Five Nuclear Challenges

Deck: 

Building reactors requires new federal commitment.

Fortnightly Magazine - March 2009

With growing demand for electricity and shrinking sources for fuel, U.S. power producers are faced with a limited set of choices for replacing America’s aging power plants. While renewable energy sources will help offset future energy requirements, there is a need to provide a fleet of base-load power plants that can operate 24 hours a day, seven days a week. Realistically, only nuclear energy and coal offer viable choices as long-term energy sources for these new base-load plants.

Although natural gas is a generally cleaner fuel than coal or petroleum, wholesale prices are volatile and subject to seasonal demands. In spite of these drawbacks, natural gas power plants remain one of the best choices for addressing daily peak periods.

In contrast, most nuclear power plants are designed to operate continuously and are ideal base-load energy sources. Over the next decade many of the nation’s 104 operating nuclear power plants will begin to be taken offline for retirement, leaving America with a significant deficit in answering current base-load needs. In addition to replacing the retiring nuclear and coal plants, growing demand from a new electric economy will serve only to increase needs for expanded base-load power production.

Nevertheless, before a new fleet of nuclear power plants is built, there are five challenges that need to be addressed. These challenges are a matter of national policy and need clear understanding before any corporation can begin building new nuclear power facilities.

The arguments presented below address these challenges from the perspective of national and regional policy makers. In addition, many local organizations should consider these same arguments while deciding how to replace their aging base-load power plants.

The Five Challenges

There are a number of challenges that will need to be met before the private sector will invest in the construction of new nuclear power plants. An absence of resolution on these issues could explain why no U.S. utility irrevocably has committed to building a single new nuclear power plant in the United States.1

Two or More Certified Nuclear Plants are Needed: There is not a single new nuclear plant that can be built in the United States today because the certification processes for proposed designs aren’t complete. Without full and non-contingent certified nuclear power technologies to review and analyze, utilities are unable to make performance comparisons, economic assessments, or prudent “build/no-build” decisions. Therefore, until the federal licensing process is completed and two or more non-contingent nuclear power designs available, decisions by the private-sector to move forward likely will be delayed.

The federal licensing process for five utility-grade designs has been underway for several years. While the American Nuclear Society (ANS) reports significant progress in the licensing schedule, there is not a single design that either has received a full and non-contingent design certification, or is being actively promoted by nuclear manufacturers.2 Without NRC certification, there are no new nuclear plant designs to compare and thus no plants to construct.3

Without at least two certified designs available for review and analysis, no U.S. utility prudently can decide whether to commit to a build/no-build decision. Industry experience has demonstrated that even minor changes in design can result in substantial cost and schedule consequences.

Figure 1

Federal Policy Must Change: Even if certified nuclear plant designs were available today, there is an absence of the necessary federal policy in place to begin nuclear plant construction. According to a May 2008 Congressional Budget Office (CBO) study, the economic value of a new nuclear plant hinges on many factors including the proposed regulation of carbon dioxide (CO2) emissions.4 This study argues that if new federal policies impose less than a $45 charge per ton of CO2 emissions, then new nuclear construction will remain unattractive to utilities and investors. The CBO’s analysis shows that the failure to economically penalize greenhouse gas emissions will result in the cost of operating polluting plants to be more financially attractive to investors than the cost of new nuclear power plants.5 Only when CO2 emission penalties reach $45 a ton will a new nuclear plant become financially competitive against the use of coal and natural gas (assuming specific capital costs and cost of capital targets as defined by CBO, MIT, and the Energy Information Administration).

Until Congress and the executive branch institute firm rules that address CO2 emissions, no utility company will realize the competitive value of a new nuclear plant. Furthermore, until such legislation is passed and implemented, it’s in the financial interest of utilities to delay the development of nuclear plants and to build coal and gas-fired plants in their place.

Trillion Dollar Predicament: Even with licensing completed and emission policy resolved, there is an industry-wide shortfall when it comes to financing large power plants. Simply stated, the power industry can’t afford to build the 40 to 50 new plants needed to replace the existing 104 units that are set to retire.

According to the CBO, the expected cost of a completed new nuclear plant is unknown.6 Based on an analysis of nuclear power history, total costs could add up to more than $10 billion per unit.7 It turns out that a price tag of $10 billion (plus or minus a few billion) is a deal breaker for most utilities regardless of how productive or how profitable each plant might be. There are only four utilities in the United States with stockholders’ equity exceeding $10 billion, and only one with a stockholders’ equity above $20 billion.8 Only one or two of these companies reasonably can afford the financial risk of building a single new nuclear power plant. Even if management was willing to bet the company, it is unlikely shareholders and state regulators would be willing to go along with such a bet.

The best-case scenario suggests that industry can afford to build only three or four of these new plants. Under this scenario, new units could be built only if a group of utilities form ownership partnerships, spread the construction risks, or qualify for government assistance and guarantees.

The Energy Policy Act of 1995 does provide limited federal assistance in the form of loan guarantees and a production tax credit (PTC).9 The loan guarantee is capped at $18.5 billion and provides early developers with low-cost debt financing on up to 80 percent of the construction costs of a new nuclear plant (the U.S. Treasury reimburses the lender in cases of default).10 The industry responded to the first solicitation and asked the DOE to provide loan guarantees in the amount of $122 billion, which significantly exceeds the $18.5 billion available under the June 30, 2008 Nuclear Power Facilities solicitation.11

The PTC is limited to the first 6,000 MW of third-generation nuclear power plants and is set at approximately $18 per MWh for the first eight years of operation.12,13 If the first wave of new nuclear plants exceeds 6,000 MW, then the PTC is reduced and pro-rated among the qualifying plants.

The price tag for 100 new plants reaches approximately $1 trillion. The question is, “if utilities are unable to fund new construction, what entity has the money needed to pay for the remaining nuclear plants and who is willing to make the necessary investment?” It appears that no one currently is able to step up to the plate.

Without assistance from federal or state governments, a majority of U.S. utilities will be unable to finance the construction of a single new nuclear facility. Without viable financing, the future of new nuclear power plant construction looks gloomy.

Most Retail Rates Are Too Low to Support Nuclear Power: The projected levelized cost of a new nuclear power plant in 2006 dollars is approximately 7 to 8 cents per kWh.14 Adding another 6 to 8 cents for transmission, distribution, line losses, fees, metering, and customer service, the retail rate for power delivered to the consumer would be approximately 13 to 16 cents per kWh.15

The average retail rate to electric consumers in the United States is currently 10.2 cents per kWh.16 If the levelized cost of a new nuclear power plant exceeds current estimates of 10.2 cents, many retail electric rates will need to increase to offset the costs of these plants.

In most states, the current retail rates are too low to accommodate a new nuclear power plant and the utility will lose money on every watt of nuclear power produced. Currently, only the Northeastern states plus California and Nevada have rates high enough to absorb the levelized cost of new nuclear power plants—and New England states have banned the construction of new nuclear units.

No utility or other business will take on such construction without some assurance that it won’t lose money. Therefore, without a restructuring of electric rates for most U.S. regions, nuclear power plants can’t, and won’t, be built.

State and Local Policies Must Change: Even if nuclear designs were available, appropriate federal policies were in place, sources of financing existed, and retail rates were adjusted, current state and local policies are either missing or counterproductive.

One roadblock, which state laws commonly term Construction Work In Progress (CWIP), keeps utilities from billing customers for construction costs as they are incurred. Ameren President Tom Voss says, “that law stops construction of Callaway-Two before it ever starts.”17 Duke and Georgia Power also are seeking reversal in CWIP laws before they consider building any new nuclear facility.18,19 Further, Georgia Power claims CWIP costs the utility an additional $2 billion in financing on a $6.4 billion project.

Another roadblock comes from the moratorium imposed by several states and regions that prohibit nuclear power developers from building new plants in their territories. New England, New York, Wisconsin, California, and other localities have prohibitions on the construction of new nuclear units.20,21 Ironically, many of these same regions are experiencing the highest retail electricity rates in the nation.22

No nuclear developer or operator will proceed with construction in regions that roll out the unwelcome sign. If local rules, like CWIP, cause the capital costs and levelized costs to increase dramatically, new nuclear plants won’t be considered, much less constructed.

All five of these challenges must be addressed before any prudent organization can proceed with a firm commitment to build a new nuclear power plant. While there are undoubtedly additional factors to consider, proceeding without resolution of these challenges introduces inordinate risk.

Prioritizing Reliability

The five challenges fall into three broad and overlapping categories; regulation, policy and money. Taken together, the challenges appear to call for a “federal solution” to avoid a national energy supply predicament. An obvious solution is to adopt the approach taken by France, China, and other countries, which is to nationalize the nuclear power industry by having the federal government build, own, and operate a fleet of new nuclear power plants.

There is an alternative to the federal solution, which could maintain private-sector ownership of new nuclear power plants without significant subsidies. This alternative will require time, adjustments in existing statutes and cooperation among utilities, states, and national interests.

Part of the solution will happen no matter what path the industry or governments decide to take. Additional time is needed for the industry and the Nuclear Regulatory Commission (NRC) to complete the certification of two or more designs. If the industry successfully freezes their designs, the NRC will begin issuing full and non-contingent design certifications within the next two or three years. The timing of these certifications depends on the responsiveness of both industry and the NRC.

While many would like to have the NRC’s certification process expedited, additional time will be needed to resolve the policy and financial challenges that have been listed previously. Additional time is needed because the embedded issues are large, complex, and contentious, and because they aren’t widely appreciated by policymakers or the public. It should also be recognized that some of the proposed responses might face significant resistance among competing stakeholders.

While the industry waits for the NRC to issue design certifications, policymakers and the public can focus on the remaining four challenges and seek appropriate solutions. Four initiatives are offered below that would provide opportunities aimed at updating and balancing the incentives needed for an independent energy supply.

The first initiative is to enact public policy that addresses three important national goals, not just two. From a public policy and public perception point of view, it’s widely understood that the United States needs to move towards energy independence and away from greenhouse gases. As emphasized above, the piece that is not generally understood is that the United States also needs reliable sources of energy available to our economy 24 hours a day, seven days a week.

The United States economy operates on a 24-hour basis with a base load of power consumption that is always present. This base load of power is required by our traffic lights, internet, communications, heating systems, hospitals, rail systems, government, banking, manufacturing, airports, and our homes. In New England, for example, the base load is approximately 16 GW.23

Recognition of this round-the-clock load is essential. Ensuring the availability of these energy resources is almost as important as achieving energy independence and avoiding greenhouse gases. Consider the developing emergency in the United Kingdom:

“Britain is ‘quite simply running out of power’ and blackouts are almost inevitable within the next few years.” This is the stark warning from the head of an energy think-tank who believes power cuts could be serious enough to spark civil disorder. Campbell Dunford of the respected Renewable Energy Foundation [REF] said: ”It’s almost too late to do anything about it. Nothing will stop us having to pay very high prices for power in future. ... The retirement of a string of nuclear and coal-fired power stations will see 37 percent of the UK’s generation disappear by 2015, partly because of EU environmental directives.”24

“The [REF] report concludes: ‘A near fatal preoccupation with politically attractive but marginal forms of renewables seems to have caused a blindness towards the weakening of the UK’s power stations and a dangerous and helpless vulnerability to natural gas.’”25

The situation in the United States ominously parallels the United Kingdom. While wind, solar, and hydro are important components of future energy supplies, they do not currently offer the round-the-clock power availability needed by our economy. Until efficient methods of storing massive amounts of energy are developed, renewable resources only contribute to the goals of achieving energy independence and eliminating greenhouse gas emissions, but they fail to address the need for round-the-clock availability.26

The energy-policy debate must include considerations of availability. It’s clear from the New England example (see Figure 1) and the current situation facing the United Kingdom, that base-load power plants are a critical element of the power infrastructure. Accordingly, every incentive should be provided at both the federal and regional levels to maintain and improve our power-plant infrastructure as we seek energy independence and clean air.

Because the achievement of all three goals is critical to the nation’s economy and future well-being, public policy and public perception of the need for availability of energy supplies must be brought up to date.

Reducing Risks

A third initiative would establish state policies that provide rate-base treatment for utility base-load assets.

It’s in the public interest for utilities to operate a fleet of safe, economic, and reliable base-load power plants. By preventing utilities from incurring excessive profits and losses and allowing the public to harness the benefits of dedicated base-load plants, it makes sense to allow utilities to place new nuclear plant assets into the rate base.27 By placing these assets in the rate base and at the same time eliminating CWIP restraints, the owning utilities would lower their risks, have better access to financing, and incur lower levelized costs. Furthermore, by adding these assets into the rate base as they are built, retail rates could be raised gradually to cover the levelized costs of the new infrastructure.

Of course, some may object to this initiative in the name of deregulation. In response, one could argue that a fleet of new base-load nuclear power plants is in the national interest, represents a natural monopoly, and therefore it’s appropriate for states to regulate the economic performance of such assets according to traditional public policy.

A fourth initiative would establish corporate policies that reduce the risks of new power construction. Utilities learned some difficult and costly lessons when they built the last round of nuclear power plants. Many of those lessons have been lost to the passage of time and the turnover of individuals that built these plants.

For example, the owner of the plant in construction has fiduciary responsibilities to shareholders and stakeholders, including state regulators.28 Owners can’t subrogate management responsibilities to a contractor unless the contractor has the capacity, capability, and willingness to fully absorb the financial risks of cost overruns and schedule delays.29

Additionally, the owner must gain full appreciation of all the risks of building, owning, and operating a new nuclear power plant. This includes determining the full scope of the nuclear construction project, including the details behind the balance-of-plant (BOP) requirements, as well as the details behind the construction schedule. Do not assume a simple replication of a “sister project.” The industry learned there is no such thing as a simple replication or a standard plant.30,31 Insist on understanding the detailed plan that integrates the remaining engineering with the construction, startup, and with operations. Perform a levelized cost analysis on the full power project, including all the BOP and site work.32

Companies shouldn’t begin construction until the majority of all engineering is completed. This includes site and BOP engineering. The industry learned that “just-in-time engineering” led to “too late construction” which in turn caused very expensive rework. It’s far cheaper to delay the start of construction by a year and make sure everything is ready than to delay the completion of construction as re-work consumes the budget and the owner’s finances. The old adage of measure twice and cut once applies here.

Also, project owners should understand that on-site concrete, welding, and electrical construction will be the work that’s most likely to delay the project, rather than the off-site manufacturing of nuclear components. The industry learned that contractors have a propensity to take shortcuts with concrete and the regulator has a habit of catching them. This phenomenon repeatedly was experienced in the 1970s and 1980s, and similar events currently are taking place in Europe.

Finally, project sponsors should share the risks. For the first few new nuclear plants, find utility partners willing to take a partial stake in the new investment. One utility should take the lead, while other members participate in supporting roles. In the past, a number of investor-owned utilities (IOU) shared ownership with other IOUs, municipals, and cooperatives.33 Some, like CMS Energy, even shared their production economics with nearby industrial partners.

Nuclear Commitment

No U.S. company firmly has committed to constructing a new U.S. nuclear power plant. Until the five challenges identified in this analysis are mediated by effective action, no new nuclear construction of any consequence is likely to proceed.

The current constraints on building new nuclear units stand in obvious tension to the impending power-shortfall emergency in the United States. If new nuclear power is not quickly added to our energy portfolio, the United States will experience inadequate and unreliable power that runs parallel to the impending British situation. If ignored, the result will be unreliable energy resources and a concomitant impact on regional and national economies.

To address these challenges and mitigate their impact on the economy and the well being of society, four initiatives are offered. These initiatives address a set of key financial and policy concerns, but they do not represent an exhaustive list. Some of these recommendations might be controversial, particularly with respect to some special interests. Once the public gains a better understanding of the issues, their concern should diminish, but some compromise might be required. However, we no longer have the time or resources to continue addressing the interests of the few while ignoring the needs of the many.

By understanding the challenges identified, the industry will be better prepared to seek action on the proposed initiatives. Such actions will help America address its greatest need: Building a modern energy infrastructure that provides energy independence, environmental stewardship, and reliable delivery of power.

 

Endnotes:

1. There are press releases regarding site permits, but not a single press release indicating a firm commitment to build.

2. See: “Renaissance Watch,” Nuclear News (August, 2008), p. 14-15

3. See: “Design Certification Applications for New Reactors” on the U.S. NRC’s website: www.nrc.gov/reactors/new-reactors/design-cert.html. There is full certification for the Westinghouse AP-600, a 600 MW reactor that is generally viewed by utilities as uneconomic.

4. See: “Nuclear Power’s Role in Generating Electricity,” A CBO Study (May 2008), p. 27.

5. CBO’s calculation analyzes the “leveled cost” of building, operating, and financing a power plant which is a cost greater than the plant’s production cost.

6. See: “Nuclear Power’s Role in Generating Electricity,” A CBO Study (May 2008), pp. 16-18.

7. The estimated cost of $10B and more is supported by Moody’s, FPL Group, and Progress Energy, in recent publications and filings before Florida’s Public Utility Commission.

8. The four utilities, in order of value, are DUK [$21.3B], SO [$13.8B], FPL [$10.6B], AEP [$10.6B]. This list does not include Warren Buffet’s companies, the National Grid - a UK-based company, or other foreign entities, as foreign companies are prohibited by law from owning U.S. nuclear power plants.

9. See: “Nuclear Power’s Role in Generating Electricity,” A CBO Study (May 2008), pp. 10-11.

10. See: “The Consolidated Appropriations Act of 2008.” Pursuant to this authority, DOE issued solicitations on June 30, 2008 for up to $18.5 billion for nuclear power facilities.

11. See: “DOE Announces Loan Guarantee Applications for Nuclear Power Plant Construction,” (Oct. 2, 2008).

12. See: “Nuclear Power’s Role in Generating Electricity,” A CBO Study (May 2008), pp. 9, 21–23, 30.

13. The $18 per MWh remains fixed and there is no provision to adjust the credit for inflation.

14 . See: “Nuclear Power’s Role in Generating Electricity,” A CBO Study (May 2008), p. 26. The data are also supported by independent studies performed by the Energy Information Administration (EIA) and MIT.

15. Some states impose significant fees on tariffs to pay for energy conservation, energy incentive, and social programs.

16. See: Christopher Palmeri and Adam Aston, “Power Surge,” Business Week (July 24, 2008).

17 . See: Bob Priddy, “Ameren says, "no new nuke plant" as long as CWIP exists,” Missouri News (June 29, 2008).

18. See: “Customers to Bear Financial Risks of New N-Plants under Duke Plan,” NC Warn (Oct. 11, 2006).

19. See: “Georgia Power Asks Regulators to Approve Nuclear Power Units,” Power Engineering (Aug. 1, 2008)

20. See: Eugene E. Dallaire, “Will Nuclear Power Survive in New England” Civil Engineering—ASCE, Vol. 51, No. 2, February 1981, pp. 61-63

21. See: “Nuclear Energy in California” website: www.energy.ca.gov/nuclear/california.html.

22. See: Christopher Palmeri and Adam Aston “Power Surge,” Business Week (July 24, 2008)

23. To provide context, 16 GW is the equivalent of operating approximately 50,000 wind plants of 1 MW each with an aggressive capacity factor of 33 percent designed to meet the 16 GW of demand and an additional 34 GW of capacity to provide the minimum storage requirements when the capacity factor falls below 100 percent (a huge amount of storage capacity that does not currently exist anywhere in the world). Even with a capacity of 34 GW, the energy storage capacity would not be sufficient if wind resources were inadequate for two or more days; a scenario with a 100-percent probability for any given month. It should be noted this is an overly simplified example of a complex storage issue.

24. See David Braddish, “Britain Could Be Short on Electricity in a Few Years,” NEI Nuclear Notes (Sept. 9, 2008).

25. See: Jason Groves, “Blackout Britain Warning,” Daily Express, (Sept. 9, 2008).

26 . See: John Petersen, “Grid-based Energy Storage: Birth of a Giant,” Seeking Alpha (Aug. 11, 2008)

27. Many states already allow utilities to place new power assets into the rate base. Other states that deregulated power assets, may not currently allow plants into their rate base.

28 . State regulators will have a more active role if the plant is to be in the rate base and CWIP is eliminated.

29. Before hedging significant risk to a contractor, look carefully at that company’s ability to absorb the risk. Surprisingly few companies can or will absorb the risk of a single nuclear power plant.

30. Compare Wolf Creek with Calloway; Maine Yankee, Surry, North Anna, with Beaver Valley; Diablo 1 with Diablo 2, etc.

31. With respect to the next generation of nuclear plants, the United States is a large country with vast differences in geology, terrain, and populations; construction access such as barging, heavy rail, and adequate roads; and access to critical resources such as cooling water, makeup water, transmission lines, and labor.

32. As more units are built, late adopters will benefit from the learning curve and will enjoy risk and economic advantages.

33. Examples include the South Texas Project, the Yankee Plants, Wolf Creek, Marble Hill, Midland, and Beaver Valley.