Sunday, September 28, 2008

Who's on First?

Can anyone make up their mind about new nuclear builds?

The future of the nuclear industry can easily be understood by two competing paradigms as laid out by the New York Times on Sept 24. The newspaper reported "there are two opposing viewpoints on expanding nuclear power."

One is that most companies will not take the plunge until they have seen the pioneers jump into the sea of challenges — technical, legal and financial — and then surface again; the other is that the time is right to push ahead with a large-scale, sustained construction plan.

The situation is about as clear as the classic Abbott & Costello comedy routine known as "who's on first." In it Bud Abbott, the straight man, explains that 'who' is one first, 'what' is on second, and 'I don't know' is one third. Confusion reigns. The classic comedy sketch has passed into history contributing an idiomatic phrase to the American version of English. (See the original version on a YouTube video or a later one at the end of this post.)

Costs are no laughing matter

Very few people in the nuclear industry are laughing about the rapid increases in the cost of steel and concrete or the length of the waiting list for large forgings. The New York Times article points out that only a few nuclear utilities want to be on first, that is, the first plant to formally commit to a new nuclear build in the U.S.

photo_wallace150One of them might be Constellation Energy. Aligned with Electricite de France and Areva, the consortium, known as Unistar, wants to build a fleet of standardized 1,600 MWe EPRs. According to Michael Wallace, (right) Unistar's Chairman, the firm will build the fleet the way a housing developer builds a subdivision. It would move specialized construction crews from one plant to the next so that a number of reactors would be coming up in parallel and enter revenue service within a shorter period of time than building them in serial fashion.

Wallace has also been outspoken about the need for certainty from the Federal government for loan guarantees for new nuclear power plants. The Department of Energy is working on a program that will provide $18 billion in loan guarantees to boost the confidence of investors in new nuclear plants. The program would guarantee 80% of the cost and 100% of the loans for a new plant.

Constellation isn't alone in its desire to participate in the loan guarantee program. NRG's plans for two new reactors at the South Texas Plant depend on the program for success. Other utilities have also filed COL applications with the NRC to get a place in line to use the program.

The nuclear industry isn't happy with the ceiling on the program imposed by Congress. Environmental groups have vigorous attacked the program as a "give away," though they haven't applied the same logic to government support for wind and solar projects.

john_krenicki_mainThe other point of view is expressed by John Krenicki, (right) CEO of General Electric Energy Infrastructure. His view is to build nuclear plants one after another in serial fashion. His view is that the second plant learns from building the "first-of-a-kind" and the third benefits from the first two and so on. Cost savings based on efficiencies accrue as each new plant is built. By the time you are starting the fourth plant you are in the groove so to speak.

Regardless of the method chosen, Richard Myers, VP at NEI, told the NYT the U.S. could have 40 or 50 new reactors by 2030. He added a very large caveat, and it is "that everything goes well." Using Krenicki's ideas, it's likely mistakes will be made on the first two or three plants. Some problems are predictable, like getting the subcontractors to work to nuclear industry quality standards. Areva is grappling with this challenge at its two new EPRs under construction - one in Finland and the other in France. Opponents of nuclear energy, like Greenpeace, have blown the issues out of proportion, but in the battle for supremacy in shaping public opinion, these details count.

Legal and technical issues will also dog the progress of new plants. Two examples are Ameren's efforts to gain permission to charge the rate base for new construction costs and GE's efforts to bring the new ESBWR to market.

Legal Issues slow Ameren's progress

AmerenUE, which is one of the utilities planning to build an Areva EPR with Unistar, has a daunting legal challenge ahead of it. According to a report in the St. Louis Post Dispatch for Sept 20, the Missouri Public Service Commission is considering a staff recommendation to deny the utility's request to pass construction costs to the rate base as it builds the reactor.

In 1976 Missouri passed a law that was directly aimed at stopping plans for a new nuclear power plant. The law bans recovery of costs from construction work in progress. Ameren plans to dispute the commission's staff finding, but it is likely it will have to go to the legislature to try to change the law. The other alternative is to take the risk of proceeding as a merchant.

That course of action is unlikely give the $6 billion estimated cost of the new reactor. So far Ameren has reportedly spent $47 million preparing its COL application to the NRC and expects to spend another $4 million by the end of this month.

gold standardThat's not all. In August the St. Louis Post Dispatch reported Moody’s Investors Service cut its rating on Ameren Corp.’s long-term debt rating to Baa3. The Dispatch notes this is a notch above junk or speculative grade. Moody's cited Ameren's declining cash flow relative to its debt obligations. The ratings downgrade affects about $800 million of debt securities. Moody's also said Ameren wasn't recovering its costs fast enough from the rate base due in part to regulatory delays.

The bottom line is that Ameren has to convince the Public Service Commission, or more likely the legislature and the voters of Missouri, that cost recovery while the new nuclear plant is being built is in their interests. Otherwise, a new Unistar EPR will remain a plan rather than a reality for some time.

The utility will have to make its case on multiple fronts to gain acceptance for what is likely to only viable economic path forward to a new reactor. A lot will depend on demand for electricity in Ameren's rate base and whether the prospects of new coal plants, instead of nuclear energy, goes down well with voters concerned about global warming.

Getting the ESBWR ready for market

The situation in the U.S. is mirrored in the market for new nuclear power stations in the U.K. The government there has committed to a massive new build of as many as 18 new reactors. About a third of the nation's aging coal-fired and nuclear power plants need to be replaced, and within the next decade, to keep the lights on. Nuclear energy accounts for about half of the plants that need to be replaced, but with the challenge of global warming, the U.K. government is shifting the mix to nuclear to replace some of the coal-first plants as well.

For General Electric the prospects of its new ESBWR reactor in the rapidly expanding U.K. market have hit some setbacks lately. The reactor design is now in the design certification process at the NRC. However, on Sept 17 Bloomberg wire service reported that the GE-Hitachi partnership which is marketing the reactor globally asked the U.K. to temporarily halt consideration of the technology for that country's massive new nuclear build.

RBF1According to Bloomberg, GE told the wire service it took the action in order to focus its resources on the design certification process with the NRC. The NRC's stamp on the design is a gold standard and is often accepted in other countries including the U.K. Without it, the reactor design is just that, a design, but not a saleable product. For its part GE told World Nuclear News On Sept 20 that the firm is submitting new information to the NRC and that it would re-enter the U.K. market in 2009.

AECL also facing time to market issues

GE-Hitachi is the second company to pull out of the U.K. competition. Canada's AECL left the ice earlier this year citing the amount of work remaining on design certification of its new ACR-1000 reactor. The Canadian Nuclear Safety Commission this year began moving forward on the review after the Canadian government committed $300 million to support AECL's technical capabilities.

time to marketThe Harper government was thinking at the time about selling shares to investors in the crown corporation. However, it realized that investors had no intentions of buying them unless the new reactor has successfully completed the design certification process.

Like GE-Hitachi, AECL needs a certified design to convince the U.K. government it can deliver a reactor on time and within budget. The U.K. is facing a massive power shortage in future years, and is unlikely to bet its needs can be met on technology that is still a work in progress. Both GE-Hitachi and AECl face similar challenges, and that is to complete the design certification process for their new reactors and bring them to market.

Well who is on first?

Right now no one is on first. Despite all the filings of combined operating and construction license applications with the NRC, the "prudent investor" rule still prevails. It isn't clear which of the two paradigms - serial or parallel construction of a new fleet of reactors - makes the most sense.

The current financial troubles on Wall Street, and in the U.S. economy generally may prove the New York Times right, at least for now, that a "cautious approach" does indeed prevail when it comes to nuclear energy.

Who's on first video - click on the arrow in center to play it

1 comment:

Joseph Somsel said...

The core conceptual issue is predicting future prices for concrete, steel, and skilled labor.

The vendors prefer to cite "overnight costs" meaning current prices and no time value of money over the construction period.

Yet, the antis will get press for cost at startup. These are difficult to do since it requires assumptions about inflation and interest rates a decade hence.

Can you predict the price of structural steel in 2015?

Can you cite a capital cost for a large wind generator? Do you include the land or the transmission lines?

A better course, I think, is to compare reactors and their competitors using mass of steel, copper, and concrete per unit output. Time to complete is ignored here but it seems simplier than these meaningless cost projections.