New Centralized Nuclear Plants: Still an Investment Worth Making?

Just a few years ago, the US nuclear renaissance seemed at hand.  It probably shouldn’t have been.  Cost overruns from Finland to France to the US were already becoming manifest, government guarantees were in doubt, and shale gas drillers were beginning to punch holes into the ground with abandon.

Then came Fukushima.  The latter proved a somewhat astonishing reminder of forgotten lessons about nuclear power risks, unique to that technology:  A failure of one power plant in an isolated location can create a contagion in countries far away, and even where somewhat different variants of that technology are in use. Just as Three Mile Island put the kaibosh on nuclear power in the US for decades, Fukushima appears to have done the same for Japan and Germany, at a minimum.  It certainly did not help public opinion, and at a minimum, the effect of Fukushima will likely be to increase permitting and associated regulatory costs.

By contrast, when a gas-fired plant in Connecticut exploded during construction a few years ago, it didn’t affect the public perception of other gas plants.  But Fukushima and nuclear power is another story.  The stakes are so much bigge

Even without Fukushima, the verdict on large centralized US nukes is probably in, for the following reasons:

1)     They take too long: In the ten years it can take to build a nuclear plant, the world can change considerably (look at what has happened with natural gas prices and the costs of solar since some of these investments were first proposed).  The energy world is changing very quickly, which poses a significant risk for thirty to forty year investments.

2)     They are among the most expensive and capital-intensive investments in the world; they cost many billions of dollars, and they are too frequently prone to crippling multi-billion dollar cost overruns and delays.  In May 2008, the US Congressional Budget Office found that the actual cost of building 75 of America’s earlier nuclear plants involved an average 207% overrun, soaring from $938 to $2,959 per kilowatt.

3)     And once the investments commence, they are all-or-nothing.  You can’t pull out without losing your entire investment.  For those with longer memories, WPPS and Shoreham represent  $2.25 bn (1983)  and $6 bn (1989) wasted investments in which nothing was gained and ratepayers and bondholders lost a good deal.

Some recent investments in centralized nuclear plants in other countries highlight and echo these lessons.

Electricite de France’s Flamanville plant has seen its budget explode from 3.3 to 6 bn (July 2011) to 8 bn Euros ($10.5 bn) as of last December, with a delay of four years over original targets.  EDF in part blames stricter post-Fukushima regulations for part of the overrun).  To the north, Finland’s Olkiluoto – being constructed by Areva – has seen delays of nearly five years, and enormous cost overruns.  The original turnkey cost of 3.0 bn Euros has skyrocketed beyond all fears, increasing at least 250%.  Just last month, Areva’s CEO conceded “We estimate that the costs of Olkiluoto are near those of Flamanville.”

In the US, recent experience doesn’t look much better:  Progress Energy (now Duke) first announced the 2,200 MW Levy nuclear project in 2006, with an estimated price tag of $4 to $6 bn and an online date of 2016.  The cost estimated increased to $17 bn in 2008.  This year, Progress announced the project would cost $24 billion and come online in 2024.  The Levy plant currently has a debt in excess of $1.1 bn for which customers had already paid $545 million through 2011.  As of now, the utility plans to proceed, with the Executive VP for Power Generation stating ”We’ve made a decision to build Levy…I’m confident in the schedule and numbers.”

In Georgia, Vogtle Units 3 and 4 (owned jointly by a number of utilities, including Georgia Power) appear in somewhat better shape, but issues have cropped up there as well.  Customers currently pay $10 per month in advance to cover financing associated with the two 1,117 MW units.  Georgia Power is allowed by legislation to recover $1.7 bn in financing costs of its estimated $6.1 bn portion of the $14 bn plant during the construction period.  However, there have already been some cost problems, and Georgia Power is disputing its responsibility to pay $425 million of overruns resulting from delays in licensing approvals.  Total cost excesses to all partners total $875 mn.  The two units were expected to come online in 2016 and 2017, but in a Georgia PSC meeting in December, an independent monitor noted that expected delays of fifteen months are largely as a result of poor paperwork related to stringent design rules and quality assurance.  Those delays will likely continue to cost more money.

Unfortunately, these experiences are not outliers.  From 2007 to 2010, the NRC received 18 nuclear applications ( of which only twelve are still active).  Of these, the consulting outfit Analysis Group reported that for eight plants where they were able to obtain two or more comparable cost estimate, 7 are over budget (including Levy and Vogtle), with updated numbers “often double or triple initial estimates.”  This is consistent with an MIT study estimating ‘overnight’ costs nearly doubling from 2002 to 2007.   As utilities management consultant Stephen Maloney was quoted in the Analysis Group study “No one has ever built a contemporary reactor to contemporary standards, so no one has the experience to state with confidence what it will cost.  We see cost escalations as companies coming up the learning curve.”

Last August, Exelon abandoned plans to construct two facilities in Texas, blaming low natural gas prices.  Two months later, Dominion Resources announced that it would shut down its existing Kewaunee station in Wisconsin as a consequence of low gas prices and a lack of buyers.  The latter move was particularly eye-opening: building a nuclear plant is supposed to be the expensive part, while operation is expected to be relatively cheap.

So it appears that the nuclear renaissance may be largely over before it started.  And yet, many projects have not yet been canceled, with utilities and ratepayers accepting ever more risk in order to rescue sunk costs. In many cases, these costs have soared or will soar into the billions. As risk management expert Russell Walker of the Kellogg School of Management is quoted as saying in the  Tampa Bay Times “When the stakes get higher, it gets harder for organizations to walk away…this happens a lot.  It’s the same problem a gambler has: If I play a little longer, it’ll come around.”

With low natural gas prices, efficient combined cycled turbines, more efficient renewables and a host of more efficient end-use technologies, that’s a bet fewer and fewer seem wiling to take.   Unfortunately for ratepayers at some utilities, they are at the table whether they like it or not…

http://www.forbes.com/sites/peterdetwiler/2013/01/15/new-centralized-nuclear-plants-still-an-investment-worth-making/