Sunday, November 4, 2007

Abstract - NRG files for two ABWRs as 1st mover

Federal loan guarantees and risk insurance are expect to help
by: Dan Yurman, Contributing Reporter
Fuel Cycle Week 10/23/07 V6 N251

NRG Energy (NYSE:NRG) and the South Texas Project Nuclear Operating Company said Sept 24 it will file a Combined Construction and Operating License Application (COLA) with the NRC to build and operate two nuclear units at the current reactor site. NRG filed its letter of intent with the NRC in June 2006 using a team of GE-Hitachi and Bechtel. Toshiba will lead the design and construction activities to build the plant.

The total capacity of the two new units is expected to be 2,700 MWe. NRG CEO David Crane said the plants will cost $5.5 billion which brings them in at $2,000 per kW. NRG is the primary investor in the two new plants with a 44% stake. CPS Energy, San Antonio's municipally owned natural gas and electric company, owns another 40%, and Austin Energy owns the remaining 16%.

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NRG expects to take advantage of two provisions in the Energy Policy Act of 2005 to reduce costs.
  • The plant expects to apply for and receive federal loan guarantees for 100% of the cost of loans and 80% of the cost of the plant. This will leave approximately $1.1 billion in private equity at risk.
  • Because NRG is a "first mover," it expects substantially more federal risk insurance coverage for any regulatory delays than the next four plants that file for NRC COLAs.
  • The firm will receive production tax credits for the first 6,000 megawatts of electricity generated by two new plants.
Competition faces “First Mover” advantages

NRG's application is expected to add urgency to other "first mover" competitors including NUStart Energy's application for two AP1000s at TVA's Bellefonte site where two PWRs have been planned but never built, and for Constellation Energy's new EPR unit for its Calvert Cliffs plant. AREVA's EPR are not yet certified by the NRC which adds to COLA review time. NRG's use of a certified design based on the GE-Hitachi Nuclear Energy reactor, and the construction experience it is buying from Toshiba, give it a huge competitive advantage compared to other first-of-a-kind projects.

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NRG's Crane told the Reuters Global Environment Summit it will be riskier to build the fourth or fifth new plant rather than the first or second. "Whether you are talking about labor or widgets there's enough capacity in the country to build the first three [new plants]," Crane said adding that shortages of labor and equipment will be the limiting factors for new plants that come later in the construction pipeline.

Risk mitigation measures are key to NRG’s success

NRG will face multiple regulatory, engineering, market, and financial risks associated with the new plant. The key regulatory risk is whether the NRC will be able to deliver an expedited regulatory review of the COLA under its new procedures.

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The key engineering risk is whether the plant can be built on time and within budget. On Aug 9 NRG announced it had signed a project services agreement with Toshiba to build the plants. Under the agreement Toshiba will support NRG in design, engineering, construction, and procurement. NRG said in a press release the agreement provides access to Toshiba's advanced construction methods for Advanced Boiling Water Reactors (ABWR).

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GE-Hitachi and Bechtel will be part of the engineering, procurement, and construction contract (EPC). Near-term activities include acquiring long-lead time components, site-specific design work, and preparation of the COLA. Crane said the EPC would come with a warranty for performance. NRG expects to cut expenses by building the two new plants next to the existing units 1 & 2 saving about $500 million as a result.

The long lead time for large forgings will test Toshiba's promise to deliver the plant on time and within budget. U.S. plants will be competing for manufacturing capacity with China who wants it for their plants. China has issued orders for four Westinghouse AP1000s. ARVA expects to sign deals with China for nuclear reactors during the state visit of French President Nicolas Sarkozy at the end of next month. During Mr. Sarkozy's visit to China, AREVA will ink a $5 billion deal to supply the country with two 1,600 MWe EPRs and the nuclear fuel for them for the next two decades.

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A key market risk is the need to lock in long-term contracts to sell power from units 3 & 4. The power from the two new nuclear units will be sold exclusively in Texas market. Traditional utilities must gain approval from state regulators before passing on the construction costs of new nuclear plants to ratepayers. NRG is a merchant energy company and not a utility. It doesn't have captive ratepayers in deregulated Texas. As a ‘merchant” plant NRG’s costs cannot be passed on to the utility’s customers. Risks of cost overruns are borne by shareholders.

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To mitigate financial risks NRG is working in obtaining support from the Japanese government. CEO Crane told a Merrill Lynch analyst meeting a recent change in Japanese policy may allow the government to extend export credits to NRG. Crane said support from Japan in the form of export credits could take pressure off to obtain federal loan guarantees for the full amount of the loans needed to built the two new units.

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Nuclear opponents aren’t caught napping

Opponents of nuclear power have already attacked NRG’s announcement because it is a "first mover." If they can knock it off the market pedestal it is currently perched on, that outcome may discourage other utilities from pursuing the nuclear option.

U.S. Rep. Edward Markey (D-MA) said in a statement the same day NRG made its announcement that the NRC's contracting efforts to support nuclear power plant licensing may be illegal. Markey charged the NRC was "outsourcing" its decision making to contractors.

Like all federal agencies, there are only so many things it can do in-house, and many support functions are contracted out. Markey's attack has the clear objective of trying to slow down the NRC’s review of license applications and create financial problems for new reactors due to schedule delays. If he can gum up the works enough, other new reactor project sponsors may be discouraged from trying to build new nuclear power plants.

In response to Markey's statement, an NRC spokesman denied that the agency will let contractors make the agency's decisions for it. "The NRC has not, and will not, delegate any decision making authority in the licensing of potential new U.S. reactors."

While Rep. Markey was targeting his opposition tactics on the narrow field of regulatory issues associated with federal contracting law, a group of famous rock stars sought to build a mass political base to oppose new nuclear power plants with a campaign using Internet video and new rock albums. Musicians Bonnie Raitt, Jackson Brown, and Graham Nash said Oct 11 that they were starting a national effort to stop construction of new nuclear power plants.

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FPL’s CEO - new reactors are a “big bet”

NRG's application to the NRC and the risks its is facing brought a comment from Lewis Hay, CEO of Florida Power & Light, who told the Miami Herald on Sept 28, "I think some nuclear power plants will be built. I don't think it is going to be this giant wave that some people are talking about."

That said Hay noted FPL will propose upgrading its existing reactors in Florida by 2012 and build two new reactors by 2020. Hay said 3,000 new MWe of capacity will cost $15 billion at current rates. "That's a big bet to take to your board," Hay said.

On October 16 FPL joined the nuclear renaissance with NRG. Despite all risks it said it filed its plans with the Florida Public Service Commission to build two new nuclear power units at its Turkey Point generating complex.

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