Taking The Long View
In today's market, with competition imminent and natural gas still cheap, nuclear generation appears dicey. The popular view tags nuclear with high costs and suspect availability, even without reaching the more fundamental issues of safety and waste disposal. One wonders: What advantages lie open to nuclear power?
Many observers see excess capacity running rampant and commodity prices falling across the board as deregulation accelerates and power flows more freely across markets and service territories. Marginal generating assets (em with most nuclear plants included in that group (em become unneeded and expendable.
Nevertheless, the debate may well hide another side. Excess capacity in electricity generation exists even today. Market prices already seem destined to fall in the short term in many high-cost regions, once retail access arrives. But for how long will prices remain low? For how long will a capacity surplus endure?
And once economic growth begins to shrink the capacity gap, and prices again start to rise, can the market find a role for nuclear assets (em expensive overall but relatively cheap to operate once investments are paid off or written off? The answer depends directly on several key factors: electric prices, cost and availability for nuclear plants, and how owners and regulators deal with nuclear investment.
That nuclear assets are valueless and better off abandoned does not stand as a foregone conclusion. Even in the midst of excess capacity, a glimpse of a very different future was revealed in April of 1996, in the Northeast. An unseasonal heat wave descended on the mid-Atlantic and New England states, just as certain key units backed out of service for maintenance, and just when Connecticut's Millstone nuclear units and New Jersey's Salem nuclear units remained down on long-term outages. The result? Rolling brownouts. Clearly, these units were needed. That need could well grow.
Today, on the brink of a very uncertain market evolution, keeping open the nuclear "option" would seem the wise course, at least until the future unfolds a bit.
Today's Bad News
Average commodity prices for electricity today run anywhere from $15 to $25 per megawatt-hour (MWh) (em a price range sufficient to cover operating (variable) costs, but not invested capital, at least for a large segment of generating assets, including most nuclear plants.
Nevertheless, some observers of recently deregulated markets (air travel and telecommunications come to mind) have noted that prices fall in the early going, but tend to inch back up again (em not to levels that prevailed before deregulation, but higher nonetheless. The same thing may well occur with electricity.
Granted, many producers appear willing and anxious to sell electricity at less than full cost. Flush with a revenue cushion from sales to captive customers, they search for incremental sales in the wholesale market, to cover operating costs and make further (em albeit partial (em contributions to embedded capital. In fact, many producers compete fiercely to land such incremental sales (em battling one another and a growing cadre of marketers and other middlemen, Not only can producers afford to sell at reduced prices, they must sell below cost, or lose out to the competition.
But market equilibrium is quite another matter.
Prices respond to supply and demand. If today's surplus capacity is unleashed, it stands to reason that prices will fall initially. But over time, as economic growth fuels demand for power, that surplus will be absorbed and prices will inch back up to a steady-state level.
Where that steady-state level might fall remains unknown, but technology can provide an important clue. When a technology can be put into production, over and over again, without limitation, at a constant cost, it creates a sort of "backstop" for costs and prices. Producers view such a backstop technology as one they can "clone" indefinitely, flattening the supply curve for a long time.
In the generation business, gas-fired, combined-cycle technology may provide such a backstop to costs and prices, as long as gas stays cheap. Many observers feel that this technology can deliver electricity for $35 to $45/MWh in perpetuity, allowing for recovery of both operating costs and invested capital.
Tomorrow's Good News
Today's market price of $15-25/MWh has plenty of room to grow before it approaches tomorrow's more realistic steady-state price of $35-45. Compare that prediction with nuclear's low-cost operating profile (on the order of $10-20/MWh, in many cases).
In the future, then, many of today's nuclear plants may well become valuable assets, not only to their owners (because of their "cash cow" potential), but to society at large.
The key lies with capital investment (em both sunk and ongoing. Today, the need to recover past investment is what pushes up costs for many nuclear plants. This need is quite real for plant owners, as they owe fiduciary duties to stockholders and bondholders. It marks a big part of today's "stranded asset" debate, and invites interest in shemes for accelerated depreciation. Over time, however, recovery of past investment may begin to take care of itself (em if not in the short term (3-5 years) years, then at least 10 years down the road, when much of this "sunk" investment may well be recovered (or even written off), turning nuclear assets into cash cows with low operating costs.
Looking forward, the biggest uncertainty apart from market prices (em indeed, the biggest barrier to realizing the future described above (em will prove the ability of nuclear asset owners to control future investment needs and future costs in general. If these owners can continue to keep operating costs under control, gradually pay off past investments, and not add significant new investments, their assets will become enormously valuable. If, on the other hand, they must continue to invest just in keep operating (em in new steam generators, for example, or massive repiping projects (em their nuclear assets will fall far short of competitive, even at a long-run equilibrium price of $35-45.
"Life extension" comes into play here. If nuclear owners can control new investment, and at the same time extend useful life from 40 to, say, 60 years, the asset may very likely become a money machine. On the other hand, if those additional 20 years of service cannot be achieved without significant new investment, the cash flow benefits may disappear altogether. In fact, the entire "life extension" process among nuclear owners has not yet truly caught on, despite the cash-flow opportunities, for just that reason (em the specter of investment required toward the end of the asset's useful life.
Those Darned Intangibles
Notwithstanding these opportunities, the future for nuclear appears problematic at best. Many problems lie outside the scope of technology and economics: Such issues as safety, enforcement, and permanent waste disposal still go without answers, yet remain so fundamental as to override the best-laid plans, no matter how the markets play out.
Each plant is unique. Managers must decide asset by asset how to address the market, as in fact many nuclear plant owners are currently doing, keeping in mind these key fundamentals:
• Excess electric capacity is probably not permanent. As it shrinks over time, market prices will probably tend to rise.
• Many existing nuclear assets can be operated relatively cheaply. Once initial investments are paid off or written off, nuclear costs to deliver electricity may drop significantly.
• The real key to nuclear cost control going forward will lie with additional capital investment, including investments in decommissioning and waste disposal. If control is possible, the nuclear asset may become both a money machine and a social good. If control is not possible, walking away early may be preferable to walking away later. t
Lewis Rubin is a principal at Portal Solutions, a management and strategic consulting firm, Santa Cruz, CA.
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