Wednesday, November 30, 2005

Taking a Second Look at a Curious Claim

Last week the California Energy Circuit published an article on the economics of ongoing operation and maintainence at the state's two nuclear power plants titled: Juice: Corrosive Investments. It's important to look at any sort of article like this with a jaundiced eye, because as we've seen before, it's easy to manipulate data to get the result that you want.

In particular, the authors are concerned about the cost of replacing the steam generators at both California nuclear power plants: Diablo Canyon and San Onofre. The California Public Service Commission has already approved this in the case of Diablo Canyon:

We are very worried about spending scarce resources on risky investments. We're pretty darn sure that it will become a bad deal for utility bottom lines in the long run. We certainly don't want more bankrupt utilities to pile on top of a cringing state economy.
That's quite a statement to make, as the replacement of steam generators has become a pretty common occurence at American nuclear plants. In fact, replacing steam generators is probably more common and economical than many people think.

Just this fall, 5 out of the 23 nuclear units that went into refueling outages replaced steam generators. And due to the replacements, nuclear units will be able to perform more efficiently and generate more electricity. More often than not a utility will spend money on uprating existing nuclear units than adding more natural gas-fired and coal capacity.
Let us throw out a number. A rather large number. It's $37.5 billion.

What could California do with that much money? That's over $1,000 per person in this state of 36 million people. Let's buy everyone a roof over their heads. One with at least one photovoltaic panel on top of it. We'd have enough left over to invest a few billion dollars in energy efficiency measures in businesses, hospitals, schools and homes. Imagine the energy and pollution reductions we'd reap.
We ought to take a closer look at exactly what benefit you could derive from just one photovoltaic panel. In essence, it's enough electricity to warm up your shower. You won’t “reap” any pollution reductions because California will then have to rely more on natural gas to make up for the cloudy days and absent nuke plants. California already relies on natural gas for almost 50% of its electricity.

I'm also bothered that the authors have once again set up a "straw man" when it comes to nuclear energy and renewables: That if you choose one, you can't have the other. Why not both? Again, there are some clear indications that solar can play an essential role in peak power production during the summer months when electricity demand is highest. Especially in the Southwest.

By promoting energy diversity, rather than depending too much on one source of electrical generation -- as California and the rest of the U.S. has with natural gas-fired electric capacity -- you can't be held hostage to price volatility.
We don't doubt that financiers will come up with the first $1.4 billion for replacing steam generators. But when the utilities start coming back to the well for the next $250 million and another $250 million, Wall Street might just start to look at ratepayers' ability to pay back the loans. Looking at the timing of this borrowing - it will come after this winter's walloping energy prices - consumers will be more than unhappy. There will be pressure to put price caps on utility bills and Wall Street won't like that. Yes, "It's the economy stupid."
Ironically, the third sentence from the above paragraph boosts the economic case for nuclear energy. We all know our heating bills are expected to be high this winter--primarily due to demand pressure on natural gas markets.

But why don’t you ever hear about nuclear prices being high? You don't, because nuclear energy's distinct advantage is its low cost of operations once plants get up and running. We call this "forward price stability," and without it, retail electricity rates in California and around the country would be a lot higher.

As our CEO, Skip Bowman, said in a speech before Town Hall Los Angeles back in September, California shouldn't just go ahead with the planned work at Diablo Canyon and San Onofre, they also ought to seriously consider lifting the moritorium on new nuclear plant construction in the state. If they are serious about reducing air emissions and freeing the state from volatility in natural gas markets, they can’t leave nuclear out of the equation.

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14 comments:

Doug Koplow said...

David,

You don't hear about nuclear prices being high because the technology has low variable costs. Oh, and the very high fixed costs to build the plants have already been dumped on ratepayers prior to deregulation; and again onto ratepayers as stranded costs at the time of deregulation. And the key areas of financial uncertainty, the things that make investors demand much higher rates of return like catastrophic accident risks and long-tailed liability for radioactive wastes, have all been shifted to the government.

Should you see new plants being built with investor money rather than taxpayer money you will once again see discussions about high nuclear costs.

Starvid said...

Hehe Doug I guess you are not very up to date are you? Check the info on US new nuclear build http://www.nei.org/documents/New_Nuclear_Plant_Status.pdf

That's at least 14 reactors. Privately funded.

And waste is payed for by the utilities. Get your facts straight.

Doug Koplow said...

Starvid,

Thanks for the link. I believe these lists refer to design licensing and siting, not funding. Big difference. Had there already been 14 new reactors funded and ready to build, you wouldn't have seen the massive new subsidies to design certification (e.g., NuStart) and plant construction that have emerged from Congress over the past couple of years.

Do share if you find documents that the private sector has already inked the financing deals, and that these deals aren't contingent on the rash of federal handouts from the Energy Policy Act of 2005.

Jim Hopf said...

Doug,

The "Circuit" article concerned extending the life of the reactors, not building them. The reactors' construction costs are past hisotry, and have no bearing on this decision going forward.

Also, the reason for higher rates of returns was solely related to the risk of construction cost overruns, and was not related at all to accident risks or waste management costs (neither of which has any measurable impact on such investment risks).

The decision to replace steam generators and extend the life of an existing nuclear plant is a complete no brainer, economically, as well as from an environmental and geopolitical (energy security) perspective.

Steam generator replacement is a routine, low financial risk operation that has already been performed successfully, on time (only ~1 month!) and on budget, at several reactors. The capital cost of the operation equates to a going forward electricity cost of ~0.5-1.0 cents/kW-hr. Adding in the plant operating cost of < 1.5-2.0 cents/kW-hr yields a total going-forward electricity cost of ~2.0-3.0 cents/kW-hr, which is roughly half the total power cost that would apply for any alternative source of supply. The solar panels they were advocating produce power at a cost of over 20 cents/kW-hr!!

Additional benefits include the lack of air pollution, and having a stable-cost, secure, long-term domestic power source, as opposed to using gas imported mostly from the Middle East (which requires involvement in that region, leads to resource wars like Iraq, etc....).

Doug Koplow said...

Thanks to Jim for his additional comments. First, a clarification on my initial post. I was not talking about the issue of keeping existing reactors running (which are likely economic), but on David's statement that:

"But why don’t you ever hear about nuclear prices being high? You don't, because nuclear energy's distinct advantage is its low cost of operations once plants get up and running."

He was inferring that was an important benefit of nuclear energy in general, as opposed just with the existing fleet of reactors. For new plants, it is a good deal more complicated.

My point is that the FULL cost of nuclear power is extremely high, and that the high overall cost (and long construction time) greatly mitigate the benefits of low operating costs from an investor (or regulated customer) perspective.

While the very high capital cost for existing reactors is sunk (borne by ratepayers through bankruptcies, higher rates during past periods, and shifting of stranded costs), it is not a sunk cost for new reactors.

Furthermore, it is far too simplistic to say that historic costs were only high due to regulatory inefficiency and unfounded opposition, as many industry boosters allege. Nuclear is a complicated technology, and was not implemented particularly well (lots of one-off designs). Large cost overruns were common even prior to the TMI accident.

Your point about accident risk or waste management having no impact on plant investment decisions is ONLY true because these risks have been shifted to the federal government in return for a low fixed payment. Were the industry to actually bear these risks, they would have quite a large affect on the investment patterns and costs within the sector.

In terms of new reactors, it is also true that the capital costs won't matter once the plant starts operating. As with the old plants, the massive capital expenditures will also become "sunk", and not affect operating costs.

But these capital costs matter quite a lot when trying to build a new plant. After all, sunk capital costs are not recovered through prices, and are not available to repay investors. The investors are aware that even the new plants are complex, and often new designs that have much higher likelihood of surprises than an old, well tested technology. Rarely do these surprises reduce costs or construction time. For this reason, the industry has worked very hard to shift as much of this capital risk as possible from investors and onto US taxpayers.

Jim Hopf said...

Doug,

There were definitely regrettable cost overruns with man's first (perhaps overly enthusiastic) foray into nuclear power, for a variety of reasons. That said, I don't think you're giving the industry enough credit in terms of being able to learn and improve.

They have spent the last decade gathering several technological improvements and all the lessons learned and produced a couple of standardized designs that are engineered down to the last detail. They then spent years with NRC going over all the potential issues. They then even passed legislation revamping the licensing process so that all (intervenor) issues must be brought forward before physcial construction starts (thus greatly limiting the risks). On top of all this, construction will be performed by only a handful of utilities and construction companies that specialize in nuclear power, and have decades of experience.

Furthermore, whereas NRC was on a steep learning curve in the 70s and 80s, and many issues crept up (i.e., were realized) during construction, the industry is now mature, and all technical/safety issues are thoroughly understood. The regulatory environment has become very stable and predictable, and few surprises or new issues are likely.

All this is a very far cry from when everyone (including several small Ma & Pa utilities w/ no nuclear experience) fell all over each other to build 100 reactors in only ~10-15 years, and everyone had their own custom design, which was not even fleshed out in detail until after construction started (w/ many design changes literally being made in the field). Also, NRC was regularly discovering potential issues that had to be addressed, and intervenors could block or tie up a plant at any point in the process, including at the end, after all the money has been spent (thus inflicting massive economic costs).

For all these reasons, new plants are expected to be significantly less expensive, and cost overruns will be much less likely and less severe. Indeed, the industry has been building several reactors overseas over the last decade, mostly on budget and on schedule. Thy have demonstrated their ability to do this. Some companies (GE) have even offered to build reactors under a fixed price contract.

Given the rising cost of fossil fuels, new nukes may be competative already, as is suggested by a few studies, including this one:

www.world-nuclear.org/economics.pdf

Nuclear is already cheaper than gas, and it would be cheaper than coal under any system where CO2 emissions are controlled, OR if coal's massive external (environmental and public health) costs were factored in. According to EPA, coal plants cause ~25,000 premature deaths and inflict ~$100 billion in indirect economic damages, EVERY YEAR, in the US alone. Nuclear, by contrast, has never had any measureable impact on public health or the environment. Scientific studies on the "external" costs of power sources show that nuclear's external costs are very small ~0.2 cents/kW-hr), as compared to ~1 cent/kW-hr for gas, and 5-7 cents/kW-hr for coal or oil. Gas also has problems with foreign dependence (energy security) and extreme price volatility.

I realize that the subsidies for the fist few plants in the Energy Bill are very large. The only apply, however, for a few plants, and for only the first few years of operation. They are necessary to overcome overly-high peceptions of financial risk (due to the past cost overruns). Once the process of licensign and building a new plant has been demonstrated a few times, they will no longer be necessary.

The potential benefit of new nuclear plants is very large given all the problems that all of the alternatives have. Coal is the leading single cause of global warming and carries massive environmental and health costs. Gas is very expensive, volatile, in limited supply, and will have to be mostly imported from the Middle East or Russia. Intermittantcy will limit renewables contribution to at most ~20%. Given the large potential benefit, this "experiment" (i.e., trying to kick start nuclear again w/ temporary subsidies) is worth it.

I would summarize by responding to your basic statement that nuclear was (is?) very expensive. Expensive compared to what? What are these "cheaper" energy sources? The days of cheap gas are gone, and dirty, conventional coal (frankly) was never cheap, considing all the external (indirect) costs.

Doug Koplow said...

Jim,

I just printed out the WNA report and will look at it in more detail. Its authors do recognize the critical importance of capital costs, and the related issue of discount rates, which I'm glad to see. Assumptions in many of the studies they cite seemed unrealistic without government subsidy, however, and these assumptions seem to drive the WNA conclusions as well.

Will debt really make up as much as 60% of the capital structure for these new plants without sovereign guarantees? I doubt it. Assumed discount rates also seem on the optimistic side, perhaps wildly so, given the uncertainties involved.

I am interested in the specifics of the deal that GE offered to build plants on a fixed price that you mentioned. Please e-mail me details and documents. The address is on my website.

Having spent a long time watching federal subsidy programs, I am also skeptical that the subsidies put in place for the "first" plants will be killed after the first plants are built. Were the industry so certain that these costs were transitory, they could easily have recommended legislative language in which they would reimburse the federal subsidies on the first 4 or 8 or 10 plants with excess fees that took effect as soon as later plants came on line. No such terms were included. That says to me they aren't nearly as confident in their ability to build unsubsidized plants as they project in their press briefings and at WNA conferences.

It's also important to note that some of the large subsidies are not limited to the first few plants.

When you add baseline and new subsidies to the cost of nuclear, it is no longer inexpensive. That is the proper cost to look at, not the portion borne by investors. And this is before all of these paper economic evaluations are actually put to the test in real facilities. Do you think costs at that point will rise or fall from paper estimates? I know which way I think they will go. Nukes also face quite high market risk should demand patterns shift, a factor that would be reflected in their cost of capital.

No doubt coal has problems. I am not defending coal, and think the coal industry should be forced to grow up and pay for its own R&D and externalities. It might be reinvented by such pressure, and end up far better off than it is now.

I feel the same about nuclear. After more than 50 years of very large subsidies, it's time to step up to the plate and pay your own way. I'm glad there are no mom & pop nuclear operators any more, as you note. Aside from better operations, this shift also means that the current industry is sophisticated and well enough capitalized to bear its own new product risks. And yet, I read nuke booster sites talking of nuclear power as an infant industry. Pretty old infant...

We face quite severe challenges in energy markets, yet have not yet engaged the price system to help us to meet them. Instead, the country has embarked on a massive energy welfare program to pump federal money, liability caps, and tax breaks to all sorts of energy types. This process is hardly free from political intrusion, and not surprisingly rewards most handsomely the energy resources with the strongest lobbying presence (nuclear is at or near the top). And this process is hardly the way to map out a diversified, efficient, and innovative set of solutions to the energy challenges we face.

Paul said...

starvid,

You aren't the first to misinterpret (and not accidentally I would say) the NEI posting on New Reactor Status as these communications to NRC are only letters of "intent" not the actual Combined Operation License applications.

Big difference... not unlike finding somebody who has crawled out onto a 10-story ledge and started yelling "I'm going to jump": Its a way of calling attention to a desparate situtation. Then again, they could be serious about jumping.

You also mistakenly identify this same contemplation as backed by private funding. Wishful thinking---but not the case as evidenced by the umbilical financial attachment being rigged through the Energy Bill to the US Treasury/American taxpayer for financing, construction, construction risk insurance, purhcased power contracts, among many other minor necessities like countering the current brain drain for operators as well as regulators before any new construction has a hope of being viable.

Even then that's for parcelling out to as many as 6 new reactors, not 14. Given the history of this meglomania, it would fall far short of completing even 6.

Jim,
You termed steam generator replacement as a "low risk financial operation" just as Diablo Canyon sunk more than $700 million into its replacements. I'd say that makes them a high stakes roller given the many surprises that still lurk within containment (i.e. pressure vessel embrittlement, the same stress corrosion cracking that destroyed the steam gens is attacking the same susceptible materials throughout the pressure boundary) and even U.S. energy policy (like the inevitable advent of more and more demand side management through cheaper and quicker efficency and conservation).

That puts a lot of pressure on license extension for a reactor sited next to the San Andreas fault line.

Paul, NIRS

Jim Hopf said...

Doug,

I would jump at the chance to have an energy policy where nobody recieves any subsidies, but all external costs are paid. Under such a system, all forms of subsidy would be eliminated. There would also, however, be taxes on CO2 emissions, as well as taxes on the release of all pollutants, based upon scientific analysis of their effects on public health. Energy security is also a consideration, which should be reflected with a tax on imported energy sources (i.e., oil and gas). Better still, a fuel use act, limiting gas or oil to peaking duty would be extremely helpful.

If one can provide a high degree of scientific proof that any toxic substances will remain isolated from the biosphere for the duration of the (significant) hazard, then no tax will be applied. This is already being demanded of nuclear waste. It is also something that people on the fossil side are only just starting to think about.

The problem with such a system (in addition to scientific arguments over external costs), is the fact that our (democratic) govt. hates to apply taxes, or any other type of disincentives that would "increase costs". The only thing they know how to do is subsidize what we DO (supposedly) want, that being decided more by political polularity than by merit, or any kind of scientific truth. Apparently increased costs from taxes or govt. borrowing are just fine.

I happen to believe that nuclear would flourish under any such system, as its external costs are negligible (~0.2 cents/kW-hr, according to most respected studies), whereas coal's are known to be almost 7 cents/kW-hr. Thus, even if nuclear costs as much as you say, it would still win out handily.

You may not agree with me, but the beauty here is that we do not need to figure out who's belief, or prognostication, is right in order for us to agree upon, and set the correct policy. The beauty of just scientifically determining external costs and then applying them is that you can let the market decide how to respond. You don't have to pick winners, or decide if this source or that has merit (or how expensive new nukes would be!!). Policy ensures that external costs are adequately reflected, solving the main problem/failure of the current market system. After that, we can just let the industry take it from there.

One final remark. In terms of lobbying clout, the nuclear industry has been pathetic, and far weaker than either the coal or oil/gas industry, at least over most of its history. How else do you explain the fact that coal and oil are allowed to have orders of magnitude higher public health and environment risks/effects, per unit energy generated? The playing field is so unlevel it's a joke, and nuclear's incredible lack of (relative) political clout is to blame.

And no, the nuclear executives didn't agree to pay back the subsidies for the simple reason that they didn't have to. I believe that the subdidies are actually more than what was really necessary, but these guys drove a hard bargain (using the threat of not building more reactors) and got very generous incentives, much of which will go straight to the bottom line (hey, it's a CEOs job to improve the bottom line as much as he can!!).

BTW, Paul, by routine I refer to the fact that dozens of steam generator replacements have already been performed in the country, w/o any hitches I'm aware of. The job only takes a month or so; just shipping in a completely prefabricated component, and installing it.

And as far as life extension is concerned, you can count on the fact that every single reactor operating today will get one, as shutting down a perfectly good, existing reactor with decades of life left on it is both economic and environmental insanity.

Doug Koplow said...

Jim,

I appreciate your candor on the subsidies front. I don't believe nuclear would do nearly as well as you do under market competition as you do. I also think that nuclear has quite a few energy security downsides that offset its potential long-term ability to displace imported energy (either through electric cars or displacing the imported LNG so many people are projecting).

However, I do very much concur with your views that the industry got too much in the Energy Bill, and that the battle over the most attractive energy resources should be fought in the marketplace, not amongst lobbyists and restricted access Conference Committee debates.

I would still appreciate if you provided me with information or contacts for the GE fixed price offer that you mentioned in an earlier post. I would also appreciate a citation for the externality study you are referencing as the most respected one. I'm curious to learn more about this specific report and how its authors dealt with some of the very complex issues that this type of undertaking always involves.

Finally, I should point out that there is a financial downside to the nuclear executives getting everything they wanted and more in the energy bill. That danger is complacency. The industry remains at severe financial risk from any single accident. This risk is greatest for an accident or attack in the US, but remains substantial even for an incident abroad.

Their desire to streamline licensing and expell dissenting opinion from the licensing and construction process, while reducing risks of delay, also reduces the ability to catch problems early. Perhaps they are perfect and their internal teams have properly vetted all contingencies to deliver a brand-new, complicated engineering project without a hitch. History in many realms of human endeavor doesn't support this viewpoint however.

Jim Hopf said...

Doug,

The results of the ExternE study are (best) summarized in Figure 9a, on page 35 of the final technical report, at:

www.externe.info-expoltec.pdf

By reading the whole report, or by typing "ExternE" into your search engine and examining the overall ExternE site, you can get as many more details as you want.

My specific reference for the GE ABWR fixed cost estimate came from a press article containing a statement from a GE executive (or perhaps an official statement). The artice was written a year or so ago, and this info does not appear in the company's official website.

However, I was able to find a basically equivalent statement in a more recent reference; a recently published cost study for an ABWR plant at TVA's Bellefonte site. The executive summary page of this report (at the bottom of the 2nd paragraph) makes refernce to a fixed-price contract with a reactor cost of ~$1500-1600/kW.

This report can be found at:

http://www.nei.org/documents/TVA_ABWR_Feasibility_Study_Summary_2005.pdf

In terms of complacency, I'm worried about complacency of a different sort. Economics historically shows that you are only as efficient (cost effective) as you have to be. The subsidies may simply result in reactor costs that are that much higher, due to lack of performance incentive. Then history will record how expensive these new reactors were....

In terms of history (backing this up), note how the performance of plants was relatively poor in the rate base days, when there was relatively little incentive to perform, and how the performance improved markedly when we went to a more market based system (where better performance meant more profit).

On a more hopeful note, the subsidies may allow new reactors to be competative even with(higher) fixed-price bids. Thus, the vendor (as opposed to the utility and/or the ratepayers) would be taking all the risk. All I can say is, these reactors had better be built on budget and schedule. I think most in the industry understand this.

Concerning the streamlined process, it must be understood that the level of rigor in the preparation for this new construction dwarfs that which occured in the construction ruch of the '70s. The industry and NRC have been pouring over these few new standardized plant designs for over a decade, fleshing out the design to the last detail, and thoroughly considering and analyzing all potential issues. They (NRC) have also learned about virtually all the issues through the ~30 years of operating experience that we now have.

Back then, we had almost 100 individual site-specific designs, engineered on the fly (and rushed into construction), by much smaller utilities who didn't have anywhere near the resources, or knowledge and experience base that the few major entities building the new plants have today.

For all these reasons, construction will go far more smoothly (not less), and far less issues (or surprises) will arise, as compared to the first generation of plants. The fact that all issues will be resolved before physical construction will greatly limit financial risks, and will greatly limit problems that arise after substantial construction is completed.

The changes in the law were made mainly to prevent outside intervenors from making claims late in the construction process, intended primarily to halt a nuclear project or increase its costs (as opposed to actually being helpful and solve problems). I would generally dispute the contention that those interventions resulted in any substantial increase in safety for the final, finished plant. They generally just caused delays and increased costs, and accomplished nothing useful (except for the actual, politically motivated objectives of those who intervened).

Simply put, the level of safety of the next plant generation, using the new licensing process, will be substantially higher than that of the last generation, which the (perfect) safety record over the last 40 years shows was already more than adequate.

Jim Hopf said...

Doug,

Those links weren't quite right. Sorry.

Try:

http://www.externe.info/expoltec.pdf

and:

http://www.nei.org/documents/TVA_ABWR_Feasibility_Study_Summary_2005.pdf

Jim Hopf said...

One more time..
It was cutting it off for some reason...:

http://www.nei.org/documents/TVA_
ABWR_Feasibility_Study_Summary_2005.pdf

Doug Koplow said...

Jim,

I just checked the link you provided regarding the fixed price offer for a new reactor. The piece summarizes a detailed costing estimate of a new GE reactor, but doesn't actually offer any fixed price. Instead, the specific wording is:

"These EPC costs would be the basis for a firm fixed price offering to TVA." As far as I can tell, there was no actual firm fixed price offering.

Please clarify if you can point me to such a contract anywhere in the US nuclear industry -- even with the massive new subsidies from the Energy Policy Act of 2005.

Thanks,

Doug