Rush for U.S. gas plants drives up costs, lead times

Surging demand for power from AI and electrification has led to a flurry of new gas-fired power projects in the United States, following years of inactivity.

"It's been 40 or 50 years, or so, since we've seen demand grow the way it's growing and is expected to grow,” Robert Gaudette, president of NRG Energy's business and wholesale operations, said.

"AI is obviously a big part of that, but you've also got reshoring of manufacturing, you've got more electrification,” Gaudette added.

The U.S. Energy Information Administration (EIA) hiked its forecast for U.S. electricity retail sales in June, predicting commercial power demand will grow by 3% in 2025 and 5% in 2026.

Solar, wind and battery storage have dominated U.S. power installations in recent years but data centers require power day and night, increasing the demand for gas-fired power and nuclear power.

“You cannot run a system fully on renewables, you need some level of backup and gas is the reliable backup at this point, until we get energy storage at long durations at low cost,” Humayun Tai, Senior Partner and global co-leader of McKinsey’s Global Energy & Materials and Electric Power & Natural Gas practices, said.

More than 100 GW of new gas-fired projects have been announced, Jay Kim, Associate Partner at McKinsey, said. Not including small projects and those without completion dates, around 120 gas-fired plants are planned by 2030 for a total capacity of around 80 GW.

"To put that number in perspective, over the last five years the U.S. added only about 35 GW of gas," Kim said. "So, it's almost triple what it was."

The surge of new plant projects has squeezed supply and construction resources, leading to longer lead times and higher costs.

The turbine supply market for U.S. gas-fired plants is dominated by three large original equipment manufacturers (OEMs): GE Vernova, Siemens Energy and Mitsubishi Power. Manufacturers are starting to invest in new capacity, but market participants are reporting longer lead times as suppliers struggle to meet surging demand.

“It can be five plus years for most of the major OEMs” to deliver large [gas] turbines, Bobby Noble, senior program manager at EPRI, a non-profit energy research and development organization, told said.

Smaller gas turbines can be attained in 3 yr–4 yr, he said.

Supply shortage. The last surge in gas-fired plant construction came between 2000 and 2010 after the U.S. shale revolution lowered gas prices.

The addition of new capacity and growing renewable energy output led to an extended period of low profit margins and a near halt in the construction of new plants. A lack of projects led to component suppliers slowing investment plans or exiting the sector, leaving the industry unable to respond to the current surge in demand.

"Driven by record demand for gas turbines, lead times are increasing, despite our capacity expansion,” a Siemens Energy spokesperson said in a statement.

Siemens' expansion plans include a 61,000-ft² expansion of its Gibsonton, Florida manufacturing facility which makes blades and vanes, crucial components in gas turbines.

Meanwhile, GE Vernova plans to invest more than $160 MM in its Greenville plant in South Carolina (U.S.) to meet surging turbine demand.

The geographic spread of new gas-fired power projects is closely correlated with new data center projects. Availability of grid capacity has become a key driver of project location as developers seek to minimize lengthy connection queues exacerbated by a large number of projects submitted to grid operators.

Of the 80 GW of projects being tracked by McKinsey, 25 GW comes from vertically integrated utilities securing their own needs, and there are about 15 GW each planned in the PJM, ERCOT and MISO wholesale markets, Kim said. The PJM market covers Mid-Atlantic and Midwest areas, ERCOT covers Texas and MISO spans Midwest and central southern regions.

Construction costs. Gas-fired power plant developers also face higher costs than in previous booms due to an exit of construction companies as well as wider inflationary pressures exacerbated by import tariffs.

Engineering, procurement and construction (EPC) companies exited the sector during the period of tepid demand and there is currently a shortage of construction companies that can “comfortably build these gas plants,” Kim said.

The lack of both construction and manufacturing capacity have led to a “huge uptick” in the cost of building gas-fired plants, Kim said.

“For a long time, it used to be a rule of thumb that it was about $1,000 per kilowatt to build a gas plant, and now it's about $2,000 to $2,500 per kilowatt,” he said.

Some developers are partnering with EPCs and equipment suppliers to reduce construction risks and secure their pipeline of projects.

In February, NRG Energy announced a partnership with GE Vernova and construction company Kiewit Corp to build four new natural gas-fired power plants to serve the ERCOT and PJM markets.

It is extremely challenging to secure components and labor resources, Gaudette said.

Even if you had unlimited funds "you're still talking in the next decade before you're [in commercial operation],” he said.

NRG is "uniquely positioned because of our [GE Vernova], Kiewit agreement, and we know we've got the skilled labor to put down about 5.4 GW of natural gas generation with GE and Kiewit as our EPC over the 2029-to-2032-time frame,” Gaudette said.

“We also have agreed to a standard package,” he added. “So, we're going to, you know, cookie cutter these things and we'll learn each time and get better every time, and all three players benefit."

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