Power market developments
Will nuclear rebound?20 February 2009
How many of the planned new US reactors, for which licence applications are now being submitted, will be generating power by 2030? By Chris Gadomski
The US Nuclear Regulatory Commission (NRC) holds 17 applications for combined construction and operating licences (COLs) for 26 new nuclear reactors. Four more applications for seven reactors are expected. For a country that has all but abandoned nuclear power over the past three decades — the last construction licence submitted to the NRC was in 1978 and no new reactors have come online in the USA since 1996 – how realistic are such scenarios?
Licensing ramp up
Shortly after the passage of the Energy Policy Act of 2005 (EPA 2005), nuclear plant operators and regulated utilities started filing COL applications with the NRC. The sudden spike in COL applications in the wake of the EPA 2005 is a result of: growing awareness among energy policy analysts, nuclear operators of merchant plant and regulated utilities that increasing demand for electricity in a carbon constrained environment warrants serious consideration of new nuclear power; and the government financial incentives established to encourage new nuclear build.
It does not follow, however, that the resulting flurry of new applications will necessarily lead to all of this new capacity being built. On the contrary, the incentives are designed to stimulate initial investment in the first few units, and the totality of applications submitted should rather be viewed as nuclear operators and utilities reserving places in a queue as placeholders to keep future options open. For example, Entergy, which operates 10 nuclear reactors at eight sites has filed two COL applications to build GE Hitachi ESBWR reactors at its River Bend site in Louisiana and at its Grand Gulf site in Port Gibson, Mississippi. A company statement notes: “While Entergy has made no commitment to build a new nuclear reactor at either site, working to secure a licence now will keep the nuclear option open for the future.”
Another point for consideration is that not all new build will qualify for government guarantees because of restrictive qualifications. To be eligible for government support, the US Department of Energy (DoE) wants innovative design, ie a design new to the US fleet, and commercial viability. Importantly, no more than three plants based on each reactor design can be considered innovative.
Demand for electricity
Obviously, without the need for more electricity, interest in nuclear would be limited to the replacement of existing baseload capacity. But the US market for electricity is not cohesive – there are markets within the country where demand for new capacity is growing rapidly.
The DoE’s Energy Information Administration (EIA) presents many different opinions on US electrical demand growth. In its reference case, the EIA forecasts total electricity sales increase by 29% from 3659TWh in 2006 to 4705TWh in 2030, at an average rate of 1.1% per year.
In the EIA’s high growth case, electricity sales, which are strongly affected by economic growth, increase by 39%, to 5089TWh in 2030. In its low growth case, electricity generation grows by only 18% to 4319TWh in 2030.
US total electricity generation from nuclear power plants, the EIA forecasts, is to grow from 787TWh in 2006 to 917TWh in 2030. In this scenario, nuclear’s share of total electrical output falls from 19% in 2006 to 18% in 2030. This forecast is driven in part by a projected 15% increase in nuclear generating capacity from 100.2GWe in 2006 to 114.9GWe in 2030. This forecast reflects 16.6GWe of new nuclear power plant capacity offset by the decommissioning of several existing facilities.
The EIA projections differ from the assessment of the Electric Power Research Institute (EPRI), which reported in February 2007 that it saw a need for 64GWe of new nuclear generating capacity in the USA by 2030 with 24GWe needed by 2020. In its scenario, nuclear would represent some 25.5% of output by 2030. According to EPRI, gearing the US electric power sector this way could reduce US carbon emissions by approximately 260 million tonnes of CO2 annually.
Figures from the DoE are higher. The DoE projects 45% growth in national electricity demand by 2030, meaning 35-50 new nuclear plants would be needed by then just to maintain nuclear’s share of the energy market.
Looking at the aggregate numbers, however, does not really provide the best perspective for analysing opportunities for nuclear. There are markets in the USA like Florida and Texas where demand is growing much faster than the US average. These two states alone, with respectively four and eight new COL applications submitted, represent more than a third of the proposed new reactors. Florida Power and Light (FPL) is one of the largest and fastest growing utilities in the nation. In assessing its future plans for nuclear over the next 10 years, the utility reports it anticipates adding about 85,000 customer accounts a year – new homes and businesses – and the per customer use of electricity is growing as well. According to the Electric Reliability Council of Texas, energy capacity needs in Texas alone will grow by 10GWe by 2014.
The USA’s electrical power sector released over 2.5 billion tCO2 into the atmosphere in 2005, an increase of 300 million tonnes since 1999, according to the EIA. During his presidential campaign, Barack Obama campaigned that he would take steps to reduce the nation’s CO2 emissions by 80% in 2050 compared to 1990. His opponent, John McCain, had articulated a plan to reduce CO2 emissions by 60% in 2050 compared to 1990, with 45 new nuclear reactors as a cornerstone of his energy policy.
And then there is the price of carbon for which market-based approaches to limit greenhouse gas emissions – either a carbon tax or a cap-and-trade – may be put in place in the USA in the near future. The uncertainty of such a market-based approach to emissions may already be having an impact on conventional fossil fuel power plant investment.
Carbon pricing of about $45/t, according to a US Congressional Budget Office study, would probably make new nuclear cost competitive with conventional fossil fuel technologies for new plant construction and with existing coal power plants. However, even at a price for carbon at $45/t, nuclear will not be competitive if the industry repeats its history of construction cost overruns or if the price of natural gas fell to levels seen in the 1990s. In this scenario, a price of carbon at closer to $80/t would be necessary for nuclear new build to be competitive. A carbon cost between $20 and $45 would make nuclear a competitive option for new capacity with coal but not natural gas.
Improving track record
Recognition of the US nuclear power industry’s safety and performance record over the last ten years remains a prominent market driver for future growth. According to the Nuclear Energy Institute (NEI), nuclear has the highest efficiency ratings in the electric sector, ie a record-high 92% average capacity factor in 2007. It also
has, according to this industry association, the lowest average cost of electricity of all expandable baseload options – ¢1.76/kWh. This compares favourably with ¢2.21/kWh for coal and ¢6.78/kWh from natural gas. All this means is that nuclear power plants have or are becoming significant cash cows – a fact not lost on merchant operators that have steadily boosted output of their facilities by optimising plant operation and minimising plant outages for refuelling.
According to Standard & Poor’s ratings agency, in an examination of the operating risks presented by nuclear power, the industry’s operating improvements over the last 10 years suggest a significantly lower operational risk profile. The years 1993 through 1997 represented one of the worst periods for outages but it appears that a paradigm shift has occurred in the past ten years coincident with the transfer of nuclear plant ownership from regulated utilities to unregulated merchant companies. The new nuclear fleet operators have tremendous cashflow incentives to operate plant efficiently and safely to avoid long outages, and apparently they are doing so.
US public opinion regarding nuclear energy is improving. While the 1979 Three Mile Island incident remains the US industry’s biggest blemish, the incident occurred nearly 30 years ago and is now off the radar screen of many younger citizens. Recent poll data suggests that the majority of Americans now favour new nuclear plants.
The EPA 2005 provided several important federal government incentives that has sparked the interest in building new nuclear capacity from merchant operators and regulated utilities. The industry, as well as potential bankers on Wall Street, considers the most important incentive to be the provision of loan guarantees for up to 80% of total project cost – presently capped at $18.5 billion.
Unregulated merchant operators may be challenged to project finance new nuclear build without debt financing secured by the federal government. They simply may not have the capability to finance these on balance sheet given the cost of these projects relative to the size, market value and their financing capability. According to the NEI, many regulated companies who have other investment needs like additional generation and transmission as well may weaken their balance sheets subsequently affecting their credit quality and debt ratings without government guarantees enabling off balance sheet financings. One Wall Street banker told New Energy Finance mid October: “Loan guarantees are essential for financing new nuclear build.”
The DoE said early October that it had received 19 Part I applications from 17 electric power companies for federal loan guarantees to support the construction of 21 new reactors at 14 nuclear power plants in response to its 30 June 2008 solicitation. The requested loan guarantees total $122 billion, far more than the $18.5 billion authorised. The DoE said the aggregate estimated construction cost of these 14 projects is $188 billion, which would add 28.8GWe of baseload electric generating capacity. Part I applicants must now submit Part II applications by 19 December 2008, from which final projects will be selected for negotiations that will lead to the eventual issuance of loan guarantees.
Safety is paramount
In the wake of Three Mile Island, additional safety reviews and inspections contributed to construction delays, adding to construction costs. Another US incident would spoil the industry’s recent exemplary track record and bring regulatory, environmental and public opinion to bear on the industry. Ratings agencies and insurers would likely reassess the operational and construction risk assigned to new projects with probable adverse financial consequences.
Given the NRC’s mandate for safety, and the licensing of several new and different reactor designs being considered in the USA, project developers face a variety of risk. For example, each design could impose significant demands on regulatory approval that could lead to costly delays for first-of-a-kind (FOAK) construction equipment, reactor components and material. But the NRC is now hiring – and vows not to be the one institution to hold back the industry.
Will the escalating cost of new nuclear power plant construction simply price the technology out of the market? Industry cost estimates have risen in the past year to about $4500-6000/kWe. For a 1600MWe reactor, that means the cost would range from $8.4-$9.6 billion for a new reactor. The two AP1000s at the Virgil C Summer plant are estimated to cost $9.8 billion, while Southern Company said its new AP1000 units would cost $14 billion. Meanwhile, Duke Energy is estimating its two AP1000 projects to be completed by 2016 at a cost of $4-6 billion each.
In October 2007, Moody’s Investor Service concluded that reactor costs could be twice as high as market estimates resulting in higher debts and a “reasonably high likelihood their (utility) credit rating will also decline.”
Building costs in the USA have risen as a result of a weakened dollar, increased prices for commodities such as steel, concrete and copper, and a shortage of skilled construction engineers and workers. As Table 2 illustrates, the history of the industry has not been good as far as meeting construction schedules and budgets.
And the news from Areva’s Olkiluoto project in Finland has also not been good. According to business reports, the cost of construction has risen from €3 billion to €4.5 billion as a result of a general global rise in commodity prices and the need for additional workers to “ensure work proceeds better.”
The US industry is hoping that the first EPR to be built in the country, likely the Unistar Calvert Cliffs installation, will benefit from experience gained from four EPRs, including Olkiluoto in Finland, one in France, and two in China.
According to the IHS/CERA Power Capital Costs Index, the price of building new power plants has more than doubled since 2000. Costs for new nuclear plant build has climbed higher than non-nuclear, suggesting that the specific requirements for properly trained engineers and technicians is an added cost needed to be borne by the nuclear industry. That brings us to the next challenge.
Is the present nuclear infrastructure and human resource robust enough to mobilise the necessary engineering, manufacturing and operating resources to realise these ambitious growth objectives? Will there be a demand for nuclear energy – but a flagging US response due to a deteriorated human resources and infrastructure capability?
In 1973 the US nuclear energy industry employed one million people. Today, that number is closer to 100,000. The shortage of human capital was frequently mentioned during the opening plenary session of the American Nuclear Society (ANS) Winter Meeting held in Reno, Nevada on 10 November. Areva management said that to gear up for the upcoming nuclear renaissance the company was hiring people at a rate in excess of “one an hour” citing a figure of 10,000 for the year. Qualified job seekers at the meeting were warmly received.
At the root of problem is an educational system not feeding enough candidates into the pipeline. For example, since 2001, the University of Utah has graduated only four doctorates and nine masters in nuclear engineering. Ten of the university’s 800 engineering graduate students in 2008 are going nuclear. Nationally, US universities produced 402 nuclear engineers and the number of US universities with nuclear engineering programmes has declined to 29 from 65 in 1980. Is that enough to fuel the renaissance?
The Center for Energy Workforce Development (CEWD), a not-for-profit consortium set up by several utilities, estimates that up to 46% of engineering jobs could be vacant by 2012. In the nuclear industry alone, only 8% of workers are under the age of 32 and there are too few qualified young professionals. Plus the number of workers in the commercial nuclear energy industry eligible to retire in the next five years exceeds 15,000. These shortages can and are driving up labour costs.
In assessing the vulnerability of the nuclear industry to elevated construction costs, Standard & Poor’s suggests: 45% of the engineering sector is eligible to retire in the next year; a strong global labour construction demand will lead to skilled labour shortages that could threaten schedule and in-service dates; a shortage of nuclear engineers and construction workers is a key construction risk; and the USA will rely on project management functions in the nuclear island from experienced French and Japanese teams.
Besides experienced welders, engineers and management, other concerns surround supply chain bottlenecks. Well known is the industry bottleneck surrounding the availability of ultra-heavy forgings (350+ tonnes) for reactor pressure vessels from Japan Steel Works that now enjoys a three-year backlog. Recent announcements suggest some progress in addressing infrastructure issues. For example, in late October Areva and Northrop Grumman announced they were joining forces to create a “world-class” facility in the USA to manufacture heavy components for the US nuclear energy industry in Newport News. Groundbreaking for the new facility is anticipated in March 2009 and the facility is planned to be operational within 36 months. The joint venture will manufacture reactor vessels, steam generators, pressurisers, and heavy supports for Areva’s EPR.
Westinghouse Electric Company and The Shaw Group also recently agreed to a joint venture to fabricate and assemble structural and equipment modules for AP1000 nuclear power plants to be built in the USA and selected global markets. Westinghouse and Shaw will each hold ownership shares in the new company, Global Modular Solutions, which will construct a 600,000ft2 facility in Lake Charles, Louisiana. Scheduled to begin operation in the late summer of 2009, the facility is expected to employ as many as 1400 workers.
The new administration
In September 2008 the DoE announced that the formal licensing process for the US proposed spent nuclear fuel facility at Yucca Mountain was going forward. There has also been renewed talk by the Bush administration and many in Congress about the reprocessing of spent fuel – a process that has been prohibited in the USA since the Carter administration in the late 1970s. Under consideration is a more integrated used fuel management policy that could include closing the nuclear fuel cycle, but their views matter less, if at all, with the political change coming in January 2009.
President-elect Barack Obama for one opposes the repository as do several powerful democratic figures. Harry Reid from Nevada, the Senate majority leader since 2006, has steadfastly challenged the licensing of the proposed Yucca Mountain nuclear waste facility in his state and has said that the concept is dead. Support for the nuclear industry from House Speaker Nancy Pelosi (Democrat, California) also remains questionable. Although she describes herself as willing to listen to the case for nuclear, she remains dedicated to legislation to mitigate global warming and her loyalties may be more closely aligned to the renewable energy rather than the nuclear industry.
There continues to be much speculation and uncertainty about the impact of Obama’s election on the prospects of nuclear power. Unlike John McCain who was emphatic about building 45 new nuclear units, Obama, according to various published press reports, has described nuclear power as “not optimal” and has labelled himself “not a nuclear energy proponent.” But he has said he would not rule out more nuclear power “only so far as it is clean and safe.”
One third of the delegates at the opening plenary session of the November ANS meeting expressed concern about the possible adverse impact of an Obama presidency on the nuclear power industry. Most speculation and intrigue appear to focus on the prospects for shutting down Yucca Mountain as “a gift to Harry Reid” while others countered that there is enough interest among the senators from states with nuclear power plants to move the spent fuel from their backyards to Reid’s backyard and that they could prevail and would enjoy doing so.
The development of the US nuclear industry will depend on many factors. These include:
• Forward prices in electricity markets.
• Capital costs of differing baseload technologies.
• Existing perceptions of nuclear power.
• Cost of carbon.
• Natural gas prices.
• Financing strategies.
• Supportive federal and state regulations.
A closer look at both Florida (a state in which the utilities operate in a regulated environment) and Texas (a state in which 85% of the generation operates in an unregulated merchant environment) illustrate how opportunities may emerge. With eight new reactor licences submitted to the NRC, Texas presents the largest state opportunity for new nuclear build. On the drawing board with four new planned units, Florida presents the second largest state market for nuclear. And while Texas has a largely restructured electricity market, Florida’s utilities operate under traditional rate-of-return regulation. Nuclear opportunities exist in both states despite differences in the probability, rate and schedule of investment recovery posed by the differing regulatory and market framework in these two markets.
Both of these markets share rapid growth in electricity demand as well as existing sites at which to collocate new facilities, thereby bypassing the inherent added regulatory, social and environmental risk of greenfield site development. There are also significant regulatory and state incentives that support new nuclear development. In Texas, for example, certain renewable energy incentives also apply to nuclear. This contrasts to some other states, California being prominent among them, that preclude the development of any new nuclear power plants until a permanent solution for spent fuel has been found. State laws in Minnesota, for example, forbid new nuclear construction in that state.
Although betting on future energy prices is an uncertain science, investing in any generating technology with high up-front capital costs looks more promising if competing fuels for generation will be high cost when the plant comes online. Given the heavily dependent nature of the power generation sectors in Florida and Texas on natural gas – 42.9% and 49.0% respectively – the volatility of natural gas in recent years, and the prospects for a national or state carbon policy being adopted suggest appropriate technology hedging strategies, especially for baseload plant.
Already in both Florida and Texas, environmental opposition to new coal plants may suggest new nuclear power as an appropriate candidate for baseload needs. For example, public opposition led to cancellation of eight of 11 coal-fired plants proposed by TXU in Texas and a proposal for a 1960MWe coal-fired plant in Glades County did not pass the Florida Public Service Commission because of uncertain capital costs, future coal and natural gas prices, and questions regarding energy policy decisions, ie carbon dioxide emissions.
Guarantees are key
Few US electric power companies have the size or financial strength to place new nuclear power projects on their balance sheet – especially when other generating capacity, transmission and distribution infrastructure, and environmental controls are required.
It is likely therefore that a wide variety of financing strategies will emerge including regulated projects, merchant projects, nonrecourse and full recourse to sponsor balance sheets and varying degrees of leverage and ownership structures. Consumers will have to bear some of the risk committing to long-term power purchase agreements, and through the use of capacity cost recovery charges in a regulated environment, will definitely do so. Over half of proposed new build lies in the US southeast where most electricity generation capacity is owned by utilities that charge regulated rates.
Given the uncertainty and discomfort the current financial crisis may place on financers, long-term projects like new nuclear power plants will most definitely rely on US loan guarantees as they will lower the funding cost and increase the profitability of early units. It is a sentiment voiced by many in the industry.
The US nuclear industry is awakening, but it is unclear how vibrant a resurgence it will enjoy. It perhaps does not have the spark and enthusiasm evident at the San Diego Solar Power International conference in October where thousands came to enjoy the weather and bright prospects for that industry despite the fact that large solar thermal power stations can deliver electricity to the busbar at ¢16-19/kWh. Rather, the US nuclear industry remains cautiously optimistic with the realisation that it really may have a substantial solution to part of the nation’s environmental challenges, though it still remains uneasy with a new and untested administration coming to Washington. Waiting with hands out for government guarantees is an unpleasant, but for now necessary, prospect for many.
Time, the urgency with which American society steps up to the plate to address its environmental concerns, and the extent of US government support, will go a long way in determining how far and how quickly the US nuclear industry rejuvenates.
Chris Gadomski, Managing Editor – Nuclear, New Energy Finance, 1841 Broadway, Suite 802 (at 60th street), New York, NY 10023, USA. The author is also a member of the faculty at New York University’s Center for Global Affairs where he teaches graduate courses on energy and the environment and on the economics and finance of energyRelated ArticlesJapanese supply chain thickens NRC to continue offering potassium iodide for emergencies Westinghouse and Shaw can proceed on Vogtle 3&4 GEH submits ESBWR design certification application Interview: "We will be back" in Europe, says GE Westinghouse and RWE negotiate to build three reactors in Wales