Tuesday, July 28, 2009

A Critique of Craig Severance's New Nuclear Cost Paper

A couple of weeks ago the Foundation for Nuclear Studies hosted a debate on the Hill between NEI’s Leslie Kass and Colorado’s Craig Severance (author of a recent controversial study on new nuclear plant economics). Mr. Severance summed up the event nicely in a post he published last week:

It was a very cordial discussion and afterward we all shook hands and posed for pictures. Yet, the differences were sharp.
Yes they were. I was at the debate and right off the bat Mr. Severance was hitting zingers to the nuclear industry on costs. No doubt the industry had a large learning curve to overcome in the past. Yet look where we’re at today: 104 nuclear reactors generating 20% of the US’ electricity representing only 10% of the US’ total installed capacity while operating more than 90% of the time. No other source of energy does that.

Assumptions Matter
The main point of Mr. Severance’s presentation was, of course, to show the estimated enormous expense to build a new nuclear plant. Estimating the costs to build a new nuclear plant relies on a plethora of assumptions. And those assumptions always differ between sources. So when Mr. Severance or anyone else releases a study claiming that new nuclear is exorbitantly expensive, you always have to ask: what are the assumptions?

Construction Cost Indices
Well, there are quite a few questionable assumptions the Severance paper made that inflated the cost results, one of which I found earlier this year. During the debate a commenter found another exaggerated assumption which Severance defended in his post:
I was asked in the Q&A why there were such big differences in cost projections, and I answered "Optimism". For instance, Florida Power & LIght is projecting that nuclear construction costs (which rose an average of 15%/year from 2002-2007), will now only increase by 2.5%/year, which is less than recent Consumer Price Index inflation rates.
If you’re unaware of what’s recently happened to construction costs for all power plants, then you should know that the costs for the materials and labor to build power plants has increased faster than normal for half of this decade. This phenomenon is documented by CERA’s Power Capital Cost Index which Mr. Severance is referring to in the parentheses in his paragraph above. But if you look at CERA’s graph, the estimated costs have moderated a bit over the past year and a half (this fact is not accounted for in Mr. Severance’s assumptions).

If we take a look at the Handy Whitman Electric index from 1990-2002, construction costs increased a little more than 3% per year. In the ‘80s, the index increased around 2.6% per year; in the ‘70s, it was about 3.6% per year. Yet, Mr. Severance’s paper assumes between 8-9% per year increase in construction costs (more than twice the average of the last three decades!).

Current Year versus Future Year Dollars
When presenting cost results, it is necessary to show to the year in which dollars are spent. In Mr. Severance’s presentation, the levelized “low” cost for nuclear comes in at 25 cents/kWh (slide 26, pdf). Yet, the year the paper’s dollars are in is 2018. If one were to deflate the numbers to 2008 dollars (which we’re used to seeing), the levelized “low” cost for nuclear is 18 cents/kWh (as shown in his slide 26). That number is still high. But for some reason, Mr. Severance and our nuclear critics still used the inflated 2018 numbers in their highlights to make it seem like nuclear is more expensive than it really is.

So I’ve shown a couple of examples of how Mr. Severance’s study is built on exaggerated assumptions and deceptions to make nuclear plants seem more expensive. Let’s take a look at how his numbers stack up against other sources.

Massachusetts Institute of Technology and Energy Information Administration
From Severance’s post:
Ms. Kass presented NEI's version of nuclear economics, citing the recently released 2009 Update to MIT's 2003 study "The Future of Nuclear Power". She did not mention the Update concludes nuclear is still not competitive with coal or natural gas, but did stress its very low cost estimates.
The results of the two MIT studies have been spun so poorly by the anti-nuclear community that I have to ask if any of them ever read the studies. Here’s page 8 of the Updated MIT study (pdf):
With the risk premium and without a carbon emission charge, nuclear is more expensive than either coal (without sequestration) or natural gas (at 7$/MBTU). If this risk premium can be eliminated, nuclear life cycle cost decreases from 8.4¢ /kWe-h to 6.6 ¢/kWe-h and becomes competitive with coal and natural gas, even in the absence of carbon emission charge.
Under a certain set of assumptions, nuclear is not competitive. But in the next sentence nuclear becomes competitive when one assumption on risk premiums is adjusted. Furthermore, if we add in carbon prices, nuclear looks even better. Yet, the nuclear critics like Mr. Severance cherry-pick the only sentence that fit their pre-conceived notions when two other scenarios are just as valid, if not more. Sounds familiar.

How do Severance’s and MIT’s results stack up to each other? Well, Mr. Severance’s “low” levelized cost comes to 18 cents/kWh in 2008 dollars whereas MIT comes to 6.6-8.4 cents/kWh in 2007 dollars. Quite a large discrepancy even after accounting for the one year difference in dollar years.

Not only did Mrs. Kass cite MIT’s results during the debate, she also cited the Energy Information Administration’s cost results that we posted a couple of weeks back. Recent data from the EIA on the levelized cost of electricity shows that “advanced nuclear” comes behind only conventional coal and gas with no carbon sequestration (same conclusion as MIT).

How do Severance’s results stack up against EIA’s? EIA found nuclear at 10.7 cents/kWh in ’07 dollars compared to Severance at 18 cents/kWh in ’08 dollars. Still quite a big discrepancy.

So who’s the outlier?
With a few additional touches in red, below is slide 22 from Mr. Severance’s presentation at the debate:
If you take a close look at the graph, you can see that Severance’s nuclear cost number stacks up almost 5 cents/kWh (or $50/MWh) higher than the next most expensive result from nine other studies. In statistics, a case can be made to eliminate the outliers. But the decision is “ultimately a subjective exercise.” So should we eliminate the outlier? I think so.

Subsidies
From Severance:
By definition – if coming to Washington for subsidies you’re not competitive – slide 2.
Well, according to this logic, I guess no energy industry is competitive then because all of them receive subsidies in one form or another.

On slide 23, Severance asked the nuclear industry: “when can we stop the subsidies?” Right above that question he showed the years when the tax credits for wind (2013), other renewables (2014) and solar (2017) are set to expire. I was stunned when he singled out the nuclear industry for asking for endless subsidies because I remember this chart from AWEA showing what happens when the wind industry no longer receives the production tax credit (pdf). Yet the PTC for wind always came back the following year and has been in existence since 1992. So does Mr. Severance ask the same question to the renewable folks?
Furthermore, if Mr. Severance is so concerned about subsidies, he may be interested to know how much loan guarantee volume has been recently issued to other technologies:
Graph based on combined totals from H.R. 1 American Recovery and Reinvestment Act of 2009 and H.R. 1105 Omnibus Appropriations for fiscal year 2009.

If anyone is interested in reading why loan guarantees are necessary and good for everyone overall, I highly recommend this page from NEI.

Wrap Up
From Severance:
The nuclear industry is always saying in effect, "Next time we'll get it right."

For Congress to accept this argument, with no nuclear vendor willing to stand behind the optimistic cost projections, would be more than optimism. It would constitute "Ostrichism" -- a refusal to face facts --about an industry that has never achieved its economic promises.
A refusal to face facts? I guess Mr. Severance hasn’t kept up with how the nuclear industry has changed from the first go-around of new plants. Here’s our table eloquently explaining the differences:So which construction cost numbers should we believe in? An accountant’s who based his calculations on one overnight cost number from Florida Power & Light and then inflated the total construction costs every way possible? Or EIA and MIT (who are not interested in anything but pure math), and three state public service commissions (who approved construction of their state utility's plans for new nuke plants). Or how about FPL? FPL is the largest generator of renewable electricity and has already received the approval to build two new nukes from their public utility commission. Hmm, tough decision.

Check out this link if you would like to vote for or against Mr. Severance’s argument. So far, the votes aren’t looking good for his paper...

Update 7/29/09 9:45 AM: I left a comment on Mr. Severance's blog post yesterday morning pointing him here and so far the comment hasn't been published. Maybe he's on vacation...

Update 7/30/09 12:10 PM: I guess he was on vacation and we should expect a response later. Looking forward to it.

Update 8/5/09 9:00 AM: If you haven't seen his comment yet, Mr. Severance responded to our post. After reviewing his response, there are quite a few new inaccuracies that need to be addressed. Stay tuned for a post next week.

7 comments:

perdajz said...

I'm always surprised by cost estimates and cost comparisons that don't take into externalities and availability. This is a silly exercise. From the get go, such a comparison assumes away nuclear power's strong points.

Yes, fossil fuels have a remarkably slight competitive advantage relative to nuclear power because fossil fuels are simply allowed to dump waste products into the environment, whereas nuclear power must carefully sequester every iota of waste for an indefinite period. And yes, wind power has a competitive advantage over nuclear power, in that wind power is free to add to the grid in dribs and drabs whenever it feels like it, rather than actually underpinning the grid and operating at 100% full power for months on end. There would quite rightfully be no competitive mercy or leeway for a reactor operator who provides 10 to 20% capacity factor, like a wind farm might. Such a reactor would be shut down quickly.

But these competitive advantages are regulatory, artificial and temporary. If we change our underlying assumptions to include externalities for fossil fuels (e.g., the Externe study), and penalize diffuse power sources for their lack of availability, it is clear there is nothing competitive with nuclear power.

Bill said...

David Bradish: So does Mr. Severance ask the same question to the renewable folks?
Furthermore, if Mr. Severance is so concerned about subsidies, he may be interested to know how much loan guarantee volume has been recently issued to other technologies:


You're off the mark thinking Severance is promoting renewables. Actually, he's promoting natural gas.

energyeconomyonline.com /Cap_and_Trade_as_Friend.html

With some success: "Natural gas is the cheapest, low-carbon baseload power around." (emphasis added.)
climateprogress.org/2009/06/03/climate-action-game-changer-unconventional-natural-gas-shale/

J Joosten said...

Mr. Severance's analysis is interesting but contains numerous misconceptions and inaccuracies. There are several references to EIA official data when it seems convenient, but EIA data is apparently ignored when it does not support the author's claims. For example, on page 26 for example, Mr. Severance chooses a high uranium term contract price of $95 per pound in 2007, even though the official EIA data shows a contract term price of only $32.78 per pound (i.e., Mr. Severance's number is 300% higher than the official U.S. data).

He likewise escalates the uranium enrichment costs by using 1975 data from old, first generation gas diffusion plants while ignoring the new lower cost enrichment sources from gas centrifuge plants that are currently in operation and under construction in the United States.

There is an assertation to the effect that: "It is uniformly agreed uranium price increases will be necessary to stimulate new world uranium production." However, these claims seem to fly in the face of world experience with new low cost in-situ uranium recovery plants.

As another example, on pages 7 & 8Mr. Severance attempts to explain how a nuclear utility must meet a "prudence" standard set by the State Public Utiity Commission. he says: "What is prudent business judgment? In practice, prudence means avoiding the choice of high-risk options, when a lower-risk option will “get the job done”. Unfortunately though, in practice, his definition and concept of prudence does not match the defintion which the PUCs, FERC, and Administrative Judges use.

As another example, Mr. Severance claims on page 4 that: "While coal and natural gas are primarily domestic fuels, the opposite has proven true for uranium. For example, per the Energy Information Administration Annual Energy Review 2007,
“Table 9.3, Uranium Overview, Selected Years 1949-2007", in 2007 the U.S. purchased imports
of 54.1 million lbs uranium oxide vs. only 4.53 million lbs of domestic concentrate production." Again, this is a distortion of EIA's official data. The USA currently holds the 4th largest known uranium reserves in the world. And while the 270 billion short tons of US coal reserves are the largest in the world, their energy content is dwarfed by the energy content of U.S. uranium. In fact, the energy content of U.S. uranium reserves is about FIVE times the energy content of our coal reserves. When all possible U.S. uranium resources are considered, the energy content is about 23 times that of the U.S. coal reserves. So clearly uranium is a LARGE domestic energy resource - much larger in fact than domestic oil, coal and natural gas combined. Also, contrary to the article, the U.S. and world production of uranium declined in the 1980s because of production oversupply not shortages. And the fact that the USA currrently imports most of its uranium, is related to the market price and not a lack of domestic resources.

Bryan Kelly said...

The effect on last wave construction costs caused by design changes mandated after Three Mile Island is another factor which is often overlooked. Or maybe downplayed.

On one hand, its mention dredges up a lot of bad memories. On the other, it opens the door to the overall exemplary record of safety, and how it comes at a cost.

D Kosloff said...

More ignored externalities:
http://www.frontpagemag.com/readArticle.aspx?ARTID=35750

Gone With The Wind
By: Tait Trussell
FrontPageMagazine.com | July 30, 2009

The statuesque and towering windmill represents one of Barack Obama’s grandiose hopes for renewable energy in our future. But windmills also have a troubling feature: They can be bad for your health.

Dr. Nina Pierpont has conducted substantial research on what she calls “wind turbine syndrome,” the clinical name she has given to the “constellation of symptoms experienced by many (though not all) who live near industrial wind turbines.” These include sleep problems like insomnia; headaches; dizziness; unsteadiness and nausea; exhaustion; anxiety; anger and irritability; depression; memory loss; eye problems; problems with concentration and learning; and tinnitus (ringing in the ears).

Dr. Pierpont is no agenda-driven fright merchant. She received her PhD in behavioral ecology from Princeton and her M.D. from John’s Hopkins School of Medicine. But she does believe that the enthusiasm for wind power, espoused by the Obama administration, is seriously misguided. “As industrial windplants proliferate close to people’s homes and anywhere else people regularly congregate (schools, nursing homes, places of business, etc.) Wind Turbine Syndrome likely will become an industrial plague,” Dr. Pierpont warns.

Craig A. Severance said...

Since David took the trouble to post two "Updates" when I was traveling and I had not yet posted a response article, I expected he would post another Update when I did post my response article, which was Friday (July 31st).

Here is a link to my article:
http://energyeconomyonline.com/NEI_Debate_Continues_.html

I encourage the discussion.

Craig A. Severance

David Bradish said...

Craig, thanks for the update. I didn't see your response until yesterday and hadn't had a chance to post an update yet.