Plant Inflation Drops to Normal Levels

JULY 23, 2010

By John Grant, Senior Consultant, CFC Financial Advisory Services

Distribution plant inflation fell to 2 percent in 2009, a rate more commonly seen before the cost run-up began five years ago. Since 2004, inflation has had a significant impact on cooperatives’ capital plant expenditures.

Leading up to 2004, the annual increase in the cost for distribution plant averaged around 2 percent. Between 2004 and 2008, however, costs rose dramatically—by 6 to 12 percent per year. Had that spike not occurred—and if the cost had instead increased by a steady 2 percent per year over that five-year period—plant costs would be nearly 30 percent less than they are now.

One big reason for the dramatic cost increase has been international economic growth. From 2004 to 2008, the emerging economies in Asia underwent a boom in growth. China and India experienced particularly significant growth: The International Monetary Fund reported 2006 growth rates of 11.1 percent and 9.7 percent, respectively. This level of growth resulted in price increases across the board—not only for raw materials used for power plant construction, but also for finished products like transformers, wire and poles.

The more modest level of distribution plant inflation experienced last year may only last through 2011, however, while China and India continue to experience short-term reductions in economic growth as a result of the global recession. Soon, the gradual recovery of the global economies, including continued internal growth in China and India, will begin to put upward pressure on prices once more.

Source: CFC analysis of Handy-Whitman data