What future for US nuclear plants in competitive electricity markets

1 October 1998



In the US, the electricity business and the nuclear energy business are going through significant change. Besides the challenge to be more cost effective and competitive, the industry must promote the environmental benefits of nuclear power and work to ensure that the proven safety and maturity of the industry is taken account in the regulatory process.


With the passage of the Energy Policy Act of 1992, and subsequent orders by the Federal Energy Regulatory Commission (FERC), wholesale competition fully exists today in the US electricity markets. All of the states are looking at the benefits of retail competition, and 18 states have already acted through legislation and/or regulation to provide for customer choice in the retail electricity market.

As a result of both federal and state actions, companies are divesting generating capacity, forming independent system operators to manage the transmission grid, and creating energy supply companies. In 1996 and 1997, 24 investor-owned utility mergers or acquisitions were announced. Twelve of those have already been consummated; nine are pending; three have been withdrawn. A recent study prepared for the Utility Data Institute found that in the past 18 months, 23 electric utilities reported the sale, or intent to sell some 81300 MW of capacity, with a book value of $18 billion.

We are also seeing significant changes in the nuclear energy business. These changes will produce a stronger, more competitive nuclear business, which operates even more safely and reliably.

ECONOMIC PERFORMANCE AND COMPETITION

We often hear people say that US nuclear power plants can’t compete with other generating sources. Nothing could be further from the truth.

In 1996 (the last year for which we have reliable, industry wide data), 68% of US nuclear plants had production costs under 2 cents/kWh and 17% of the plants had production costs under 1.5 cents/kWh. Even when you add in estimates for to-go capital, G&A and profits, you find almost all of the plants can produce electricity for 3 cents per kilowatt-hour or less, which is still competitive with the most efficient new combined-cycle gas plants. Looking across the industry, real progress has been made in achieving greater economic efficiencies, but significant opportunities still exist – particularly for the third- and fourth-quartile performers – to get more efficient. Our best performing plants are spending less that half as much on operation and maintenance (O&M) as the fourth quartile, and only 60% of the expenditures incurred by the third quartile.

Recent decisions by nuclear utilities to pursue licence renewal demonstrate the growing understanding of the financial benefits of existing plants in a competitive business environment. A deregulated, competitive electric generating business creates a powerful business incentive to renew a nuclear plant’s licence. Under traditional cost-of-service regulation, a power company’s earnings are based on its rate base – its total investment in plant and capital equipment. Because a 40-year-old nuclear unit would be fully depreciated – and thus not part of the rate base – it would have limited earnings potential under cost-of-service regulation. In a deregulated, competitive business, a fully depreciated nuclear plant is a tremendous asset. It can sell its power at marginal cost, which (for a nuclear unit) is very competitive. Such a plant would have significant profit potential.

We do expect that some of our plants will shut down either prematurely, or when their 40-year operating licences expire. In fact, we have already seen this happen for plants that were not performing well and required significant additional investment, or that were good performers but could not bring their costs into a competitive range, often because of uncertainty in the regulatory process.

ENVIRONMENTAL BENEFITS – THE HIDDEN VALUE

For years, little or no attention was paid to the fact that nuclear energy produced trillions of kilowatt-hours of electricity without contributing to air pollution problems.

It is now beginning to be recognised by supporters and detractors alike that nuclear energy provides nearly 20% of America’s electricity, while also contributing significantly to meeting clean air goals.

Between 1973 and 1996, nuclear energy met 40% of the increased demand for electricity in the United States. At the same time, it avoided the emission of 80 million tons of sulphur dioxide and over 34 million tons of nitrogen oxide. In 1996 alone, nuclear plants avoided the emission of 5.3 million tons of SO2 or greater than 50% of the SO2 cap established by the 1990 amendments to the Clean Air Act. Annually, our nuclear plants currently avoid the emission of 147 million tons of carbon and about 2.5 million tons of NOx.

Fossil-fuelled power plants are already subject to heavy and increasingly stringent regulatory and enforcement burdens under the Clean Air Act in the United States, and the administration has also made clear its desire to increase that burden by expanding the list of pollutants regulated by the Environmental Protection Agency (EPA).

The EPA’s current method of regulation in the acid rain programme is a “cap-and-trade” compliance system for SO2 emissions, under which emissions beyond the specified “caps” must be offset by reductions in SO2 emissions from other sources using an SO2 allowance system. In other words, if a company wants to exceed its pollution limit, it can purchase the right to do so from companies that have reduced emissions. There is irony in this approach since in order to participate a company must actively pollute the atmosphere. Because nuclear plants do not emit air pollutants they are not participants in the cap-and-trade process. The Nuclear Energy Institute recently sponsored a study that showed that the SO2 emissions avoided because of nuclear energy’s increased contribution to electricity supply between 1990 and 1995 allowed coal-fired plants to effectively bank about 480000 tons of SO2 allowances, with a market value of about $60 million.

One of the industry’s goals is to gain appropriate economic recognition for this hidden environmental value of nuclear energy. We believe tradable credits should be earned not only on the basis of reduced pollutant emissions, but as a function of avoided emissions as well. As the EPA looks to increase controls on ozone production in the atmosphere, and as the Clinton administration looks towards satisfying its Kyoto carbon reduction commitments, the use of cap-and-trade systems, including proposals that would give credit to nuclear and other non-emitting sources, are being discussed as part of the policy formulation process. In the area of ozone control, the use of a fuel-neutral NOx cap-and-trade programme could provide between 0.3-0.5 cents/kWh economic benefit to nuclear plants. In the area of carbon abatement, estimates of benefits to nuclear plants are twice the potential value of NOx credits.

Because of the Clean Air Act, non-emitting sources like nuclear energy are likely to benefit fossil-fuelled plants and other industrial or mobile air pollution sources. If the air is cleaner because of the operation of a nuclear plant, the pollution control requirements on other sources are likely less stringent than would otherwise be required, and the economic development opportunities in the area are likely better than otherwise would exist. Conversely, if the nuclear plant shuts down, there could be an impact on other generating plants and sources of air pollution in the area, including limitations on economic development in the area.

REFORMING THE REGULATORY PROCESS

US nuclear plants are performing at exceptional levels of safety and reliability, and all trends indicate continued improvements in plant performance. Even so, both the industry and the public still need and demand a credible and effective regulatory oversight and licensing process to ensure adequate protection of public health and safety.

However, the regulatory process has not kept pace with the technology, and today’s process is not well-suited to regulation of a mature technology. More to the point, today’s process is not well-suited to regulation of a mature technology about to enter a competitive market. Revolutionary, not evolutionary, change is required at the Nuclear Regulatory Commission (NRC).

We are working with NRC to develop a regulatory process that is objective and based on requirements with a clear connection to public health and safety. The NRC should establish performance expectations that are directly linked to public health and safety, and that can be measured objectively. The same approach should be used in the inspection and enforcement programme, the process that supplies most of the input for plant assessments.

The agency should also establish a firm, safety-based threshold for measuring plant performance. There has never been such a threshold. Instead, the regulatory bar has been continually raised. But after 2000 operating-years of experience in the United States alone, the basis exists to set performance-based thresholds that provide adequate protection of the public health and safety.

The industry is not alone in recognising the need for change. Key members of Congress realise that nuclear energy must be part of America’s future, and a growing number of them realise that the current regulatory system can be more effective in providing adequate protection of public health and safety and less burdensome.

THE FUTURE

The US nuclear programme faces both opportunities and challenges as the electricity market becomes competitive. We see significant opportunities for the continued operation and for licence renewal of our existing plants. We see positive signs that nuclear energy will gain economic recognition for its environmental benefits. Finally, we believe the opportunity for significantly improving the effectiveness and credibility of the regulatory process has begun and can be achieved sooner rather than later.



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