On Sept. 16, 1954, in a speech to a group of science writers, Adm. Lewis L. Strauss, then head of the agency now known as the Nuclear Regulatory Commission, made a bold prediction. The potential for peaceful uses of nuclear energy was so great, he said, that electricity produced by nuclear power plants would one day be “too cheap to meter.”
Over the coming decades, the economics of nuclear power turned out to be more problematic. Even before operational catastrophes at Three Mile Island in Pennsylvania and the Chernobyl nuclear power station in the Ukraine, the industry was reeling from a series of financial catastrophes that brought widespread project cancellations and effectively ended construction of new plants in the U.S.
Now, nearly three decades after the last new plant was approved, proponents of nuclear power say the economics of atom-splitting energy have dramatically improved. In fact, they argue, financial forces have become a driving force behind a new enthusiasm for nuclear energy as the power industry scrambles to meet growing demand for electricity with an aging fleet of generating stations.
But the industry still needs to raise tens of billions of dollars before the proposed round of new plants can be built. That means persuading Wall Street investors to put up the money and state utility regulators to bless the higher rates needed to pay for these multi-billion-dollar projects.
Despite billions of dollars in federal incentives to jump-start construction of a half dozen new nuclear plants, any new wave of nuclear construction will have to satisfy those two groups if it’s ever going to get off the ground, said Dimitri Nikas, a utility industry analyst at Standard & Poor’s, one of the bond rating agencies that will be advising investors on the credit risk involved in financing these projects.
“The biggest battle will be with utilities getting enough certainty that they will be able to recover their investment and regulators ... getting certainty that this is indeed the lowest cost and the most appropriate way to address increasing power demand, the greenhouse gas risk and costs that will continue to increase," he said.
Financial short-circuit
The economics of building nuclear power plants began to short-circuit in the 1970s, after a building boom that lasted more than a decade. Part of the problem was the widespread use of so-called “cost-plus” contracts, in which the companies building plants were not held to a fixed price, according to Dan Keuter,head of nuclear business development for Entergy, which has applied for a site permit to build a new nuclear unit.
“You had multiple subcontractors working on cost plus basis,” he said. “So they were actually motivated not to get it done early. ... And (they) were definitely not motivated to do it within budget because the more they spent, the more they got."
Most plants were designed one at a time from the ground up; in some cases, engineers and designers were still working on plans as construction was under way, said Keuter. Changing regulatory requirements created further delays.
As a result, construction schedules began to double and triple, costs skyrocketed and projects in the pipeline were canceled. For those projects that continued, rising carrying costs as interest rates hit double-digits added to already huge cost overruns. By the end of the decade, the nuclear power industry was buried under a pile of debt.
Though memories of that financial meltdown linger, the energy industry today is giving a fresh look to the economics of nuclear power. And with rising fossil fuel costs, a more favorable regulatory process and generous government incentives for new plants, many in Congress and the power industry like what they see.
Existing plants become more profitable
Owners of existing plants also have seen their profits rise, thanks to sharply higher output and fewer shutdowns for maintenance or safety problems. The average nuclear plant is now online and producing electricity 90 percent of the time, up from an average of 55 percent in 1980. Since fuel represents a fraction of the cost of operating a nuclear plant, the soaring cost of fossil fuel — especially natural gas — has further tipped the scale in favor of nuclear.
And it turns out nuclear plants have a longer life span than many originally assumed. Plant licenses were originally granted for 40 years, based on the standard accounting payback schedule used for conventional power plants when the first commercial reactors were built in the late 1950s. Now, as those original 40-year licenses expire, nuclear plant owners today are applying for — and getting — 20-year extensions from the Nuclear Regulatory Commission.
“We’ve gone from the assumption that this was all going to have to be decommissioned to the assumption that that everybody is going to get a license extension. That’s huge,” said Christine Tezak, an energy industry analyst at Stanford Group in Washington, D.C. “This (nuclear) capacity was supposed to go out of the national portfolio and now everyone saying. ‘We’re not going unplug what we have.’”
The industry’s hope is that these improved economics, on top of government incentives approved in the past few years, will lay the groundwork for construction of a handful of new plants that will demonstrate the economic viability of new plants — and trigger a second coming of nuclear power in the United States.
Making the case for nuclear
“Once the confidence level is there that these plants can be built on time and in budget, and they're going to be operated at the efficiency levels (owners) want — which is typically very high — that confidence level will spur more new construction,” said Peter Wells, general manager of marketing for GE's nuclear business, which is hoping to build new plants based on a design that has already been approved by the NRC. (MSNBC.com is a joint venture of Microsoft and NBC Universal, a unit of GE.)
Proponents of new plants point to several changes that they say will be advantageous in getting the next generation of plants off the drawing boards:
Standardized designs: The existing fleet of U.S. power plants was largely custom-built, a one-at-a-time process that all but insured delays in approval and construction, along with runaway costs. Today, with several standard designs already approved by the NRC, builders of nuclear power plants say they are much better able to manage costs and maintain quality control. Large, standardized components are expected to be built off-site and then delivered and assembled at the plant.
Improved safety features: New designs include “passive safety” features; for example, “gravity-fed” water supplies to cool a reactor core if it overheats, reducing the risk of pump failure. In some cases, nuclear proponents say, design simplifications have reduced both risk and cost.
Regulatory changes:One of the biggest sources of delay, high costand financial risk inthe heyday of nuclear plant building was a two-step review process that required separate federal permits for construction and operation of plants. With pre-approved designs, the NRC now reviews a combined construction and operating license application which, if approved, reduces the risk that a completed plant may face costly delays in getting an operating license.
But streamlined federal approvals won’t help utilities win — and maintain — the support of state regulatory commissions, which will also have to sign off on plans to build new plants. That presents a continuing risk that utilities or investors will have to factor into their calculations, said Nikas, the Standard & Poor's analyst.
“Say the utility commission changes over the course of the construction project,” he said. “What if the new commission is anti-nuclear for whatever reason? If it tries to scupper the utilities’ efforts to build the plant, that can wreak havoc because the utility has already committed to a very large capital spending budget.”
Carbon tax: The U.S. has been slow to adopt economic incentives to cut carbon emissions linked to global warming, but many power industry leaders expect Washington to levy some form of “carbon tax” in the life span — 40 years or more — of any new nuclear plant built in the next few years. Because nuclear plants emit virtually no carbon into the atmosphere, that would give them a huge economic advantage over plants that burn fossil fuels.
That financial edge could be $12 per megawatt less than the cost of electricity generated by plants that burn fossil fuels, according to Keuter, the Entergy official, adding that generating costs for new nuclear plants are expected to average $40 to $50 per megawatt. Though alternatives like solar- and wind-generated power offer opportunities to hedge future penalties and rising fossil fuel costs, even in the most optimistic projections those power sources won’t be able to meet the growing “baseload” power demand expected in the next several decades.
Federal incentives: To encourage new construction of nuclear plants, Congress is offering several important sweeteners to the first several companies that come forward with plans. These include guarantees on loans used to finance the projects, tax credits for the power they produce and insurance against losses that result from delays in the regulatory process.
Nukes for sale
But it’s far from clear that this new round of plants will ever be built. Even if all goes as proponents hope, the first plants won’t come online before 2014 and will cost an estimated $4 billion each. Before ground is broken for the first new plant, the power industry will have to convince state regulators and investors that the numbers add up. To do that, they face several important hurdles.
Most of these projects are expected to be financed by bonds. To help reassure investors that the bonds are a safe investment, Congress has provided loan guarantees for 80 percent of the financing for the first several projects to win NRC approval. But that critical guarantee has already hit a serious snag.
Typically, these projects would be financed with 80 percent debt and 20 percent cash or equity put up by the owner of the plant. But federal officials in charge of loan guarantees have interpreted the law to mean that those guarantees apply only to the debt portion of the financing package. Using that math, the loan guarantee — 80 percent of 80 percent — will only cover about two-thirds of the total cost. That could be more risk than Wall Street is ready to assume — especially for the projects that go first.
Congress to the rescue?
Though the current interpretation of the rules could throw cold water on efforts to raise money, many in the industry expect Congress to clarify the rules to provide more generous guarantees.
“You had a lot of people who voted for the (Energy Policy Act of 2005) that have a pet project at home that they thought they were arranging a loan guarantee for,” said Tezak, the energy industry analyst. “But it has the potential to be a deal breaker.”
Another question is how those bond investors will be paid off once a new project is approved. Under the old system of utility regulation, still in place in some states, state public utility commissions review all construction plans in advance to make sure they made economic sense. If they approve the plans, the utility is allowed pass along the construction costs to consumers in the form of higher rates, all but assuring a profit that can be used to pay back investors.
But in states operating under so-called “deregulated” energy markets, owners of generating plants compete with each other to sell electricity on the open market. That increases the risk to bond investors that the profits from those market-based power rates may not cover the cost of repaying those bonds, plus interest. That’s why the first proposals for nuclear plants will most likely come in Southern states, where utility commissions still allow companies to recapture their construction and development costs from ratepayers.
“It's much easier to allocate that risk to consumers under regulation than under competition,” said Ken Malloy, a former Federal Energy Regulatory Commission staff member who now heads the Center for the Advancement of Energy Markets, a nonprofit group that advocates the deregulation of electricity.
Industry looks to nuclear-friendly states
That also means proposals for new nuclear plants will be confined to a relatively small number of nuclear-friendly states.
“I can’t imagine a place like Vermont would allow a new nuclear plant to come online, or a place like Washington or Oregon,” said Standard & Poor's Nikas.
Utilities also face the ongoing problem of what to do with spent nuclear fuel. A federal proposal to build a single repository at Yucca Mountain in Nevada has been stalled for over a decade, with no resolution in sight. For now, nuclear plant owners say on-site storage of spent fuel is safe and won't prevent new projects from moving ahead. But left unresolved, the continued accumulation of spent fuel will raise the long-term cost of building a new nuclear plant. And it will add uncertainty to regulators' estimates of the cost of the ultimate decommissioning of the plant, which must be factored into the total cost of the project.
Given the ongoing public concern about nuclear plant safety, the first round of proposals will likely consist of additional reactors at existing power stations. Though many of the 103 operating nuclear power plants in the U.S. were designed to house up to four reactors, most sites operate with just one or two. So a proposal to add another reactor to an existing plant would likely face less local opposition than a new “green field” site.
Utilities hoping to build new nuclear plants are in the early stages of the lengthy application process. After applying to the NRC for a combined construction and operating license, a utility must persuade a state regulatory commission to add the cost of building the plant to its customers' electric rates. Only then can the utility begin to work on financing the development and construction of the plant. In order to meet deadlines for production tax credits and other federal incentives, those NRC applications are expected to be filed sometime late this year or early 2008. If all goes according to schedule, the first new plant would begin producing power in 2014 or 2015.
Many questions remain
But even with a simplified federal regulatory process, generous government incentives, better construction management, higher fossil fuel costs and the future threat of a carbon tax, the dawning of a new age of nuclear power won’t become reality unless and until utilities sign the construction contracts and commit the capital to build them.
Companies like GE, which already does a solid business building nuclear plants in other countries, have gotten suppliers lined up and laid out plans to ramp up if U.S. utilities decide to move ahead. But that’s not the same as having a signed contract, said Wells, the GE executive.
“We’re constantly monitoring what customers are doing as opposed to saying — and that’s a big difference,” he said. “The reality is that if we get to a point where we don’t see the right actions taking place, we’ll have to sit back and reconsider our position. So 2007 will be an important year because the utilities that wish to hit the 2015 commercial operation date will need to start making big decisions.”
If a utility company does make it past the hurdles of getting regulatory approvals and lining up financing, investors still won’t be fully persuaded that these projects can be built on time and on budget until the first few plants are completed successfully. Without a solid track record for the first movers, the so-called nuclear renaissance could be over before it even begins.
“On the very first one, we’ll be just as nervous as people who were looking at these plants for the first time,” said Nikas.