13 Jan

Natural gas–fired power plants are cheaper to build

WRITTEN BY Mayur Sontakke, CFA, FRM

Overnight capital costs

Overnight capital costs are a useful measure while determining the current cost of building a power plant. While the measure doesn’t take into account financing costs and inflation, it gives you a clear indication of the cost of building a power plant at the current moment using a company’s own funds. The US Energy Information Administration (or EIA) published estimates for capital costs for various fuel types in April 2013. Note that these costs are indicative costs for plants in the US and don’t take into account regional variances.

Natural gas–fired power plants are cheaper to build

Capital costs for different fuels

The EIA’s findings suggest that natural gas–fired power plants are cheaper to build with overnight capital costs ranging from $676 to $2,095 per kilowatt (or kW), depending on the technology. Typically, natural gas power plants have capacities ranging from 85 megawatts (or MW) to 620 MW. (1 MW = 1,000 kW.) General Electric (GE), which is part of various ETFs including the SPDR S&P 500 ETF (SPY) and the Industrial Select Sector SPDR ETF (XLI), is the market leader in the gas turbines segment.

Capital costs for coal-fired power plants range from $2,934 to $6,599 per kW, depending on the technology. Typical coal-fired units have a capacity of 520 MW to 1,300 MW. GE and Siemens (SIEGY) are leaders in the steam turbine segment.

Nuclear plants are costlier to build, with a capital cost of $5,530 per kW for a plant with a capacity of 2,234 MW. GE, Westinghouse, and Fluor (FLR) provide engineering services for nuclear power plants.

Bottom line

Natural gas–fired power plants are clearly the cheapest to build among thermal power technologies. This is due to lower land requirements and faster, cheaper construction. Thus, solely on the basis of capital costs, natural gas is a winner.

However, power plants have a long life, often exceeding 25–30 years. So the ongoing costs are an equal or even more important consideration when choosing a technology. Let’s discuss ongoing costs in the next part of this series.

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