Tuesday, August 25, 2009

Round Two on Debating Craig Severance’s New Nuclear Cost Analysis

More than a month ago, Mr. Craig Severance wrote about his lively debate on new nuclear costs with NEI’s Leslie Kass and in response, we posted this. The following week, Mr. Severance responded timely to us and now it’s our turn again. We’re on our second round of posts and the debate has gotten into the weeds. The statements on nuclear from Mr. Severance have become more glaring, in my opinion, so that simply letting just a few of the statements go would be a mistake. Besides the needless analogies and repeating literally half of his rebuttal with previous literature, there are some major interpretation issues Mr. Severance assumes in his latest rebuttal that need airing. (Disclaimer: you're about to read a really long post with no pictures and visuals, hope you enjoy and make it through it!)

“Black Box”
From Mr. Severance's latest post:

The NEI fight-back response is welcome in that we are blowing open the "Black Box" of hidden assumptions about the costs of new nuclear power. It is NOT a cordial discussion when one side won't disclose its numbers.
Won’t disclose its numbers? I have yet to find a publicly available source that shows the costs from all types of power plants (coal, gas, wind, etc) that have ever been built. And there’s a reason that good construction cost numbers are hard to come by: most are kept proprietary for competitive reasons. Utilities do this for all power plants, not just nuclear.

Furthermore, I can’t quite figure out what Mr. Severance means by “Black Box.” When I read his literature, I found no new assumptions he accounted for that the nuclear utilities haven’t put in their public documents. The only differences are the numbers for their assumptions.

Also, he’s brought up a number of times the specious analogy of “a man who started to build a tower, but because he did not 'count the costs' to complete the tower, had to abandon the project to the ridicule of his neighbors.” Mr. Severance seems to think that the nuclear utilities haven’t included all of the costs for the plants because the utilities present the numbers in today’s dollars. He argues that “by the time you actually start building the plant you will need to pay the 'going rate' in the future years when construction actually takes place.”

Well, utilities have taken into account the going rate. Page 250 of Florida Power and Light’s petition to build two new nuclear units (pdf) shows a table of numbers which includes the estimated total cost for the project in future year dollars (it’s the bottom line of the table). FPL estimates it will cost between $12.1B-$24.3B to build two units by 2020. Maybe Mr. Severance didn’t make it to page 250 when he cherry-picked FPL’s overnight cost numbers for the base of his study, otherwise he would have seen that his analogy is not applicable here.

Construction Durations
From Mr. Severance's latest post:
This is a huge error of many optimistic nuclear cost projections. For instance, the MIT Update assumes construction takes place over just 5 years from 2009-2013, with the plant operational in 2014! This is far shorter than nuclear project schedules laid out in utility dockets today (e.g. the South Carolina Electric & Gas facility projects pre-construction expenses beginning in 2007, with operation of the two reactors beginning in 2016 and 2018, a total length of 11 years).

This construction schedule flaw in optimistic nuclear estimates was clearly discussed in my recent articles (e.g. my "Boiling the Frog" article here) -- yet NEI Notes chose to completely ignore this issue.
Well, since Mr. Severance brings this up, let’s discuss it then. First, MIT’s assumption for five years of construction starts when the first safety-related concrete is poured, not when a utility thinks it wants to build a nuclear plant like Mr. Severance seems to assume. No new plants in the US have had their first safety-related concrete pour yet.

Second, the reason we chose not to debate the length of construction is because Mr. Severance didn’t even run a scenario showing how much it costs when delays happen. Here’s what he says two paragraphs earlier:
As noted in my Study, I did not assume any delays, though delays are chronic for the nuclear industry.
So why would we argue with him on an issue he didn’t even analyze? Furthermore, if you take a look at the assumptions in his original study (pages 36 and 37), 87% of the expenditures for a new plant take place during a five year period. But that five year period takes place after spending about 13% of the expenditures five years earlier on licensing, site prep, and other pre-construction activities.

The development period of a new nuclear plant does not see that much spending. It’s when safety-related concrete is poured and construction begins that the spending matters. Nuclear plants take quite awhile to develop and build. This is well known and the expenditure table Mr. Severance used was legitimate in our opinion. Thus, there are multiple reasons why we didn’t get into this argument.

Utilities are low-balling estimates?
From Mr. Severance's latest post:
He [Mark Cooper] comments: "Utilities, especially in the early phase of the regulatory process, have an interest in understating costs, as long as the estimates are nonbinding. Low-balling the costs helps to get the power plant approved."
The publicly available cost numbers to construct a nuclear plant (FPL, Progress and SCANA) are from utilities that are in rate base. Utilities in rate base generally receive a 10% return on their prudent investment which is granted by their state public utility commissions (PUCs). Thus, it is in the utility’s greatest interest to provide the most accurate cost estimates to build a plant, otherwise their returns will be lowered or erased if the PUC does not believe they managed the project prudently. Therefore, it makes no sense why utilities would low-ball the estimates to get the power plant approved as Mr. Severance and Cooper claim. If anything, utilities overstate their cost estimates because they plan ahead for contingencies (pdf).

Last year’s credit crisis and today’s situation
From Mr. Severance's latest post:
Even in this recession, the most economical projects (energy efficiency, wind power) are still obtaining private financing and still moving forward. The riskier, more expensive projects are not having as much success attracting private capital.
Examples? Sources? I hear this all the time being spouted by nuclear critics but I never see anything to back it up. Here’s the situation, the Nuclear Regulatory Commission is currently licensing new nuclear plants. Utilities planning to build those plants are not yet at the stage of acquiring the necessary capital for construction. Thus, it’s premature to ding the industry for not obtaining financing yet.

Furthermore, many of the “most economical projects” are not moving forward, contrary to what Mr. Severance and the critics say. Not only that, Josh Green at the Atlantic Monthly noted that the renewable industry had a rough September in 2008 when the credit crisis hit:
...For renewable-energy companies, tax-equity deals meant life or death: the combination of credits could offset two-thirds of the capital cost of a project. Companies like Lehman Brothers, Wachovia, and AIG became an integral part—even the integral part—of the renewables industry, because the utility-scale projects they financed produce the overwhelming majority of clean energy in the United States.

Basing the entire system of federal incentives on tax equity had two weaknesses, one that has always been clear and another that became clear only recently. Forcing renewables companies to route government support through Wall Street, thereby sacrificing a portion of it, was needless and inefficient. But it also tied the industry’s fate to that of the financial world’s most aggressive players. Just as Wall Street bankers bet that housing prices could never fall and got wiped out when proved wrong, Congress seems never to have imagined that Wall Street might someday have no profits and need no tax equity. Early last year, the multibillion-dollar tax-equity universe consisted of 18 providers. After September’s record carnage, the number dropped to four. Credit froze, and most projects ground to a halt. All of a sudden, not just a few start-ups but the entire renewable-energy industry was staring into the Valley of Death.
All new electricity generation projects are struggling to raise capital during this major recession.

Who’s Credible?
From Mr. Severance's latest post:
There are big differences in cost estimates for new nuclear power, depending upon who is doing the estimating -- a nuclear promoter, or an independent analyst.
Are independent analysts somehow more virtuous or free from bias than everyone else? Also, who’s the nuclear promoter being referred to here? FPL (which is also the largest producer of renewables)? SCANA (which generates 80% of its electricity from fossil fuels)? Or Progress (which generates 67% of its electricity from fossil fuels)? How about MIT that studies all forms of generation or the Energy Information Administration that is part of the Department of Energy? The list goes on...

The utility estimates are developed by large teams of subject matter experts, so they cannot be discounted as erroneous just because of a presumed but unproven bias.

Contradiction?
From Mr. Severance's latest post:
Since enormous amounts of money are at stake, the big question then becomes -- whose money is on the line? If nuclear vendors want to project very low costs, let them back up those projections with firm commitments.

Instead, we see the industry turning to ratepayers and taxpayers to take the hit if their numbers are wrong.

In other words, the industry wants to play but won't put its money up. With a huge stash at risk, is this a good bet?
Hmmm. Ten paragraphs before, Mr. Severance cited Moody’s saying this:
Moody's considers new nuclear power projects so risky they described the risk for utilities as a "Bet the Farm Risk", in their June 23, 2009 pronouncement "New Nuclear Generation: Ratings Pressure Increasing".
Wait. Mr. Severance says that the industry won’t put up its own money, yet he cites Moody’s earlier as saying utilities are pretty much betting their own company to build these things. Contradiction?

To receive a loan guarantee under Title XVII of the Energy Policy Act of 2005, the loanee (utility) will have to put up at least 20% equity into the project. This means that if a nuclear plant costs around $8B to build, the company building the plant would have to contribute at least $1.4B of its own money to the project. That’s a lot of money for utilities and is the reason why Moody’s calls it betting the farm. Not all utilities will be putting up just 20% of their equity, however. SCANA is planning to pony up 50% equity ($3B, p.2) to build two nuclear plants at its VC Summer nuclear plant. The utilities will be putting up billions of dollars. Yet I don’t know how Mr. Severance or any of the critics can say nuclear utilities have no stake in their projects.

False interpretations of my post
On top of debating Mr. Severance’s analysis, I have to spend time clarifying my previous post because apparently it wasn’t clear enough the first time. There are a number of comments in his latest post that either mis-interpreted what I said or got completely wrong. Here’s one:
The charts and numbers they [NEI] link to show one thing very clearly -- energy industries with lots of money for lobbying and campaign contributions (oil, gas, coal, and nuclear) have enormous subsidies from the Federal government. Meanwhile, solar and wind power have tax credits, set to expire in a few years.
Uh no. The subsidy chart I referenced showed that renewables received the bulk of loan guarantee subsidies, not “energy industries with lots of money for lobbying and campaign contributions.” Thought that was pretty clear but I guess not. Furthermore, renewables have been receiving tax credits since 1978. We don't mind one way or the other but I highly doubt the credits are going away anytime soon like Mr. Severance implies. Here’s another false interpretation of my post:
The NEI Notes article cites older experience with electric utility cost indices, arguing from this older experience that we should once again expect power plant costs to rise at very gentle inflation rates.
Not quite. Nowhere in my post did I project what future construction cost indices will look like. Instead, I argued that over the past 40 years, they increased around 3% per year which included years that saw rapid increases in costs and years that saw very little. My argument is that Mr. Severance needs to take a broader view of past experience instead of only assuming the recent high construction cost indices from a short window of history.

Wrap-Up
While this is a serious topic, I find this debate on costs humorous and entertaining. Why? Because the nuclear critics who cry about the exorbitant costs to build a nuclear plant use numbers from a utility (FPL) which has already gone through rigorous cost analyses, submitted its petition to build two new plants, and received approval by state regulators. After all that state review, the critics dismiss the utility’s and regulator’s conclusions, come up with their own exaggerated numbers and expect everyone to believe them, not the utilities or regulators. And as shown above, the critics contradict themselves and interpret issues incorrectly.

I can understand the need to challenge the nuclear industry’s numbers. Many of the construction costs for today’s operating plants were way underestimated. Much has changed since then. Even though I’m a representative of the nuclear industry, for me, I place my money with the utility whose business is to provide reliable power to its customers, not third-party critics and observers who have no accountability for what they say. Of course, we’ll have to wait and see how well the first wave of new plants is managed and built before we find out how well everyone’s projections turned out…till then, all we can do is make noise.

Update 8/26, 4:30 PM:
Here's Mr. Severance's brief response.

3 comments:

Jack Spencer said...

While this discussion is interesting, that we have it in relation to public policy decisions demonstrates the flaw in our approach to energy policy. The expense of a project should have nothing to do how that project is treated by policy makers. These should be decisions made in the market place. If investors want to build a nuclear plant (or windmills or a coal plant or anything else) they should look at all of the variables and make a decision. Using cost as an argument to or not to build nukes allows opponents to stop progress by either advancing policies that drive cost higher or to argue that prices are higher than they actual would be. And that is exactly what is happening with nuclear energy.

Jeremy said...

I'm always surprised by the number of self-appointed financial analysts in the nuclear world that spend their own money and time to donate uncalled for advice to private companies.

If a company is spending a fortune on a power plant with a risk of falling flat on its face the answer is simple: keep your opinions to yourself and hurry up and invest in its competitor.

Rod Adams said...

Jack and Jeremy:

I believe that the anti-nuclear organizations are grasping at the cost issue because it has the potential for bringing back bad memories in some very active political constituencies. For a wide variety of reasons, including imposed delays and extremely high interest rates, many of the most recently built nuclear power plants came on line at costs that far exceeded their initial estimates.

Because nearly all of them were built by rate regulated utilities that were allowed to earn a politically determined rate of return on their prudently invested capital - once it was allowed into the rate base - nearly every plant completion resulted in an electric power rate increase blamed on "expensive" nuclear power.

In today's electric power market, there are still a number of jurisdictions where the same risk is in play today. Despite what any of us might like to imagine about the free market, the normal rules simply do not apply to legal monopolies like electric power utilities in rate regulated states.

I believe very strongly that the utility decision makers have learned far more from the experiences of the First Atomic Age than the opposition did. They are taking prudent steps to make sure they have complete designs, complete approval to build and operate, and well trained work forces that will not make construction errors that require massive amounts of rework (I expect some rework, but not anywhere near as much as occurred in the 1980s). I also expect that David is right - the published numbers are conservatively estimated and included significant contingencies.

For me, the key is that many of the PUCs are reviewing the analysis and agreeing with the utilities - nuclear may be "expensive" but it beat all other competing sources.