Costs to build gas plants triple, says CEO of NextEra Energy 


A backlog in gas turbine manufacturing could slow the growth of gas in the power sector, according to NextEra Energy, one of the largest power plant builders in the U.S.

The explosive growth of data centres has raised expectations that the U.S. will see a surge in gas consumption. Some forecasts see electricity used for data centres tripling by 2028.

At the CERAWeek conference in Houston in mid-March, oil and gas executives talked excitedly about the growth prospects for gas provided by the AI boom. There was wide speculation that gas would account for much of the new electricity demand.

But not everyone saw it that way.

“There is a lot of demand for gas turbines right now. You have to get in a long line. It has pushed the prices up,” NextEra Energy CEO John Ketchum said at CERAWeek. NextEra built 16 gigawatts of gas-fired power over the past two decades, and operates a fleet of 26 GW of gas capacity. It also builds renewable energy.

“We built our last gas-fired facility in 2022, at $785/kW. If we wanted to build that same gas-fired combined cycle unit today…$2,400/kW,” he said. “The cost of gas-fired generation has gone up three-fold.”

Not only are gas turbine costs shooting up, but the backlog of orders means that they are hard to come by in the near-term. On top of that, gas plants can take several years to build.

“When you look at gas as a solution…you’re really looking at 2030 or later,” Ketchum said.

Ketchum said that the U.S. will need 460 gigawatts of additional capacity by 2030, but gas can only account for roughly 75 GW, or 16 percent, of that total. The rest will be made up largely by renewable energy.

Renewables are “cheaper and available right now,” Ketchum said.

He elaborated on the problems with gas, which also include a shortage of labour. The sudden demand for new power plants is happening after a period in which very little was built. “With gas-fired generation, the country is starting from a standing start,” Ketchum told investors on an earnings call in January.

“When you go to EPC contractors, a lot of the labour they have that knew how to build gas-fired turbines are gone,” Ketchum said at CERAWeek, referring to engineering firms.

Financial analysts are starting to wake up to the array of problems facing the gas industry.

“The turbine supply constraints are fairly well known at this point but the degree of labor price increases is still under-appreciated. The skilled labor pools that built projects ten years ago have largely retired or moved on to other projects including LNG export, data centers, semi manufacturing, chemicals, industrial processes, etc.,” investment bank Jeffries wrote in a recent note to clients.

This combination of factors is making it very costly to build new gas-fired power plants.

“I think parts of the cost increase is financing, which is higher interest rates. Part of the cost increase must be labour. Part of the cost increase I think are delays in permitting interconnection queues,” Advait Arun, senior associate for energy finance at the Center for Public Enterprise, a New York-based think tank, told Gas Outlook.

A spokesperson for GE Vernova, which manufactures gas turbines, told Gas Outlook that their gas turbine backlog does indeed stretch through 2028, and that only a small portion of those orders relate to data centres and AI, suggesting that there will likely be more demand ahead.

“To help meet this growing demand, GE Vernova announced more than $160 million investment in its Greenville, South Carolina, facility earlier this year,” the spokesperson said. That will increase capacity to “70 to 80 heavy-duty gas turbines per year beginning in the second half of 2026 and shipping approximately 20 gigawatts annually starting in 2027.”

The expansion may not relieve the bottleneck. In an article in Heatmap, Arun from the Center for Public Enterprise argued that GE Vernova was happy to see its order book stretch out several years, guaranteeing strong earnings well into the future, instead of spending much larger sums on building new manufacturing facilities that would expand capacity.

That has been a selling point GE Vernova has made to investors, reassuring them that they will maintain capital discipline. “There is significant growth we will achieve in this facility in the years ahead, all within the same four walls, without pouring concrete or adding new cranes,” GE Vernova CEO Scott Strazik told investors on a quarterly earnings call in January.

Such a strategy may be wise for GE Vernova, allowing them to increase their profit margins.

“Higher EPC costs are a material driver but we expect that turbine providers, including GE Vernova (GEV) are seeing robust margin expansion as well,” Jeffries’ analysts wrote, describing the reasons for rising costs for gas.

But moving cautiously also likely means the gas industry with be dealing with a lengthy backlog for turbines for several years.

That’s exactly why NextEra Energy says renewables will makeup the vast majority of new electricity capacity.

“[NextEra] emphasized the readiness of renewables and storage to quickly meet large and growing power needs of customers, a stark contrast in speed compared to unplanned natural gas-fired generation (5+ years) and new nuclear / SMRs (10+ years),” JP Morgan analysts wrote in a note to clients, after meeting with NextEra Energy. “We sensed particular excitement around the outlook for energy storage deployments over the next several years given the technology’s ability to complement ‘all of the above’ forms of generation while covering >70% of the generation provided by a typical gas peaker at a meaningfully lower cost.”

Indeed, the battery storage deployment is in its early stages. Falling costs are leading to a battery storage boom across the U.S., with installations up 34 percent last year.

Jigar Shah, former director of the U.S. Department of Energy’s Loan Programs Office, said in a LinkedIn post that “Batteries will be deployed at 10X the capacity of combined cycle natural gas units over the next 4 years.”

But Arun cautioned against assuming that renewables will automatically pick up the slack. Supply constraints for both gas and renewables could put a squeeze on electricity supply.

“I agree renewable energy is the way to go. But if gas won’t get us there and you’re going to say that renewables are the better solution because we can build them now, I think that ignores the real struggles with building renewables now,” Arun told Gas Outlook. He pointed to supply chain bottlenecks for electric transformers, key to moving electricity, as a big obstacle standing in the way of faster deployment of solar and wind.

“As long as transformers capacity is delayed, it’s a lot harder to get renewable and clean energy on the grid just in the first place.” He also noted the lengthy grid interconnection queue for solar and wind projects, which is a notorious problem in the electric power sector.

Meanwhile, the U.S. Congress is considering repealing key tax credits for renewable energy written into the Inflation Reduction Act.

But if the Republican-controlled Congress repeals tax credits for renewable energy, it would put even more pressure on the gas turbine market, driving up costs to as much as $3,000/kW, Jeffries’ analysts wrote, citing NextEra estimates.

At CERAWeek, NextEra’s CEO John Ketchum warned that rescinding the tax credits would exacerbate the electricity supply crunch and drive-up costs further. He expressed hope that enough Republicans in Congress would oppose efforts to rescind the tax credits.

“They’re super important to meeting the power demand at a cost-effective way in this country,” he said.