A number of factors point to expanded nuclear generation. But when?
The role that nuclear power will play in the U.S. electricity generation mix during the coming decades has been a subject of continuing speculation. Few analysts deny the remarkably improved prospects for the existing fleet of reactors: Efficiencies realized by industry consolidation, reactor uprates, and plant license renewals have, in a period of about five years, greatly increased the market value of nuclear plants and the competitive advantage of companies that own them.
Where doubts arise, however, is whether these improvements will translate into expanded use of nuclear power generation, in the form of advanced reactor construction. The high capital costs of nuclear plants continue to be the main obstacle to new plant construction, particularly in deregulating markets that have favored technologies with short lead times and the potential for quick recovery of capital costs. In addition, although public opposition to nuclear has declined, remaining concerns over plant safety and nuclear waste disposal continue to present risk factors as far as the investment community is concerned. Skeptics believe investors will continue to shy away from nuclear in the coming decades, especially given the specter of capital cost overruns that plagued the nuclear industry in the 1970s.
But conditions may be changing. The three largest nuclear fleet operators-Exelon, Entergy and Dominion-remain cautious concerning new nuclear orders but are proceeding with pre-licensing work to obtain early site permits from the U.S. Nuclear Regulatory Commission (NRC) in any case. The U.S. Department of Energy's stated goal of bringing two advanced designs on line by 2010 may be somewhat optimistic, but there may be good prospects for achieving this a few years later. And even before the deployment of these new reactors, there is the potential for restart of shutdown plants such as the Tennessee Valley Authority's Browns Ferry Unit 1, and possibly completion of the TVA's partially built Bellefonte reactor.
Enthusiasm for new nuclear plants seemed to increase rather suddenly in early 2001 in the midst of California's energy crisis, which raised considerable concern over looming power shortages nationwide. The newly inaugurated Bush-Cheney team announced that the United States would have to build 1,300 to 1,900 new power plants over the next 20 years, and it voiced strong support for nuclear power as a component of this buildout.1 In 2000 and 2001, nonutility generators and utilities substantially increased the amount of new capacity brought on line (mainly gas turbines) over the amount throughout the late 1990s. It appeared for a time that new nuclear orders would be forthcoming as well.
But by early 2002, with the U.S. economy mired in recession and the collapse of Enron fresh in people's minds, the euphoric mood of power producers and equipment suppliers subsided as it became clear that the perceived power shortages had been overstated. Nonutility generators brought a total of 59 GW of new capacity (again, mostly gas) on line in 2002, but in the same year cancelled 5 GW and delayed another 37 GW beyond 2002.2
New gas-fired capacity continues to come on line, and analysts project that the national average reserve margin will peak at 37 percent in 2004.3 The most recent reliability assessment from the North American Electric Reliability Council (NERC) finds that electricity demand is expected to grow 71 GW in the near term (by 2006), but that new resource additions of 159 to 263 GW are expected over the same time period.4
But there are two important caveats concerning these high reserve margins. First, even with the widespread capacity overbuild nationally, there are concerns about adequate reserve margins in key regional markets. Regions such as New England and the PJM have succeeded in maintaining healthy reserve margins, but states such as California and New York have had far less success. New York continues to wrestle with how to convince developers to build sufficient reserve capacity, without imposing such strict penalties for failing to do so that developers will be discouraged from investing in the state. NERC's reliability assessment indicates that New York will not meet its 18 percent installed reserve margin requirement beyond 2004.5 In May of 2003 the New York ISO (NYISO) called for the approval of 5,000 to 7,000 MW of new generating capacity in the next five years to maintain a reliable supply of electricity and keep prices competitive. NYISO President William Museler noted that "approximately 2,500 MW is under construction today but only another 1,000 is realistically on the horizon."6
Second, since the recent capacity growth has come in the form of gas turbines used for peaking and intermediate loads, it is not clear that any glut exists in traditional baseload power sources. It likely will become necessary to rely on the new gas-fired capacity for a portion of baseload generation, a proposition that introduces, at a minimum, economic risk and in the worst case serious concerns about the reliability of supply.
Some analysts are concerned electric reserve margins could drop to dangerously low levels by the latter half of this decade if significant additional baseload capacity is not built. For instance, William Horton, research analyst for Platts Energy, says, "A continuing stream of new generating capacity is required to meet or exceed normal reserve margin requirements. … The country has enough generation for the near term, but … the abundance will be short-lived."7
Thus, serious doubts remain regarding the effectiveness of deregulation in ensuring that adequate generating capacity is maintained. To guard against the strong possibility that competitive markets will fail to stimulate sufficient investment in generating capacity, the Federal Energy Regulatory Commission (FERC) has proposed a reserve adequacy requirement (RAR) within its standard market design (SMD) proposal, which it announced on July 31, 2002.8 The RAR would mandate a 12 percent reserve margin in deregulated electricity markets across the country. (Many experts are skeptical, however, whether such requirements would actually be enforceable.)
Nevertheless, it appears likely that deregulation will continue, despite questions arising in the wake of the California energy crisis and now the Northeast blackout of Aug. 14, 2003. (The spread of retail competition nationally appears to have slowed in the wake of the California crisis, but thus far there does not appear to be a significant trend to return to re-regulation.) There is too much at stake for the continued competitiveness of U.S. industry to expect otherwise, particularly among energy-intensive segments such as chemicals and primary metals, where electricity is a significant cost of production. Companies in these industries are a major source of revenue for power producers, and can opt to invest in cogeneration facilities if necessary to avoid high regulated power rates. They can also forgo expansion plans or move operations to another state, or offshore. Partly for this reason, state policy-makers, at least those in the more densely populated Northeastern and Midwestern states, are heavily invested in establishing competitive power markets and are unlikely to reverse course.
Impact on Nuclear
What do recent trends in reserve margins and future deregulation policy mean for nuclear? A key point is the declining share of traditional baseload power sources in the generating mix. It is important to emphasize that the recent overbuild of generating capacity in this country has come almost entirely in the form of nonutility generators building gas turbines. Rising gas prices already challenge the wisdom of having built a large number of these gas-fired units to meet electricity demand in deregulated markets. The current circumstances should lead energy companies and investors in coming years to look again to traditional baseload technologies as the best means of ensuring adequate capacity, recognizing that their higher capital costs are offset by their lower and more predictable fuel costs.
Investment in additional baseload capacity will become increasingly important as the economy grows in the coming years, and it is difficult to imagine power producers adding baseload capacity without a significant contribution from nuclear. Consider the other options:
- Coal Plants. Investment in new coal plants-already the largest source of baseload electricity-would run the risk of worsening economics due to carbon constraints that seem inevitable in the next few years and are already proceeding at the state level. (It must be noted, however, that the Bush administration's recent New Source Review decision, which allows the oldest coal plants to upgrade without installing pollution control equipment, effectively holds down the average cost of baseload power, a negative for nuclear's prospects as well as public health.)
- Gas Turbines. Meanwhile, gas prices of late clearly show that fuel to be a choice ill-suited to baseload generation. We could come to regret future reliance on gas for baseload generation, which could be a high-cost option, or worse still, could reduce electric reliability in the event of a significant gas supply interruption.
- Renewables. Renewables will continue to gain market share, but it may take decades before they provide a significant portion of the country's baseload generation capacity. Wind energy costs, for example, are down about 90 percent since the 1980s, from 80 cents/kWh to about 4 cents/kWh today, and the industry is poised to reach 6,000 MW of installed generating capacity nationwide by the end of this year.9 But as a recent report for the World Wildlife Fund observes, "Since wind is an intermittent electricity generator and does not provide power on an 'as needed' basis, it loses some value on a per kilowatt-hour basis, compared to traditional electric generation that can provide baseload power. On the other hand, wind provides benefits in terms of reduced emissions and elimination of fuel risk that can more than make up for this lost value."10 As well as biomass derived from energy crops, geothermal may be better suited to baseload generation, but the degree of market penetration is expected to be relatively modest.
Even given their higher capital costs, nuclear plants, once built, have generally lower operating costs than their fossil-fired counterparts-an advantage that will increase as greater restrictions are placed on fossil fuel pollutants. According to the Nuclear Energy Institute, 2002 was the fourth successive year in which "nuclear energy was the low-cost leader for baseload production of electricity," with production costs of 1.71 cents/kWh, in comparison with coal-fired power plants, 1.85 cents/kWh; natural gas plants, 4.06 cents/kWh; and oil-fired plants, 4.41 cents/kWh.
Increased demand will make investment in new baseload capacity imperative in coming years. It is highly likely that when this occurs, nuclear power will be the only available technology well-suited to baseload operation that can contribute substantially to meeting this demand without also contributing to global warming, urban ozone pollution, acid rain and other environmental and public health impacts of burning fossil fuels.
Investment Community Views
Despite the greatly improved operational efficiency of existing plants, and the improved economies of scale resulting from industry restructuring, the investment community remains generally skeptical of new projects in competitive electricity generation. Wall Street is shying away from construction of any type of new plant until debts from the recent merchant energy fiasco are paid off. Power industry stocks have suffered major losses, especially those companies relying heavily on natural gas. Most of the failures to date have been in the merchant energy sector and were a result of over-investment in gas-fired units. However, Wall Street does have some special concerns about nuclear investment, based on uncertain construction costs and risks to company earnings during potentially protracted construction of the first new nuclear plants. Moreover, the investment community views the potential for accidents, and concerns about nuclear waste and terrorism directed at the nuclear industry, as risks that must be taken into account.
The companies that could build the new nuclear units also remain skeptical, concerned that in a competitive environment they cannot afford to tie up a large investment for several years before any earnings on that investment will materialize. Thomas Capps, chairman of Dominion Resources, put it the most bluntly, in recent comments to Public Utilities Fortnightly: "Right now I don't think anyone in this country is going to build another nuclear plant. We certainly are not. There is too much risk."11
Entergy could be the most serious contender. Writing recently in Nuclear Plant Journal, Entergy Nuclear CEO Gary Taylor said: "Entergy is considering a two-track course on new nuclear-advanced light water reactors for the near-term and advanced gas-cooled reactors that could be built underground and are supersafe for the longer term." Taylor noted that the gas-cooled option could produce hydrogen at a low cost and fuel a new hydrogen economy. However, he cautioned: "We have not decided to build a new reactor."12
In the current investment environment-recession, excess capacity, and bad experiences with power sector projects-it is understandable that no U.S. utility has yet committed to the high capital costs and long construction duration of a new nuclear unit. But the investment climate could change for two reasons:
- The rising cost of natural gas. The recent increase in gas prices probably improves the economic attractiveness of new nuclear only to a limited extent, since the projected price of natural gas a few years down the road matters more than the current figures. But if gas prices remain high into next year, these projections will likely adjust upward; executives and investors may then have increased concern over the risks of over-dependence on gas.
- The potential for a carbon policy. Exelon CEO John Rowe described the influence of a carbon policy very clearly, in an interview with the Sustainable Energy Institute: "Sooner or later, we're going to have ever-tightening standards on carbon and that is going to force a new generation of nuclear in this country."13
Edward Tirello of Berenson & Co.'s Power and Utilities Group recently provided an upbeat assessment of nuclear power's future, telling Fortune magazine last year: "If they use advanced designs, and get all the litigating done up front before construction starts, and the companies have assured Wall Street that they have markets for the power output, these plants are bankable. Nuclear plants are the best assets you have in the power business, because the power outflow, costwise, is steady."14
The key to future nuclear orders may be the industry's ability to share risks for first-of-a-kind plants and produce economies of scale by forming a consortium that would build several plants. Southern Nuclear CEO George Hairston told Fortune this might involve "a group of four or five utilities, vendors, and financial institutions coming together and building perhaps eight plants, and charging everybody the average cost, so nobody has to bear the risk of the first plant alone."15
The timing of new plants may also depend on whether investors differentiate risks between non-utility generators (NUGs) and traditional utilities. NUGs carry enormous debt from the recent over building, while utilities do not; and NUGs build new capacity based on price signals, while utilities building baseload units appear to continue to focus on demand growth. It may be that the bad experience with deregulation is still too fresh in investors' minds to differentiate the risks this way. Moreover, utilities may not yet see sufficient baseload demand growth to justify new nuclear units, but an increasing dependence on expensive gas-fired units for baseload generation could quickly change this view.
In the hope of overcoming hesitation on Wall Street and in power company boardrooms, the nuclear industry has lobbied for some form of stimulus or support from the federal government. The industry's concern is that the first new plants-which will likely be new ALWR designs going through a new NRC licensing procedure-could be delayed because of licensing uncertainties as well as first-time engineering risks. Incentives such as a production tax credit, similar to the 1.7¢/kWh tax credit that wind energy plants currently enjoy, are likely to emerge from the energy bill negotiations now under way in a House-Senate conference. A major new report on nuclear energy from the Massachusetts Institute of Technology proposed a credit of $200/kWe of the construction cost of up to 10 "first mover" plants, paid out over a year and a half of full-power operation at a rate of about 1.7 cents/kWh.16
Such credits are often criticised as unnecessary federal handouts to mature industries. However, it is important to recognize that the energy bills that have passed the House and Senate are loaded with stimuli for just about every other fuel type, amounting to about $18 billion in tax credits most heavily allocated to the oil and gas, renewable energy and alternative fuels industries.17 To keep a level playing field, it would be necessary either to eliminate all production incentives or to keep a balanced mix.
Federal Role in Ensuring Capacity
It is increasingly clear that under deregulation, a federal role is necessary to ensure a sufficient overall level of generation nationwide as well as a diversity of new generation facilities, including baseload capacity. Federal action also will probably be necessary to provide sufficient incentives for this new capacity to be clean burning.
The most effective policy solution to achieve these goals would be an across-the-board stimulus to develop and install clean energy technologies. A carbon policy of some form would be the best means of accomplishing this. Further incentives may take the form of the reserve adequacy requirement in the FERC SMD, and other incentives to build, such as production tax credits, or portfolio standards specifying minimum levels of generation from desired technologies. Without such intervention, deregulated markets will continue to yield only the type of new plants having the quickest payback.
A national carbon policy would have the advantage of simplicity, in contrast with a complex regime of different production incentives for different electricity generation sources. The energy bill recently under debate in Congress cobbled together a patchwork of production incentives-not necessarily a bad approach as long as there is an emphasis on clean technologies, diversity, and long-term reliability.
Carbon constraints, or financial incentives for non-carbon technologies, would significantly improve the future of nuclear power generation. Clearly, the Bush administration's decision to scuttle new source review for aging coal plants will not help nuclear power's prospects in the near term, as power companies will be able to continue operating these plants inexpensively without installing costly pollution control equipment. Nonetheless, carbon constraints will become a reality as the decade progresses, based on state if not federal policies, as well as consumer pressure.
It is likely that new nuclear plants eventually will get built in the United States with or without government intervention. Some combination of growing demand, rising gas prices, and lower nuclear capital costs eventually will convince investors, and the time may not be far off. But government action could have a very large impact on the timing and extent of a nuclear second coming. Most significantly, if U.S. energy policy would internalize the public health and environmental costs of fossil fuel combustion, market forces alone would bring about new nuclear orders and there would be no need for direct government support. Absent such a policy, direct incentives for new nuclear plants, as were debated in the energy bill, will serve as a reasonable hedge against the risks from increased reliance on natural gas, especially for baseload generation.
- National Energy Policy Development Group, , May 2001. pp. 1-5 to 1-6.
- Derived from U.S. Energy Information Administration, Form EIA-860A, "Annual Electric Generator Report-Utility" and Form EIA-860B, "Annual Electric Generator Report-Nonutility."
- "U.S. Reserve Margins Expected to Peak in 2004 as Supply Expansion Continues," press release, Energy Ventures Analysis Inc., April 11, 2002 (available at http://www.economy.com/store/dept.asp?c=1&h=H00120024).
- North American Electric Reliability Council, 2002-2011, October 2002, p. 5.
- Ibid., p. 19.
- New York Independent System Operator, "Power Alert III: New York's Energy Future," May 2003 (available at www.nyiso.com).
- Horton, William, "Realities Constraining North American Capacity Expansion," , April 2003. p. 53.
- U.S. Federal Energy Regulatory Commission, "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design" (Notice of Proposed Rulemaking), Docket No. . The SMD is designed to organize the nation's transmission facilities under the jurisdiction of four or five regional transmission organizations, independent supervisory bodies that would oversee the maintenance and use of these facilities. The intent of organizing the nation's transmission grid in this fashion is to standardize costs of moving electricity across the grid and decisions about investing in the grid. The fate of the SMD is far from certain; as of this writing, the House and Senate versions of an energy bill, containing SMD provisions, are in conference, with the most likely outcome being that SMD implementation will be delayed until at least 2006 to placate regulated Southern and Northwestern states, as well as consumers across the country worried about the effect of transmission "wheeling" on grid reliability.
- A. Clamp, "Wind Flies High," , July/August 2003, p. 24
- Tellus Institute and the Center for Energy and Climate Solutions, "The Path to Carbon Dioxide-Free Power: Switching to Clean Energy in the Utility Sector," prepared for the World Wildlife Fund, April 2003.
- "The CEO Power Forum," , May 15, 2003, pp. 36-37.
- G. Taylor, president and CEO, Entergy Nuclear, "An Investment in the Future," , July-August 2003, p. 31.
- John Rowe, CEO, Exelon Corp., interview with Sustainable Energy Institute, "The Sustainable Energy Top Ten Awards 2001," January 2002. p. 67.
- Brown, Stuart F. "How Do You Feel About Nuclear Power Now?" , March 4, 2002, pp. 130-134.
- Massachusetts Institute of Technology, , 2003, pp. 80-81.
- S. Lazzarri, Congressional Research Service, "Energy Tax Incentives in the 108th Congress: A Comparison of the House and Senate Versions of H.R. 6 and the Senate Finance Committee Amendment," Aug. 19, 2003.
Success at Existing Plants
The biggest surprise to date regarding nuclear power in a deregulating environment is simply how well nuclear plants have survived. As deregulation began in the 1990s, nuclear was considered a dying industry. The market value of plants had plummeted, and some owners were anxious to get rid of them. But in the last 10 years, operators have managed to greatly improve reactor performance industry-wide. Moreover, with the industry's restructuring under deregulation, large power companies like Exelon, Entergy, Dominion, and Constellation have purchased these plants from regional utilities. These consolidators and other operators have improved operations and turned nuclear plants into sound, highly competitive investments.
As a result of these efforts, capacity factors and refueling outages have improved to record levels, and perhaps most importantly, plants that are nearing the end of their initial 40-year licenses, far from being decommissioned as many once predicted, are in fact applying for 20-year license extensions. The market value of reactors increased dramatically in some cases, and power companies with nuclear assets generally have outperformed those without them in the stock market. To the surprise of many, nuclear plant operators made their plants far more competitive operationally during the first decade of electricity deregulation in the United States.
To be sure, industry critics question whether this operational improvement has come at the expense of safety. The Union of Concerned Scientists warns that "extreme pressure to cut costs at marginal nuclear plants has one very serious possible consequence: It could reduce the margin of error on safety."1 Nuclear Regulatory Commission (NRC) safety performance indicators thus far show continuing safety improvement through 2001, the latest year for which data are available.2 Clearly, the NRC as well as the industry itself must continue to be vigilant in ensuring that the competitive pressures of deregulation do not compromise plant safety.
Assuming continuing safety improvements, the good fortunes of existing plants in the deregulating electricity industry will contribute to improving the prospects for new ones. One key factor is that the restructuring of the power industry has resulted in larger and stronger nuclear operating companies that are more likely to build additional nuclear units.3
- Union of Concerned Scientists, "Nuclear Safety in a Changing Electricity Industry" (available at http://www.ucsusa.org/clean_energy/nuclear_safety/page.cfm?pageID=180).
- U.S. Nuclear Regulatory Commission. Information Digest, 2002 Edition. NUREG-1350, Vol. 14, pp. 50-51 (available at http://www.nrc.gov/reading-rm/doc-collections/nuregs/staff/sr1350/v14/fig25.html).
- Neil J. Numark and Robert D. MacDougall, "Nuclear Power in Deregulated Markets: Performance to Date and Prospects for the Future," , 2001.
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