Energy bill gives hope

3 August 2003

The possible re-awakening of the US nuclear industry follows the June decision by the Senate to reject an amendment to strike nuclear loan guarantees from S14, the Energy Policy Act 2003. Under the measure, the US government would provide loan guarantees of 50% of the cost of new nuclear plants up to 8400MWe. The guarantees are part of a broader package of pro-nuclear measures in the bill, which include the permanent reauthorisation of the Price-Anderson nuclear insurance act, and $1.1 billion to develop an advanced gas-cooled reactor at the Idaho National Engineering and Environmental Laboratory to demonstrate both electricity and hydrogen production. At first it might not be viewed as much of a step forward, but given the nature of the industry and the previous pace of change, many commentators see it as the start of a slow, but definite renaissance.

Some critics have argued that nuclear power should not receive federal handouts and should be allowed to sink or swim on its own. Others however, are unapologetic including the measure's chief architect, Senator Pete Domenici. He said following the Senate vote: "This provision allows industry to build advanced light water nuclear reactors that are smaller, safer and more efficient than the plants we built 30 years ago. The electricity they produce costs less than electricity from coal or natural gas. I predict we will one day look back and wonder what took us so long to realise the promise nuclear energy offers us."

The measure marks the most ambitious attempt to energise the nuclear industry in decades and goes much further to help nuclear power than House legislation passed in April. According to Per F Peterson, professor and chair, Department of Nuclear Engineering at the University of California, the loan guarantees are well designed to overcome the most important market failure impeding new nuclear construction. He said this occurs because the first utility to build a new reactor must take all the risk of learning whether the new regulatory system works, whether plants can actually be built on schedule and in turn can avoid costly interest payments from start-up delays. In this situation, the market failure occurs because subsequent utilities can free ride upon the lessons learned by the first, which struggles to capture even a modest fraction of the commercial value of the risk it takes. Peterson added: "Because the loan guarantees are limited to the first 8400MWe, about six new plants, they help invert the equation and make it more desirable to be first, rather than last, to build a new plant. Thus these loan guarantees provide an appropriate federal market intervention."

Detractors

It is the issue of previous cost over-runs and the possibility of defaulting on the loans, however, that dominate the thoughts of critics such as US Senator Ron Wyden. He led the opposition to the loan guarantees, citing a 50% estimate by the Congressional Budget Office (CBO) that reactor projects might default, leaving taxpayers with a huge bill covering half the total cost of the construction loans.

Cost over-runs are a stigma that the nuclear industry has found difficult to shed, and these were accrued by many fully constructed US plants that sought to obtain operating licences in the 1980s after the Three Mile Island accident in 1979. Ground has not been broken on a new plant since then and the last plant to go online was Watts Bar in Tennessee, which was turned on in 1996 after 23 years of construction and billions of dollars in cost over-runs.

The CBO's report issued in May estimates that nuclear construction costs would be more than 60% higher than industry estimates, based on what the Nuclear Energy Institute (NEI) says is outdated data from the US Energy Information Administration (EIA). The CBO's findings indicate that new nuclear plants would not be competitive in electricity markets. According to the NEI, the CBO also assumes that a company would pursue the construction of a new plant knowing in advance that it would never be economical, seek a federal loan, and default on the loan. The NEI believes this scenario is not credible and private companies would only proceed with new nuclear projects, and request federal loan guarantees to support financing of those projects, if they were confident that these projects would ultimately provide a reasonable return on investment. In addition, it stressed that the federal government would not issue a loan guarantee to a project knowing in advance it was not economically viable.

Analysts have suggested that in the worst case scenario, new nuclear capacity could cost taxpayers as much as $6.7 billion in liability, or 50% of the total capital cost at $1600 per kWe. This is the upper threshold at which utilities could be expected to place 50% of their own capital at risk. These estimates have, however, been called far-fetched and misleading by nuclear industry representatives. They say they are based on analysis from power plant projects almost two decades ago when costs ballooned because of regulatory delays and licensing problems. The new plants would be built under regulations that removed many of the past licensing hurdles.

Nuclear industry analysis

The NEI believes that the nuclear industry's detailed cost-analysis of new plant construction costs provides a more realistic assessment. This analysis comes from a team of nuclear industry experts from Westinghouse, seven US power companies and the engineering group Bechtel, which together completed an evaluation in May 2002 of the capital costs of Westinghouse's AP1000, which is currently undergoing the Nuclear Regulatory Commission's (NRC's) safety review. The NEI said that, although specific details of the evaluation are proprietary, the capital costs for the first 2GWe project (two reactors) is less than $1400/kWe. This includes all of the first-time costs for completing design, engineering and licensing of the initial project. It added that after the first few

projects have been completed, the capital cost for later plants ­ typically achieved by the sixth or seventh reactor built ­ would be approximately $1000/kWe. This would be competitive with other large sources of baseload electricity and, according to Jonathan Falk, vice president at the National Economic Research Association (NERA): "If Westinghouse is right, then high costs will not be a problem."

Peterson also believes that the worst case outcome is not particularly credible, since it would require that all plants under construction expend all of their construction budgets without actually ever coming online and producing any electricity revenues. He said: "In the more likely case where each of the approximately six plants covered by the loans would be constructed in a phased approach ­ to accommodate the production capabilities of equipment vendors ­ the construction of the later plants would be terminated if major problems were encountered with the lead plant construction."

Much still to be done

It is likely to remain a highly emotive topic, but perhaps the issue of the US Senate's rejection of the nuclear loan guarantees amendment should be put in context. Firstly, the Senate bill is not likely to be voted on until August, with passage of a final bill in September. The actual content of the final bill will need to be analysed closely. And then there is the issue of whether the loan guarantees actually provide any utility with the necessary incentive to build a new nuclear plant. It has been widely mooted that later this year Entergy, Exelon and Dominion Resources will begin seeking licences to build nuclear plants. Others are less sure. Falk commented: "The loan guarantees will not create sufficient incentive to build any nuclear plants. The critical aspect of the vote is that it keeps the prospect of new plants alive politically. Financially, no utility is yet ready to invest in new nuclear plants."

Other significant factors

Other factors, however, are moving in nuclear's favour. A key feature in the USA recently has been the significant improvement in operating performance of the existing stock of over 100 nuclear reactors. It has given some demonstration that they can be an extremely economic and reliable generating source in competitive electricity markets. Load factors have risen to over 90% in some plants. The Californian situation exposed the fragility of supply when demand is growing strongly. Security of supply is a key concern for US policymakers as the country consumes more and more energy and imports more and more energy resources. With the US having to import an escalating amount of its energy resources, nuclear power becomes a significant home grown resource. It is also expected that most US nuclear plants will apply for, and be successful in gaining, additional 20-year operating licences beyond the usual 40 years.

There are two other issues that are expected to play into the hands of the nuclear industry ­ rising natural gas prices, which are eroding the advantage of natural gas over nuclear, and the environment. Ian Hore-Lacey, head of communications at the World Nuclear Association (WNA) said that because of these concerns, nuclear power would remain essential in any realistic electricity scenario. "Without it, the USA would need to rely on either burning coal using something like current technology, or on natural gas combined-cycle for replacing its baseload capacity. In either case there are major greenhouse gas (GHG) emission implications which cannot forever be ignored, and which pose a long-term risk in relation to the capital raising. With gas, the GHG emission implications are less, but the fuel price risk in even the short-term is great," he said.

The environment, along with the industry's sustainable development attributes, is an area the nuclear industry is particularly keen to emphasise. The very limited environmental impact of the nuclear fuel cycle and the very secure supply base of its foundation ­ uranium ­ may yet yield advantages in future energy supply. It is tough at present, however, as despite the emphasis by the industry on nuclear's clean air and particularly non-GHG attributes, these have so far had limited impact on policymakers. The US government's non-committal to the Kyoto Protocol has also done nothing to advance nuclear's environmental credentials.

However, it is important to highlight other clean forms of energy and the direct taxpayer subsidies that these energy sources receive. For example, wind power projects receive a ¢1.7/kWh tax credit. Similarly, the US Department of Energy last February announced plans to build a $1 billion prototype of a pollution-free fossil-fuelled power plant. Peterson believes that any uproar over nuclear subsidies should also be discussed in light of the magnitude of other energy subsidies. He said that if the ¢1.7/kWh (wind energy) subsidy were applied to the

proposed 8400MWe of new nuclear capacity over its 60 year lifecycle, taxpayers would have to pay $70 billion.

What next?

There is certainly some way to go before ground is broken on a new nuclear plant in the USA. The signs are there, however, that nuclear is on its way back, slowly, but surely. US moves are also expected to have wider implications according to Hore-Lacey: "The USA has been a world leader in nuclear energy and, though it is clearly less so today, its example in moving to replace and expand its extensive nuclear power generation capacity will be helpful worldwide."

Last year, the Bush administration cleared the way for solving the looming nuclear-waste disposal problem by approving Yucca Mountain in Nevada as a spent fuel repository. This year the industry is expected to be granted loan guarantees for possible new nuclear build. If these loan guarantees are finally passed by all the necessary parties, nuclear industry players might start looking at what next year might bring.



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