Constellation’s tough decision to pull out of the US federal loan guarantee programme has shone light on a dark and dismal corner of the US regulatory system. By J. K. August
In October, Constellation Energy pulled out of negotiations for a US $7.5 billion US federal loan guarantee to build a new nuclear reactor in the state of Maryland, Calvert Cliffs 3. Constellation and French utility EDF had formed a joint venture, UniStar, to pursue a design certification for EDF’s Evolutionary Power Reactor (EPR) with state-owned French reactor designer Areva. Jointly they would construct Calvert Cliffs 3 under the US NRC’s Part 52 combined construction and operating license rule.
In an 8 October letter to the Department of Energy, Constellation said uncertainty created by the Office of Management and Budget’s determining the project’s credit subsidy cost led to concerns. It did not see a ‘timely path’ to reach working terms to build Calvert Cliffs 3 in an economically sound, statutorily justifiable manner. It said that the loan guarantee terms were unreasonable. The high credit subsidy estimate would force UniStar to pay the US Treasury $880 million (a rate of 11.6% to obtain the loan guarantee. “Such a sum would clearly destroy the project’s economics (or the economics for any nuclear project for that matter), and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be,” it said.
Loan guarantees protect owners (buyers) of new nuclear plants against regulatory delays beyond their control. In the 1980s, when the NRC was unable to deliver final licenses under the previous regulatory rule Part 50, project costs soared. Interveners often brought technical objections before final licensing boards. Project owners were faced with expensive delays just to respond, and ultimately paid the added costs. As did ratepayers: utilities passed on what project costs they could. The delays caused severe financial damages, ostensibly in the name of public health and safety. The primary intent of more recent combined construction and operating licence, Part 52, was to eliminate or reduce delays caused by errant authorities, federal courts and specious litigants.
The irony is that loan guarantees have had the opposite effect of what was intended. Rather than promote new US nuclear construction and suppliers, they deterred it. Based on licensing issues, they excluded General Electric’s Economic Simplified Boiling Water Reactor (ESBWR) from the market. They penalized Constellation with exorbitant costs. They have introduced huge costs to all new nuclear generation projects, including the Southern Company’s Georgia Vogtle Units 3 and 4 site. (Southern formally accepted a $3.4 billion guarantee in June 2010. Its costs are still confidential, but presumably similar to Calvert Cliffs; however, unlike Southern Company, Constellation’s supply market is deregulated, so it cannot automatically include the costs of building new power generation into consumers’ rates, as Southern could.) Limited loan guarantee funds force those seeking them to compete. Yet no owner feels able to move forward without them. The DOE must allocate scarce funds based on project viability. But in reality, a nuclear project is only as viable as its regulatory support.
How Constellation’s rate was set remains a mystery. One can only say that the rate compares with those for the most risky construction project performance bonds. That says that government’s confidence in its own processes is very low. With licensed designs, 40 years of experience and construction performance overseas, one wonders if loan guarantees are needed at all. Since operators would build licensed designs on approved sites with a pre-approved license, it seems reasonable to assume agencies could meet project schedules—as they have in China, Korea, Japan and Taiwan.
Unfortunately history has shown that in nuclear power, the parties best able to manage regulatory risk—the NRC and Congress—have been unable to deal with it at all. For example, inability to come to terms with government authorities about Long Island, New York’s Shoreham Station in the 1980s led that state’s utility, Long Island Light and Power Company (LILCO) to go bankrupt after investing US $4 billion into a project that in the end, it couldn’t license. How could anyone ever authorize a permit to build a plant on that site? How could authorities ever let a completed and tested plant be shut down and decommissioned, new? This could only happen in the USA.
Eventually, the state of New York indemnified LILCO for their project. US governments should likewise indemnify owners (and their lenders) of duly licensed projects if they, the governments, don’t deliver on their promises. It’s not only fair, it’s the only way to bring accountability to government. Furthermore, it may be the only way to renew lender interest in nuclear projects in the US No lender will (or should), put their funds at risk for capricious government decisions that have been decided and re-decided after initiating a project and committing funds.
To demonstrate good faith supporting nuclear applications, Congress should take the lead. Should Congress indemnify nuclear projects against regulatory delays, the costs to federal taxpayers for nonperformance could be huge. Therefore, the NRC would also have to evaluate how it performs its activities to meet project schedules. In my opinion, it will find it has a huge need to simplify its processes and streamline its framework.
But the government is not entirely to blame for the NRC’s inefficiencies. The industry has grown complacent, and has been loath to upset a quasi-stable relationship with the NRC. Thus, industry has failed to challenge the NRC on its oversight processes, their speed or requirements. Industry has let the NRC lead, while it followed, on many significant issues. This is just one consequence of that approach.
-J. K. August, professional engineer, is VP operations at nuclear reliability plan developer CORE, Inc. Email: [email protected]
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