Aging infrastructure, a new energy bill, and rising fuel prices have contributed to a very active and increasingly diverse power industry in recent years. In fact, Sugar Land, Texas-based Industrial Info Resources is currently tracking 1,026 active projects valued at more than $59 billion — a 36% increase over the same period in 2005.
“In the last 18 months many generators have seen that given the volatility that's going on with natural gas prices they need to have their generation portfolios better balanced by the diversity of the fuels that they'll use,” says Tom Griffiths, executive vice president of business development and risk management for Overland Park, Kan.-based Black & Veatch.
Indeed, due to the increased price of natural gas used to run gas turbine plants, many power companies are now balancing their portfolios with new coal plants. “Coal plant building hasn't occurred in the United States for decades, and now you've got anywhere from 40 to 50 new coal plants that are expected to come online,” Griffiths says.
Retrofit needs of existing coal plants are also contributing to the growing amount of construction taking place in the power industry. New environmental legislation requires coal plants to either buy pollution credits or put flue-gas desulfurization equipment on the back-end of their plants, starting in 2010. Griffiths notes that a lot of building is going on right now in order to meet that compliance deadline.
“By 2010, there are also rules to comply with mercury, and by 2015 there's another level of reduction that must occur in these gases,” Griffiths says. “It's not unusual for these projects to take anywhere from four to five years.”
The government is helping out though — with both retrofit and new coal-fired electricity projects — offering $1.6 billion in tax credits for clean coal investments, according to Raleigh, N.C.-based research firm FMI. But coal isn't the only solution to power plant diversification. Many generators are also looking into nuclear power.
“There hasn't been a nuclear plant built in decades, and there are a dozen or so that are in various stages of the permitting and licensing aspects,” Griffiths says. “We believe that new nuclear power will come online in 2015 to 2017, which means the owner of that facility literally needs to be getting the permits in place such that in the 2008-09 time frame they can start engineering and turning dirt.”
The passage of the 2005 U.S. Energy Bill is being credited with contributing to an increase in construction for both coal and nuclear power plants, as well as liquefied natural gas terminals and pipeline construction. In fact, an FMI report concludes that part of the reason capital investments declined in 2003 and 2004 was because many investors were waiting for the outcome of this bill.
“I think that the outlook is a lot more stable and predictable now that the energy bill has passed,” says Roberto Torres, strategic analyst for San Jose, Calif.-based market research firm Frost & Sullivan. “The projects that need to be done have been known for awhile, so they'll probably be accelerated now.”
Besides the many incentives offered by the new energy bill, it also repealed the Public Utilities Holding Company Act of 1935 that restricted industry mergers and foreign investment. According to FMI, the repeal will open the door for significant capital investment in the U.S. power markets.
According to Griffiths, a surprising amount of this new capital investment is being put toward biofuels, ethanol, and biogassification.
“Since President Bush's state of the union speech, when he opined that America is addicted to oil and that we should really start to look at these alternative fuels, the venture capital that's pouring into that whole area is amazing,” he says. “I think this is a market that's going to come to fruition over the next 10 years.”
Another segment of the power industry contributing to construction growth is the nation's aging transmission lines.
“I think right now we're in a replacement cycle,” Torres says. “Growth will be relatively good, due to the old infrastructure that we have in place now, the need to modernize it, and the need for electric utilities to address the reliability problem to avoid unplanned outages — and make the transmission grid better suited to support the growing loads.”
Griffiths agrees, adding that there is a growing interest in national grid projects.
“I think that we're going to see a lot of building going on, especially now that FERC [Federal Energy Regulatory Commission] has eminent domain authority, which means they can step in and require the state or owner to give over a right-of-way such that these kinds of grid expansions can occur and not get hung up,” he says.
Despite all the good news for power construction, analysts caution that it could be a number of years before many of these projects actually break ground, due to the arduous process of licensing and permitting. As a result, FMI is now predicting a gradual growth of 3% to 4% a year for power construction through 2010.