Guest Post: Nuclear Energy and the Value of CWIP

Bottom of containment vessel for new reactor at Plant Vogtle

The following guest post was written by NEI's Mitch Singer.

Jeff McMahon bases his argument against nuclear cost recovery “Editors Rebel Against Ratepayer Financing For Nuclear Plants,” on the sole premise that because natural gas is inexpensive at this point in time it will remain so for decades. Therefore, energy companies should rely solely on one source of electricity generation. Ignoring the old adage of not putting your eggs in one basket is as relevant in generation choices as it is in financial investments.

Energy companies evaluate a variety of factors to determine their generating mix and plan not in years, but rather decades ahead. Public utility commissioners do the same. They conduct an extensive analysis of the state’s demand growth commonly known as a “determination of needs” that looks at all methods of generation to see which ones are most suitable. Commissioners are also obligated to make sure there is diversification in the state’s generating portfolio, balance economic and environmental concerns and try to keep costs down.

Florida, for example, receives 62 percent of its electricity from natural gas and an overall 86 percent from fossil fuels. Natural gas may be low now, but history has proven on many occasions that low natural gas prices in the U.S. are not sustainable. Within the last month we’ve seen the price of natural gas spike to more than $30 per million BTU on the spot market in New England due to frigid weather and a shortage of natural gas pipeline capacity. So what did New England do to mitigate the impact? It imported significant amounts of electricity from the Indian Point nuclear plant in New York.

Here in lies the value of nuclear energy as it provides a stable, low-operating cost baseload source of electricity that offers a myriad of economic and environmental benefits. Nuclear cost recovery, commonly known as construction work in progress (CWIP), allows a utility to recover financing costs and return on equity. By doing so, a utility avoids paying “interest on interest” that would occur if all costs are held until the plant goes into service.

In Georgia, where Southern Co. and Georgia Power are building two new reactors at Plant Vogtle, just this past week the Georgia Public Service Commission (PSC) approved the latest cost and schedule reports. One PSC staff member put the reasoning succinctly, saying the project “remains more economically viable than any other (fuel) resource, including a natural gas-fired alternative.”

In Georgia, CWIP is expected to save Southern Company’s ratepayers $300 million in financing costs during construction. CWIP also will reduce the in-service cost of the plant by $2 billion, saving customers additional financing costs over its expected 60-year life. The utility also has improved cash flows through CWIP that support stronger financial ratings, which result in lower interest costs for the project and all other utility investments over the long term. CWIP is allowed by public utilities and the Federal Energy Regulatory Commission to support the construction of baseload electricity plants and transmission lines for a simple reason: because it saves money for consumers and gets necessary infrastructure constructed.

New nuclear power plants also act as a macro-economic catalyst. The reliable, low-cost electricity provided by nuclear plants operates at close to 90 percent capacity. Thus, nuclear’s forward price and supply stability provide a high level of confidence in attracting capital formation to start new businesses and expand existing businesses, which results in job formation and expanded tax revenues. The Plant Vogtle project is about one-third completed and has already generated almost 5,000 jobs during the construction period and there will be about 700 permanent, high-paying jobs associated with the two new reactors when they’re completed by the end of this decade. In addition the average nuclear plant generates approximately $470 million a year in total output for the local community and about $40 million per year in total labor income. Nuclear also bring the environmental benefit of being the largest source of emission-free electricity.

Natural gas may be the preferred generation choice of today. But as Roman conquerors were warned during the celebrations of their triumphs; all glory is fleeting.

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