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Navigating Nuclear Risks

New approaches to contracting in a post-turnkey world.

Fortnightly Magazine - July 2008

declines of owners of natural gas combined-cycle (NGCC) plants as the market became overbuilt throughout the 1990s.

Against this backdrop, three complex, interdependent and more highly speculative factors dominate decision-making today:

Carbon Regulation: Stringency of standards and the ultimate carbon tax or cost of CO 2 credits;

Natural Gas: Long-term price trends and the real impact of LNG; and

Technology: Relative capital and operating costs and the likely maturation of alternative generation and emission mitigation technologies, such as carbon capture and sequestration (CCS).

Driven in large part by the run-up in natural gas prices, which have approximately quadrupled since 1999, and the political challenges of building new coal plants (of the ~150 new coal plants announced in the past five years, only about one third have moved forward to a permit being issued or beginning construction), nuclear has become increasingly attractive. This is particularly true with no scalable alternative technology currently available.

Recent regulatory filings in Florida point to nuclear generation as the lowest-cost solution under a broad range of natural gas prices and CO 2 costs when compared to NGCC. Our independent assessment confirms this perspective. When compared to NGCC and coal, nuclear is economically advantaged under a broad range of natural gas and CO 2 cost scenarios (see Figure 1) .

Looking ahead to a carbon-constrained world, the most advantaged supply technology will be defined by the relative cost of natural gas as the marginal generation source and by the cost of CO 2 as a new major driver of variable cost. The relative levels of CO 2 and gas prices ultimately define the per-kilowatt capital cost at which nuclear breaks even against any competing technology. For example, with a natural gas price of $9/MMBtu and a CO 2 cost of $20 a ton, nuclear is economically attractive up to overnight capital costs of $4,400/kW of capacity. However, at a CO 2 cost of $40/ton, nuclear remains viable up to overnight capital costs approaching $6,000/kW (see Figure 2) .

Sensitivity analysis suggests that the ability to control the capital cost of nuclear construction has the largest impact on economic advantage. Consequently, as the owner’s most controllable factor, predicting and developing proactive mitigation strategies for execution risk becomes of utmost importance. Given the amount of uncertainty over likely completed costs, owners will have to redouble their efforts to develop cost estimates that are well-founded, negotiate contracts that tightly define expectations and actively manage construction. Relying on markets for natural gas and CO 2 prices to bolster new nuclear economics cannot be the sole basis for proving out relative economics.

Aligning Interests

For nuclear to fulfill its promise as an economic solution to the country’s emissions and baseload power challenges, all industry participants—owners, OEMs, suppliers, EPCs, regulators, governments and financiers—need to recognize the nature of the environment in which the sector currently exists. Learning to live with uncertainty is, by necessity, a trait all participants will need to embrace.

The risks of undertaking new nuclear construction may be apparent to all observers, yet the implications of these risks