Tuesday, January 29, 2008

The Nuclear Resurgence and Reasonable Expectations

Over the past few days we've seen a number of announcements that have given some folks pause over the near-term prospects for a resurgence in the American nuclear energy industry. In particular, we've seen both SCANA in South Carolina and a group in Idaho headed by Warren Buffet pull away from plans to build reactors.

For some insight into why these decisions were made, I asked NEI's Vice President of Policy Development, Richard J. Myers, to weigh in with his thoughts:

We’ve seen a couple of announcements over the last few days that various companies are adjusting their plans for new nuclear generating capacity. Mid-American Energy announced that it will not pursue development of a new nuclear plant in Idaho – partly due to concerns about cost, partly because of difficulties in coming to terms with suppliers over risk-sharing. South Carolina Electric & Gas and Santee Cooper also announced that they would defer their application for a construction/operating license for a new reactor at Summer. Again, costs were cited as a factor in the companies’ decision to defer their license application.

No-one should be surprised.

These are tough times in the electric power business. The power industry must invest approximately $1 trillion by 2020 to upgrade and expand our electricity infrastructure – new power plants, efficiency programs, transmission and distribution, environmental control technology – at a time when input costs are increasing dramatically.

A recent assessment by the Brattle Group, a well-regarded consulting firm, shows that between 2004 and January 2007, the cost of steam generation plants, transmission projects and distribution equipment rose by 25-35 percent, compared to an 8 percent increase in the GDP deflator. The cost of gas turbines: Up by 17 percent in 2006 alone. Prices for wind turbines: Up by more than $400/kWe between 2002 and 2006. Prices for iron ore up by 60 percent between 2003 and 2006, and for steel scrap up by 150 percent. Aluminum prices doubled between 2003 and 2006, and copper prices almost quadrupled. Much of this is driven by double-digit economic growth in China and India.

These cost increases hit all new power plants – nuclear, coal-fired, gas-fired and renewables. Small wonder that companies are holding back, waiting to see if input costs moderate, before making billion-dollar investment decisions.

Here at the Nuclear Energy Institute, we’ve always tried to create reasoned expectations about new nuclear plant construction. We believe the renaissance of nuclear power in the United States will unfold over time, relatively slowly at first, particularly given the inputs to the project development process (not the least of which is limited availability of high-quality construction management expertise). We believe that we’ll see 4-8 new plants in the first wave – in commercial operation by 2015-2016. We also know the rate of construction depends on a range of factors (most beyond our control), including electricity market conditions, the capital costs of nuclear and other baseload technologies, commodity costs, environmental compliance costs for fossil-fueled generating capacity, natural gas prices, customer growth, and availability of federal and state support for financing and investment recovery.

If those first 4-8 plants are completed on schedule, within budget estimates, we believe a second wave would be under construction as the first wave reaches commercial operation. The confidence gained by completing the first projects on time and within budget estimates will support the decision-making process for the follow-on projects, and provide incentive for companies to invest in the expansion of the U.S. nuclear component manufacturing sector.

We must also recognize that these are large $5-7 billion projects, that such projects are inevitably subject to schedule delays, that we fully expect project ownership and project structures to change as companies get closer to build decisions, that we may well see new combinations of companies lining up behind certain projects, and that, yes, we may see some decisions not to move forward at this time.

We should also recognize that project cancellations and deferrals are not a uniquely nuclear phenomenon: 28,500 megawatts of new coal-fired capacity was announced in 2006 and 2007; 22,300 megawatts was cancelled.

And finally, decisions to delay or defer new nuclear projects takes nothing away from the inescapable fact that the United States needs more nuclear generating capacity, as part of a diversified electricity supply and demand management portfolio, to help meet the nation’s economic and environmental goals.
Thanks to Richard for sharing his insight with us.

8 comments:

Anonymous said...

We'll know it's for real when someone actually steps up to the plate and builds a plant. Until the dirt starts flying, it's all so much talk, and talk is cheap. I've been disappointed too many times before by people who say they're going to do something and talk a good line, but in the end don't do crap except some kind of paper study that promptly gets round-filed. This country is going to have to get serious and start pouring concrete and welding steel if we're going to assure ourselves of an adequate energy supply. Piddly-@$$ sources like wind and solar aren't going to cut it. We need reliable baseload capacity and that means either coal or nuclear. If we're really serious about limiting GHG emissions, that pretty much puts a limit on coal use.

aa2 said...

One thing America needs imo is massive consolidation in the electrical industry. Although each of these proposals is exciting, when I read who is setting up the deal its these amatuer hour like consortiums. So if the price moves around it scares them out.

Compare it to France where they have basically one national electrical company. Electrictie de France, with revenues of 80 billion. It has the revenues of like our 6 biggest electrical companies combined. When you have 80 billion in revenues you aren't terribly worried if the first next generation plant comes in 1 billion over budget.

America imo shouldn't have more then 3 major electrical generation companies. Maybe even 2 only, with such scale they can then also overpower the regulators and force whatever rate increase is neccessasry. The government could even get involved using pension funds to buy up shares and force a consolidation, then force the 2 companies to build massive retained earnings instead of giving out irresponsibly high dividends.

Matthew66 said...

The problem with State controlled monopolies is that they become cash cows for the government that owns them, which means that the government has a vested interest in keeping cash outlays down, and cash inflows up. They also become political footballs.

There are also problems with privately owned monopolies, which are so heavily regulated it makes it difficult for them to make any long term investments either.

However, consolidation in the electricity generation business is a good idea, but not to the point of a monopoly, at least in my opinion. BTW this could also be applied to alot of other industries like banking. I think the US probably has more banks than the rest of the world put together.

A lot of these sorts of things are in the hands of the state governments, who have no intention of giving their authority up to the federal government.

Anonymous said...

There was a "clean coal" plant that was supposed to be built in Illinois just got the ax the other day. Too much escalation of the initial cost estimates, likely a result of increased prices for, you guessed it, copper, concrete, steel, etc. These cost increases are going to impact all projects that use those things, steam electric plants, windmills, solar installations, pipelines, oil refineries, factories, you name it. So now will NIRS/Gunter be singing the praises of the demise of the coal industry? After all, this one project cancellation can't mean anything else.

aa2 said...

Matthew 66, I agree completely with what you said. For government buying shares I meant 10-15% of the shares to have a strong voice, but not so much that they are in control day to day. I believe the French government did this in order to consolidate the way they wanted.

I also agree with you in banking, I shake my head when I see four different banks on the same corner, and tens more banking outlets within say a 5 block radius. Its inefficiency in action.. and so many also means they shave each other on all the good deals, while out of desperation financing bad deals.

America because of her size should be able to have 3 electric corporations the size of EDF in France.

Anonymous said...

I think that those inking contracts to buy long lead hardware already (Callaway, Calvert Cliffs, North Anna, Grand Gulf / River Bend, Exelon Texas, etc.) are the ones to watch. They have hot metal already in the works for pressure vessel rings and turbine components. Everyone else is a poser until they start to antee up with $100M or more in hardware. SCANA and Mid-American have been posers, and now they are confirming their poser status. There will be other posers revealed as time progresses. Watch the money to see who is serious as cancer.

Matthew66 said...

US utilities wanting to build new nuclear reactors had better get their orders in quick. If they don't move now, they may have to wait years in line for the necessary components. See
Eskom asks “How much for a dozen?”.

Starvid said...

According to a recent presentation from RWE, plant and equipment costs are up about 30 %.

This results in the perverse effect that we'll see a second dash to gas as the gas plants are cheap to build, even as we see gas running out in North America.

But, in the long run, equipment and plant costs will fall back as manufacturing capacity grows (go Japan Steelworks!), while gas production will never EVER return, as gas is a finite resource.

The presentation: http://www.rwe.com/generator.aspx/investor-relations/property=Data/id=482802/factbook-electricity-download.pdf