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May 24, 2011

Capital costs have major impact on projected power sector investments

Source: U.S. Energy Information Administration, Annual Energy Outlook 2011

Natural gas-fired power plants dominate the 2011 Annual Energy Outlook (AEO2011) Reference case projections of future generating capacity additions. Natural gas plants have low capital costs compared to coal, nuclear, and renewable utility generation plants, and these costs are a chief consideration for capacity investment. AEO2011 also includes several alternative cases with lower assumed capital costs of nuclear, fossil fuel and renewable power plants.

Gaining experience building certain types of plants, a concept known as 'technology learning,' can lead to lower power plant capital costs over time. The low capital cost side cases assumed an accelerated learning rate of 25% beyond that of the Reference case. Furthermore, relative to the Reference case, these cases reflected 20% lower baseline costs in 2011, declining to 40% lower in 2035.

Source: U.S. Energy Information Administration, Annual Energy Outlook 2011

Factors other than capital costs affect plans to build new generating capacity as well. Low natural gas prices, as a result of increased domestic shale availability, also play a key role in natural gas being the preeminent type of new capacity. In addition, slow mid-term demand growth delays most generating capacity additions until after 2020.

EIA recently updated its capital cost estimates for all power plant technologies with the assistance of an engineering consultant with extensive experience in evaluating power sector projects. This update of current and projected costs was a critical component of AEO2011 electricity projections.