Sunday, October 12, 2008

Partly cloudy with a chance of cheeseburgers

Will the global financial crisis turn the nuclear renaissance into a patty melt?

patty meltEveryone is watching the global financial meltdown that has tied the investment community up in knots. Top banking executives are on the hot seat with Congress and probably feel like they're in the middle of a pan of frying onions. In some cases it may be justified, but the future is what concerns the industry. Finger pointing is cathartic for fearful politicians, but not useful for building new nuclear power plants.

Nuclear utilities who have filed combined construction and operating license applications with the NRC might be justified in wondering where the money will come from to build the plants. This isn't a small question. In the past five weeks, six plants have filed COL applications and seven filed in the preceding six months for a total of 13 applications and 19 reactors. Add to that the five applications and eight reactors that filed in 2007 and you don't just have a "renaissance. " What you have, collectively, is a spectacular statement of confidence in the future of nuclear energy. Who is gong to pay for it and how?

Locations new reactors US
Click on the map for an interactive web page at the NRC web site.

How much money will be needed and when?

Time-MachineWhere is the financing going to come from and when? All of these reactor projects are facing the same question when they emerge from the 42-month long cocoon inside of NRC's licensing review. You don't need a time machine out of H.G. Wells science fiction to think about some of the answers to these questions.

Taking a look at the timing, the earliest plant filing was in September 2007 by NRG making it the nation's "first mover." The latest to file was PPL at Blue Bend last Friday. Add 42-months to these dates, and what you have are the plants looking to lock up billions in investment commitments starting in March 2011 and ending in April 2012. Basically, in a 13-month period, the future of nuclear energy in the U.S. will determined by these critical investment decisions. The timing won't be exactly that precise, but the impact of having all of these plants looking for investors at the same time will create a competitive environment for funding.

Assuming for the sake of discussion the cost of new nuclear generating capacity stabilizes at an average of $3,500/Kw. With 18 applications for 27 reactors, that's a lot of investment. Assuming an average of 1,200 MW per plant, in order to get a rough order of magnitude number, what you are looking at is investment demand for 27 reactors X 1,200 MW/each X $3,500/Kw equals an astonishing $113 billion. What's interesting about this rough order of magnitude estimate is that it is close to the total amount ($122 billion) requested in federal loan guarantees by these utilities.

Where will the money come from?

The dates when these funds will be needed are too far in the future to predict how the current financial crisis will affect the industry, but some factors may be at work now that will be influential then.

  • Carbon tax & carbon-cap-and-trade

The first is the likelihood of carbon taxes and carbon-cap-and-trade programs. The Congressional Budget Office has taken a look at policy issues associated with proposals now before Congress.

carbon taxIf the rates and processes are set up properly, utilities will have time and resources to switch from fossil fuels to nuclear without burdening their rate bases. It will be equally important for the cap-and-trade program to be worked through a global market exchange with standardization of units of measures and international standards for regulatory oversight. This organizational development would allow U.S. nuclear plants to benefit from a global program and considerably broaden the opportunities for bringing in potential new investors.

  • Recovery of costs while under construction

Second, more states, such as Missouri, will have to decide whether they want to continue to contribute to global warming with new fossil plants or whether they will drop their current bans on recovery of construction costs for new plants. Florida's regulatory climate allows this practice and has resulted in plans for four new reactors to meet growing demand for electricity. Merchant plants will have much higher risk profiles. They may be part of a second wave of construction of new nuclear reactors once the economics of the first wave in regulated states have proven themselves to be successful.

  • Energy investment for profit across state lines

pirateThird, states such as Utah, which are divided over rate payer risks, will have to decide whether the cost of a new nuclear power plant can be made feasible by building enough capacity to wheel surplus electricity to power hungry cities like Los Angeles. Rate payers in Utah are justified in thinking that their support for a new nuclear power plant is actually a pirate's raid on their full faith and credit to keep the lights on in southern California.

California is happy to establish energy colonies in other states while preserving its now three decade old ban on new nuclear power plants. A change in this practice, at least one that may pass political muster in one of the nation's "greenest" states, is to be an active investor in new plants.

I rate it as unlikely that California will ditch its ban on new nuclear power plants inside the state's borders. It still needs to keep the lights on, and with its "green" commitment to avoiding new fossil fuel emissions, nuclear plants in nearby states is the most likely scenario.

Los Angeles cannot just say "not" to new coal plants, which is what it did with Intermountain Power. It must pledge its full faith and credit to a new nuclear plant in Utah or Arizona. It can't ask rate payers in those states to act alone to provide the guarantees to build the plant especially if most of the power goes out of state. This means property owners and tax payers in California would be part of the investment commitment for a new nuclear plant in Utah or Arizona.

  • Spent fuel reprocessing

Fourth, the U.S. government is going to have to invest in a complete nuclear fuel cycle building and managing spent nuclear fuel reprocessing plants and open Yucca mountain for the remaining residuals. Over the next half century the U.S. may have to invest in as many as five 1,000 ton/year plants to handle the expected volume of new spent nuclear fuel. The cost could be as much as $25 billion. Some of the cap-and-trade funding might offset these direct expenses.

MOX fuel plants and fast reactors may be a significant part of the mix two decades from now. Early examples include that Japan is already developing a plutonium fueled energy economy. South Africa just inked a deal to reprocess 1,000 tons of spent nuclear fuel in France and will sell the resulting MOX at a profit.

  • Small reactors matter because one size does not fit all

Nuclear Fuel pebblesSmall reactors, with power ratings of less than 300 MW, and related lower costs, may gain market share for parts of the country, like the arid West, that don't have the population or the water supplies to support 1,000 MW plants. There are a range of technologies that are on the drawing boards or in the prototype stage that could in the next decade offer cities and states reliable emission free electricity at competitive costs. The NRC is developing a regulatory paradigm to review and approve the new designs. Examples include small LWR designs, the Pebble Bed Modular Reactor (PBMR), Hyperion's nuclear battery, and other projects still in the brainstorming stage.

Doom and gloom exciting but not recommended

While the U.S. and the G7 countries are trying to figure out the way out of the current financial mess, it is no different in a lot of ways than a lot of other "busts." Four years from now when the nuclear plants that filed COL applications in 2007 and 2008 come looking for investment dollars, the financial landscape will look a lot different than it does today. The global cooperation which it taking place with financial policy issues may provide models for international agreements on energy and environment. It will be interesting to see what shows up.

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1 comment:

ShortFatBald said...

Just noticed a quote from the NY Times article last week about the candidates positions on nukes, and it makes me worry that we're making extremely grand promises about nuclear that will never be realized. (No one's said "too cheap to meter" yet, but that might be coming.)

"Patrick Moore, a founder of Greenpeace and the co-chairman of the Clean and Safe Energy Coalition, a pro-nuclear group, estimated that each reactor would cost up to $8 billion and would generate 3,000 to 4,000 jobs during the construction phase and up to 800 permanent jobs once in operation.

Asked to provide a ballpark figure on employment if all 45 reactors were to be built, Mr. Moore, responded, "225,000 good union jobs that you can support a family on."

He obviously just multiplied 5000 jobs by 45 plants, so he's rounding up on his 3000-4000 construction jobs + 800 plant workers claim and doesn't even consider that most of the construction jobs are just for a few years out of a 4-5 year project.