Thinking Strategically About Nuclear Energy

T H I N K I N G

S T R AT E G I C A L LY

A B O U T

N U C L E A R

E L E C T R I C

E N E R G Y

NUCLEAR POWER: AN ASYMMETRIC RISK TO THE UTILITY INDUSTRY AND TO THE NATIONAL ECONOMY Nuclear electric energy is the production of electricity by boiling water through the heat naturally generated by the fission of low energy uranium (LEU) fuel to generate steam that turns turbines. There’s 104 nuclear power plants operating at 65 locations in 20 states in the U.S., more than any other country in the world. Nuclear energy provides 20 percent of US electricity. 1 Outside of the U.S., an additional 332 nuclear power plants are operating in 30 countries (as of May 7, 2009). Currently, 45 plants with an installed capacity of 40 GW are under construction in 14 countries. 2 Nuclear electric energy is presently rationalized through the promulgation of the following inaccurate as stated or misleading beliefs: (1) nuclear energy is inexpensive to produce; (2) nuclear energy is less carbon intensive than other traditional alternatives; (3) nuclear energy is perfectly safe, and (4) ready and adequate capital is available to build new nuclear plants at a reasonable ROIC (return on invested capital); Conventional cost studies produced by the nuclear energy industry, studies funded by the industry, and government DOE studies price the cost of nuclear power at, on average, 4.7 cents/kWH.3 However, the economic cost of nuclear power is more like 17.7 cents/kWH, making nuclear power by far the most expensive option to produce electricity presently being considered among the available options (e.g. hydropower, conventional coal, ‘clean’ coal, natural gas, thermal solar, and wind, both onshore and offshore). The most recent nuclear industry estimates that the capital cost for new reactors is around $4,000 per installed kW.4 However, credit rating agencies like Moody’s puts estimates between $5,000 - $6,000/kW as of October 2007. 5 Since then, the estimated price tag for a new nuclear power plant has increased to $7500/kW. 6 Both TVA and Florida Power and Light (FPL) have produced internal estimates of construction costs as high as $8,100/kW, making construction of twin-1,500 MW plants cost around $20 billion in today’s dollars, before inflation. However, these more recent estimates may not fully take into account historical experience where nuclear power construction has quite consistently exceeded original construction budgets by 200%-300%.7

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Typically, U.S. nuclear power plant estimates cost ongoing storage of spent fuel at 0.1 cent/kWH during the life of the plant. However, this cost assessment significantly underprices the potential actual cost of spent fuel storage by externalizing the majority of these costs to the public sector, under the premise that U.S. taxpayers will foot the bill for the storage of spent nuclear fuel. In places such as Sweden where power plant operators are asked to pay a more reasonable amount for storage, they are assessed 1.30 cents/kWH, which the government then uses to invest in methods for containing spent fuel and research for reprocessing the spent fuel. Transmission costs are often neglected from the upfront cap costs for a new plant. These costs can easily amount to billions of dollars, adding as much as $1,300/kW to new power plant costs.8 Claims that nuclear power is less carbon intensive (i.e. produces less CO2 emissions during its life-cycle than other nonrenewable power sources ) is based on the faulty premise of just accounting for the operating characteristic of nuclear power which does produce significantly less carbon emissions than other nonrenewable power sources (e.g. coal, oil, natural gas). However, if the entire nuclear fuel cycle and the full life cycle of the nuclear power plant (e.g. decommissioning, nuclear waste disposal and storage, etc.) is included in the carbon calculation, nuclear power has a carbon footprint only slightly less (immaterially so) than ‘clean’ coal. But capital is available to build nuclear power plants, so why not go ahead and build them, especially if nuclear power is so highly subsidized (and the way higher capital costs can be used to drive higher utility revenues as utility rates are set partially by the recognition of depreciation of power generating assets). In the 1970‘s, both investors quit funding and utility company managements quit ordering new nuclear power plants because it became known that shareholders would be better off if the utility foreswore additional nuclear power. That is the utility’s stock price would be worse off if nuclear power comprised a greater percentage of the utility’s power generating portfolio. That is because of the large uncertainties in the economic costs of building, operating, decommissioning, and nuclear waste storage. These economic drivers and their uncertainties have not changed since the 1970s. What has changed is the sophistication of financial engineering practices that have enabled utilities to essentially default

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on nuclear plant construction debt and to spin off the short-term operating cash flow from nuclear power to SPEs (special purpose entities) that make it possible to have nuclear power look immensely profitable by accounting trickery, and by offloading decommissioning and nuclear waste storage to the public sector through negotiated deal making. Of course, non of these financial engineering tricks change the underlying economics of nuclear power. They just move the real, economic costs of nuclear power around to different entities. However, this game of smoke and mirrors makes it appear that nuclear power makes sense, even though, from an economic perspective, it does not, as it is presently unclear that nuclear power ever produces a positive cash flow - when all costs are accounted for in the cash flow stream. ENDNOTES As of December 31, 2007, there are 104 commercial nuclear generating units that are fully licensed by the U.S. Nuclear Regulatory Commission (NRC) to operate in the United States in 65 locations in 20 states. Of these 104 reactors, 69 are categorized a pressurized water reactors (PWRs) totaling 65,100 net megawatts (electric) and 35 units are boiling water reactors (BWR) totaling 32,300 net megawatts (electric). 1

The current Administration has been supportive of nuclear expansion, emphasizing its importance in maintaining a diverse energy supply. But as of December 31, 2007, the last new reactor to come on line in the United States was the Tennessee Valley Authority’s Watts Bar 1 reactor in Tennessee. The first U.S. reactor went online in 1957 in Shippingport, Pennsylvania, and we have a halfcentury of experience with this. The nuclear industry still cannot get private insurance against a major catastrophe. You do not have to take out insurance on a wind farm against an accident or a terror attack that will destroy an entire city. See: http://www.eia.doe.gov/cneaf/nuclear/page/nuc_reactors/reactsum.html; http://www.statemaster.com/graph/ene_nuc_ene_num_of_nuc_pow_pla-energy-nuclear-num ber-power-plants 2

Most of the countries in Europe depend on nuclear energy for their electricity—Slovakia, 60 percent; Belgium, 65 percent; France, 80 percent. France gets about 80 percent of its power from 58 reactors. But even France has not completed a new reactor since 1999. On June 26, 1954, at Obninsk, Russia, the nuclear power plant APS-1 with a net electrical output of 5 MW was connected to the power grid, the world's first nuclear power plant that generated electricity for commercial use. As of end 2007 the total electricity production since 1951 amounts to 59,450 billion kWh. The cumulative operating experience amounted to 12,750 years by the end of 2007. See http://www.euronuclear.org/info/encyclopedia/n/nuclear-power-plant-world-wide.htm

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The best summary of conventional cost studies as to the cost of nuclear electricity is “The Economics of Nuclear Power,” The World Nuclear Association (May 2009) available at http://www.world-nuclear.org/info/inf02.html (accessed 05/22/09). Table source: http://www.treehugger.com/files/2009/05/nuclear_power_n.php *MIT (2203) numbers amd 2009 Update available from “The Future of Nuclear Power” at http://web.mit.edu/nuclearpower/ 3

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2009 MIT study

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Moody's Investors Service, "New Nuclear Generation in the United States: Keeping Option Open versus Addressing an Inevitable Necessity," October 10, 2007 6

Moody’s Investors Service, "New Nuclear Generating Capacity: Potential Credit Implications for US Investor Owned Utilities, May 2008. The Seabrook nuclear plant, Shoreham, Three Mile Island itself, Diablo Canyon in California, these reactors came in at more than 500 percent over budget. The average construction cost for a new nuclear plant in the last century, in the twentieth century, was twice as high as originally estimated. There are reactors now that are supposedly going to go under construction in Florida whose price—estimated price has tripled, prior to even digging the first shovel at the construction site. For example, in India, the country with the most recent experience of nuclear reactor construction, completion costs for the last ten reactors have, on average, been 300% over budget. M.V.Ramana, Antonette D'Sa, Amulsa K.N.Reddy, 'Economics of nuclear power from heavy water reactors', Economics and Political Weekly, April 2005. 7

For example, Progress Energy estimates that its 200-mile, 10-county transmission project will cost $3-billion more. This transmission project is necessary for its twin 1,500 reactors near its Crystal River power station in Levy County. The $14 billion estimated “total cost triples estimates the utility offered little more than a year ago.” See Asjylyn Loder, “Final Progress nuclear reactor tab could top $17-billion,” St. Petersburg Times (March 12, 2008) at http://www.tampabay.com/news/business/ energy/article414653.ece. 8

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