Tough Conditions Change Prospects for New Reactors
This is my updated coverage of the outlook for construction of new nuclear reactors in Texas as published in Fuel Cycle Week, V10:N443, 09/29/11, by International Nuclear Associates, Washington, DC.
In 2007, Texas was the place to be for working on the nuclear renaissance in the U.S. Ambitious plans created a boom-type atmosphere in the state, as three utilities announced they would build a total of six new reactors, two of them at a greenfield location.
Yet today four of the reactors are no longer likely to be completed in the next decade—if ever—and two more are looking at a prolonged construction schedule that could put revenue service well past 2020. So why are four of the reactors in Texas toast? Is nuclear energy riding off into the sunset in the Lone Star state?
Beginning in Fall 2007, holding company NRG Energy (NYSE:NRG) made headlines with a first mover announcement that it was filing a combined construction and operating license (COL) with the Nuclear Regulatory Commission. The firm said it would expand the existing two-unit South Texas Project plant by building two 1,350 MW GE-Hitachi ABWR reactors.
Then Dallas-based Luminant, a unit of Energy Future Holdings, said it would build two Mitsubishi APWR 1,700 MW reactors next to the existing Comanche Peak site. The plan marked Mitsubishi’s first entry into the U.S. market and required the Japanese firm to submit its design to the NRC for safety certification.
Finally, Chicago-based Exelon (NYSE:EXC) announced it would build two of GE-Hitachi’s new design, twin 1,530 MW ESBWR reactors, at a greenfield site in Victoria County, located 120 miles southeast of San Antonio.
All three projects ran into headwinds. First, none qualified for the Energy Department’s nuclear power loan guarantee short list. Second, each utility saw sharp declines in electricity demand, the result of an economic downturn in the U.S. stemming from the global financial crisis.
NRG: Soaring Cost Estimates, Fukushima
For NRG the bright promise of 2007 turned into a dismal ending in 2011. When the merchant generator filed the COL application, it had two key Texas cities lined up as investors: Austin, the state capital, and San Antonio, one of the state’s largest cities.
Confidence in these investors turned out to be misplaced as Austin’s municipal utility, Austin Energy, spearheaded a charge to withdraw from the project.
In what might be seen as a karmic second chance, the effort to pull out was led by the utility’s general manager Roger Duncan, who headed anti-nuclear forces in the 1970s when STP 1 & 2 were moving from the drawing board to construction.
This time around Duncan convinced the city council that new reactors were a bad deal.
In February 2008 Austin, TX, Mayor Will Wynn released a memo from Austin Energy Interim General Manager Roger Duncan, which states,
"Austin Energy has completed its review and has determined the projected costs of the new units and their permitting and construction schedules are overly optimistic and include an unacceptable degree of uncertainty and risk for a commitment of this size. The additional cost to construct the project could be in excess of $1 billion and take more than two years longer than estimated by NRG."
The memo concludes, "Austin Energy believes it would be imprudent for the city to take on such risks."
Austin dropped its financial support of STP 3 &4, and with good reason: the city is still paying off bonds it had to take out to pay for cost overruns for the original STP reactors. Duncan retired in 2009 with his mission accomplished.
The situation in San Antonio is a bit more complicated, but money was still the key factor in the decision by CPS Energy, the municipal utility, to drop its investment level from 40% to just 8% of the project. What turned the utility from a major to a minor role was a frightening cost estimate from Toshiba, which was contracted to build the reactors, that total costs might soar to $14 billion. Matters were not helped by the mishandling of how CPS Energy communicated this information to elected officials who have to approve the utility’s rate increases.
The final nail in the coffin came last April, when NRG lost Japan’s TEPCO as a key pre-licensing investor as a result of the Fukushima crisis in March 2011. NRG pulled the plug on STP completely suspending all investment and engineering work on the project. In an April 19 statement NRG said it would not invest additional capital in STP 3 & 4.
The firm wrote down $481 million in costs. It handed off the burden and expense of completing the NRC license to Toshiba, perhaps on the hope it could to other investors who could, at some undetermined future date, seek to actually build the reactors.
Luminant: Drowning in Debt
A big reason Luminant hasn’t charged ahead with construction of new reactors at Comanche Peak is debt. Parent company Energy Future Holdings, formerly TXU, is struggling with mountains of high-priced debt from its $45 billion buyout by two private equity firms in 2007.
The company has renegotiated extensions on its huge debt burden, but analysts believe the buyout, combined with lower natural gas prices, has slashed the value of Luminant’s coal-fired plants and makes further investments in pollution controls highly unlikely.
At the same time, Luminant is engaged in a power struggle with the Environmental Protection Agency over the Cross-State rule, which include a major emissions reduction burden for Texas. The utility has asked an appeals court for a stay in implementation of the June 2011 regulations.
Another reason is that it can afford to wait. CEO David Campbell said in Spring that while the project has a target date of 2021 to see revenue service, that schedule is not engraved in stone. “We don’t have to make the decision today,” Campbell said in a statement to the Dallas Business Journal last April.
However, the Luminant CEO also said the withdrawal of NRG from expanding STP gives his company a slight competitive advantage. Until NRG pulled out he said his firm was approaching new build cautiously. With a change in the business landscape,
Campbell said, “It means we have a more advanced project.” While Luminant has soldiered on despite not having a loan guarantee, the firm hopes to get one as a “runner up” if any on the short list drop out or if Congress expands the program.
Ashley Barrie, a spokesperson, told FCW Luminant is pushing to move its place in line higher on the list. “We have applied for a loan guarantee. We are continuing to keep the Department of Energy apprised of our license application progress, which continues to move forward.”
She said the firm will make a final decision whether to proceed once it has the COL from the NRC. According to a Sept. 8 chart on the NRC website, the schedules for both the Comanche Peak COL and the Mitsubishi APWR design certification are being revised, possibly by as much as three years.
Exelon: Missed Opportunities
Exelon had a string of bad luck. It failed in an attempted hostile takeover of NRG via a low-ball, all-stock offering. It switched horses from the ESBWR design to the ABWR when the Department of Energy rated the former’s time-to-market as not plausible relative to Exelon’s loan guarantee. application. But it was too little, too late. Exelon scrapped its COL and submitted an Early Site Permit (ESP) for the Victoria site in Spring 2010.
Craig Nesbitt, a spokesman for Exelon, told FCW there are several reasons why the firm backed out of seeking a COL and opted to preserve its long-term options with an ESP.
First, he said the regulatory environment in Texas, which emphasizes a merchant business model, isn’t friendly to the huge capital requirements for a new reactor, much less two of them, which was part of Exelon’s original plan.
Second, the lack of federal loan guarantees adds to the challenge of getting investors to sign on to the long-term nature of new reactor projects.
Third, the electricity demand to support twin new reactors just isn’t there. Significantly, Nesbit did not mention the current low price of natural gas.
An industry observer familiar with Exelon told FCW the Victoria project was started at a time when everyone believed the Texas market (ERCOT) was the best place to do business. It’s a physically closed electricity system and was considered to be a reasonable environment for merchant generators.
The expert told FCW one of the underlying problems was getting a firm price for the reactors. “Commodity prices were rising and the vendors didn’t want to be on the hook for them so they tried to put it on the buyers.”
Getting a firm price out of GE-Hitachi for the ESBWR was a case in point. The reactor was still in the design phase so exact costs on what it would take to build one were a work in progress.
“The problem is that the price kept getting higher and Exelon’s board didn’t think the investment was wise. The project could have represented as much as 30-35% of the company’s market cap.
“I don’t believe that the Board had to point that out to management,” the expert continued. “Management was able to go through the same logic and reach the same conclusion. I would chalk it up to not being afraid to change plans when the going-in assumptions go against you.”
Could Hitachi Take Over?
One silver lining to the hard luck conditions in Texas new build is the possible involvement of Hitachi. A top executive with the Japanese giant told Kyodo News on July 20 that it is not cutting its business plan to export nuclear reactors because of Fukushima.
Vice President Tatsuro Ishizuka said the company hopes to get orders for 20 new reactors in Asia and the Middle East. “We will give priorities to negotiations with India, Vietnam, the U.S., and other countries with growing energy demand,” he explained.
What is not widely known is that Hitachi owns some of the intellectual property for the two ABWR reactors that Toshiba planned to build. That tidbit has prompted some in the nuclear industry to wonder whether Hitachi would take over the South Texas Project once the NRC issued the COL.
While there is no indication a move by Hitachi to take over the STP project is in the wind, Dave Knox, a spokesman for NRG, told FCW “any changes in the scope of the project would have to come from the investors.”
He added that no proprietary information owned by Hitachi is included in the NRC license application. This might open a takeover effort by Hitachi to other investors who would see that there would not be technology licensing fees to pay as price for their participation.
For now Toshiba will carry the ball in NRC licensing hearings that begin the end of this month. Whether that firm will continue to play that role in the future is one of the questions that adds uncertainty to the future of nuclear energy in Texas.
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