated steel, heavymobile construction equipment (bulldozers,earthmovers, and so forth), transformers, andgenerators.

Evolution of theInternational MarketplaceMajor Equipment SuppliersRegardless of the country or the location of thepower plants, equipment and materials are now being purchased in the global marketplace.Regional or country markets still retain some

Figure 3.1 Cost Indexes for 316 Stainless Steel, Nickel, and Chrome

400

350

300

250

200

150

100

50

0

3 1 6 S S a n

d s e

l e c t e d c o n s t

i t u t e n

t s

( J a n - 2

0 0 5 =

1 0 0 )

Nov04

Aug05

May05

Feb05

Jan08

Oct07

Jul07

Apr07

Jan07

Oct06

Aug06

May06

Feb06

Nov05

Apr08

month-year

316 stainless steelcontains 1014% nickeland 1618% chrome

316 SSnickelchrome

Source: Modied after Stainless Steel News.


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unique characteristics (especially in China), but regional differences are being reduced. Forexample, most large Japanese suppliers haveestablished offices in the United States andare getting a signicant share of the recentlyconstructed or contracted power plants. Inaddition, Chinese suppliers are bidding onpower plants especially in Africa, South Asia,and Southeast Asia.

Among the key developments, the potentialparticipation of industrial or heavy equipmentsuppliers from China may have the mostdramatic impact on the global market, includingpower plant equipment prices. Chinese suppliersare starting to make inroads into selectedcountries such as Botswana, India, Indonesia,

Nigeria, Pakistan, the Philippines, and Vietnam.Another factor affecting the level of theirpresence is likely to be related to the Chineseeconomy. If the growth of the Chinese economy(which has experienced consistent increases inGDP of 1012 percent annually for more than adecade) slows down, its manufacturing capacitywill be available to compete in the internationalmarketplace. For this reason, it is importantto briey examine the Chinese market and itspotential global impacts.

Currently, China has an installed coal-fired capacity of approximately 400 GW. Itscapacity is growing by 50120 GW per year.Before the late 1990s, the Chinese power sectorconsisted exclusively of subcritical coal-redplants ranging from a few megawatts (110MW) to standardized 200-MW, 300-MW, and600-MW units. All of these power plants weremanufactured domestically under licensingagreements with foreign suppliers. Units above200300 MW utilized technology obtainedthrough licensing agreements with Westernsuppliers. One such agreement for boilertechnology was with Combustion EngineeringInc., which was later acquired by Alstom. Thetechnology was made available to all of theleading local manufacturers (Harbin BoilerGroup, Shanghai Boiler Group, and DongfangBoiler Industrial Group, as well as smaller

manufacturers such as Beijing Boiler Works andWuhan Boiler Co.).

China started using supercritical technologyin the 1990s, first with 10 units (4x320MW;4x500MW; and 2x800MW) procured from Russia.The first plant utilizing Western technologywas the Shi Dong Kou plant, commissionedin 1992. It consisted of 2x600-MW units with25.4 MPa/538C/565C steam conditions. Thesecond plant utilizing Western technologywas the Waigaoqiao plant in Shanghai (nextto the Shi Dong Kou), which consists of two900-MW units with steam conditions of 24.7MPa/538C/565C. The project was nancedwith a World Bank loan in the mid-1990s. Sincethen, many more supercritical units have been

built.As of the end of 2006, China had 46

supercritical plants in operation representing30 GW of installed capacity; most of them have been designed for 24.7 MPa/565C/565593C, but two have ultra-supercritical (USC) steamconditions of 24.7 MPa/600C/600C. The rstUSC plants (Huadians Zouxian and HuanengsYuhuan power plants) started operating inNovemberDecember 2006. By the end of 2007,approximately 120 GW of installed capacity

was expected to utilize supercritical steamconditions. 2 Sixty percent of the future plantsare expected to utilize supercritical and USCsteam conditions.

An interesting development is that each ofthe Chinese manufacturers has developed a joint venture or licensing agreements with oneof the international suppliers. This is a departurefrom the past, when all the Chinese suppliersobtained blanket licensing agreements. Morespecically, Shanghai Boiler Works has teamedup with Alstom and Siemens; Harbin BoilerGroup works with Mitsubishi; and DongfangBoiler Industrial Group has a joint venturewith Hitachi. Additionally, the fifth-largestmanufacturer (Wuhan) was recently acquired by Alstom, which reportedly plans to expandits capability to produce both subcritical andsupercritical plants.

2 Prof. Mao, Jianxiong, Electrical Power Sector and Supercritical Units in China, presented at the Workshop on Design of EfcientCoal Power Plants, Vietnam, October 1516, 2007.


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The manufacturing capacity of China isestimated in the range of 100120 GW per year.While no specic estimates are available, 3050percent of this comes from second- and third-tiermanufacturers (the rst tier being Harbin BoilerGroup, Shanghai Boiler Group, and DongfangBoiler Industrial Group), each of which is capableof manufacturing subcritical units up to 300 MW.

Reportedly, the rst-tier manufacturers are booked for the next two to three years (20082010)with domestic orders for supercritical and USCplants. However, even these manufacturers haveexpressed interest or have already participatedin recent commercial projects outside China. Thesecond- and third-tier Chinese manufacturersare facing a shrinking domestic market and are

under pressure either to upgrade to supercriticalor to seek markets outside China. As a result,the potential for exports of both subcritical andsupercritical plants by Chinese manufacturers isreal. Export of subcritical plants is possible andis already taking place; supercritical plants arelikely to follow in the coming years, especiallyif Chinas rate of economic growth slows down.

In this context, it is important to review theprices of power plants manufactured by Chinesesuppliers. The following prices are quotes from

within China during the last two to three years: US$600650/kW for 300-MW subcritical units; US$540/kW for 600-MW supercritical units;

and US$540/kW for 1,000-MW ultra-supercritical

units.

These units do not include the emissioncontrols systems required on U.S. plants.Even so, these prices are one-half to one-thirdof the international prices for similar plants.Nevertheless, it is not clear whether theseprices reect actual manufacturing costs andinternational commodity prices. Approximately50 percent of the costs is estimated to be materialcosts. The fact that these prices have stayed atthe same level while international commodityprices have experienced a substantial increasein the last two to four years raises questionsregarding their pricing structure. It is certainthat labor costs alone provide China with a

competitive advantage that may be reected inits 2040 percent lower production costs. This(even when international commodity pricesare used) is likely to give Chinese suppliers anadvantage to compete in the global marketplace.

The nature of Chinese entry into the externalmarket is not completely clear. In the near term(two to ve years), the most likely scenario is forChinese suppliers to focus on Asia and Africa.Recent large PC power plant projects in theseregions suggest that the Chinese suppliers areunderbidding international prices, but not aslow as their domestic market. In other markets,Chinese pricing (e.g., on circulating uidized bed plants) is slightly below international prices.In India, their pricing for large power plant

equipment is more aggressive (they bid lowerthan other countries). Part of a market entrystrategy may be a result of the Chinese boilermanufacturers facing Bharat Heavy ElectricalsLimited (BHEL), the dominant Indian supplierwith a near monopoly (BHEL equipmentgenerates 73 percent of the total power producedin India).

In general, the impact of the potential entry ofChinese suppliers on global power plant pricesis likely to be positive, potentially resulting in

moderate-to-substantial price reduction in somemarkets and less in others. Over the long term,the price gap between Chinese suppliers andother suppliers is likely to reach an equilibriumpoint (below the level without their presence, butat some price level between their prices and theprices of all other competitors). The magnitudeof the price reduction and how long it will lastwill depend on a number of factors. In general,the following should be taken into account:

Large markets such as India and SouthAfrica may experience very low bid pricesin the short term, until the Chinese suppliersestablish a substantial position in thesemarkets. Longer term, they are likely to bringtheir prices closer to international levels.

The Chinese suppliers are expected to bemore aggressive in their pric

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