Thursday, May 10, 2012

Watts Bar: Fairytale or True to Life Story

The project will come in three years late and $2.5 billion over budget

This is my updated coverage from Fuel Cycle Week V11:N471 May 3, 2012, published by International Nuclear Associates, Washington, DC

Once upon a time an ailing king abandoned one of his castles. He said it was too expensive to keep up more than one court. Besides, the peasants weren’t bringing in the sheaves, which made the whole kingdom’s economics shaky.

Then a new king arose, who was wiser in the ways of castle upkeep.

“We can reopen the closed court,” he boasted, “and for half the price of building a new one!”

Excited about restoring the realm to its former glory, the builders set out to their task. Like ants they swarmed over the ramparts, each to his or her appointed place. But as they worked, the new king noticed something was wrong.

“There are too many workers,” he thought. “I’m paying a fortune for their labor, but they’re getting in each other’s way!” So the king went back to his court, and asked his treasurer and his wise men, “what should I do?”

“Fire a bunch of workers and let the work go slower,” they said in unison. No one would mind if the castle was three years later than expected.

“But the cost of building goes higher every year,” the king complained.

“Don’t worry!” cried his advisers. “The castle will last at least 60 years, and your grandchildren might get another 20 years. You’ll get your value out of it because you and your family will use it a long time.”

Fairytales vs. True Confessions

This fairy tale is brought to you by the Tennessee Valley Authority, which in 2007 restarted construction of the mothballed 1200 MWe Watts Bar 2 nuclear reactor. The workers swarmed over the 55%-completed reactor just like the fairytale workers. The employer, Bechtel, promised to complete the reactor for about $2.5 billion by 2012.

But soon there were problems due to safety lapses, quality assurance issues and a slower pace of completing work than the aggressive schedule allowed. In August 2011 TVA CEO Tom Kilgore took the reins back from Bechtel and ordered a new cost and schedule baseline.

This week the TVA Board of Directors accepted a new cost estimate that adds $1.5-2 billion to the bottom line and brings the reactor online three years later, sometime in the fourth quarter of 2015. The total cost estimate could be as high as $4.5 billion and full time to completion is now eight years. The target cost is $4.2 billion.

A Bargain at Twice the Price

Kilgore believes that completing the reactor is still a bargain compared to putting up a new one at today’s overnight price of about $5,000/kw. That would make a 1200-MWe reactor come in at $6 billion or $1.5 billion more. That’s the equivalent of 1500 $1-million lottery tickets and Kilgore is betting that every one of them will pay off.

There are good reasons for this optimism. According to TVA, the impetus for wanting to complete the project starts with having a reactor pressure vessel in place. As of February 2012, the project has moved from being 55% complete in 2007 to 80% complete, and with pluses and minuses for progress on electrical and mechanical work.

Tough Case to Keep Going

Kilgore still had a tough case to make with the TVA Board to keep the work going on the reactor a second time. None other than former TVA Chairman S. David Freeman said the new cost overruns showed it was time to put the brakes on the project. Freeman said the new story is the same bad story that persuaded him to pull the plug on runaway costs at reactor projects in the 1980s. TVA could get better results for its money by investing in energy efficiency, demand-response management and renewable energy.

One cause of cost overruns in the 1980s was that EPC firms did the engineering work based on designs as they were building the project. At last week’s TVA board meeting, Mike Scaggs, the TVA manager in charge of construction at Watts Bar 2, said that, in retrospect, more design work on the semi-complete reactor should have been done up front, rather than while the plant was already under construction.

Overall, Kilgore and Scaggs told the board that the cost increases were the result of poor estimates and they said the reviews of those estimates were incomplete. They pledged that the new estimates were much better.

In spite of all these daunting problems, stopping work on Watts Bar 2 was never an option for the TVA board. In a company statement TVA Board Chairman Bill Sansom said the board “endorsed the leadership and actions of…Kilgore and his team.”

TVA also plans to restart work on the Bellefonte 1 reactor, as soon as they load the fuel into Watts Bar 2. The three-year delay to finish the first reactor most likely pushes completion of Bellefonte 1 past 2020. Last month TVA laid off half the workforce at Bellefonte as the utility changed is schedule for Watts Bar 2.

TVA Financials in a Nutshell

The utility said in a filing with the SEC it suffered a net loss for the second quarter and a projected loss for the budget year, TVA officials said it would cut 1,000 jobs and delay capital projects including work to complete Bellefonte Nuclear Power Plant. That action is expected to save $150 million.

The federal utility reported a net loss for the first half of fiscal 2013 of $267 million on sales of less than $5.2 billion. In the same period in 2011, the Tennessee Valley Authority earned $205 million on sales of $5.8 billion.

TVA Financial Operating Manager John Thomas cited unusually warm weather and a sluggish economy on the downturn.  He said costs will increase due to increased spending to complete the the Watts Bar 2 nuclear reactor.

In March, TVA laid off 430 of the 900 contractors working on the Bellefonte project, the utility's partially complete nuclear plant.

The Watts Bar reactor already is overbudget and behind schedule, and officials say it will take three more years and up to $2 billion more than expected to finish.

TVA President and CEO Tom Kilgore said the increased costs for Watts Bar overruns will not raise rates.

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