The Staggering Cost of New Nuclear Power

The Staggering Cost of New Nuclear Power
Part One in a Series on a New Nuclear Cost Study AP/Jamie-Andrea Yanak
The sky lightens just before dawn behind the cooling towers of the Perry Nuclear Power Plant in Perry, Ohio.
By Joseph Romm | January 5, 2009
Part One: The Staggering Cost of New Nuclear Power
Part Two: Warning to Taxpayers, Investors: Nukes May Become Troubled Assets
A new study puts the generation costs for power from new nuclear plants at 25 to 30 cents per kilowatt-hour-triple current U.S. electricity rates!
This staggering price is far higher than the cost of a variety of carbon-free renewable power sources available today-and 10 times the cost of energy efficiency (see "Is 450 ppm possible? Part 5: Old coal's out, can't wait for new nukes, so what do we do NOW?"
The new study, "Business Risks and Costs of New Nuclear Power," is one of the most detailed cost analyses publically available on the current generation of nuclear power plants being considered in this country. It is by a leading expert in power plant costs, Craig A. Severance. A practicing CPA, Severance is co-author of The Economics of Nuclear and Coal Power (Praeger 1976), and former assistant to the chairman and to commerce counsel, Iowa State Commerce Commission.
This important new analysis is being published by Climate Progress because it fills a critical gap in the current debate over nuclear power-transparency. Severance explains:
All assumptions, and methods of calculation are clearly stated. The piece is a deliberate effort to demystify the entire process, so that anyone reading it (including non-technical readers) can develop a clear understanding of how total generation costs per kWh come together.
As stunning as this new, detailed cost estimate is, it should not come as a total surprise. I detailed the escalating capital costs of nuclear power in my May 2008 report, "The Self-Limiting Future of Nuclear Power." And in a story last week on nuclear power's supposed comeback, Time magazine notes that nuclear plants' capital costs are "out of control," concluding:
Most efficiency improvements have been priced at 1¢ to 3¢ per kilowatt-hour, while new nuclear energy is on track to cost 15¢ to 20¢ per kilowatt-hour. And no nuclear plant has ever been completed on budget.
Time buried that in the penultimate paragraph of the story!
Yet even Time's rough estimate is too low, as "Business Risks and Costs of New Nuclear Power" quantifies in detail. Here is the executive summary:
It has been an entire generation since nuclear power was seriously considered as an energy option in the U.S. It seems to have been forgotten that the reason U.S. utilities stopped ordering nuclear power plants was their conclusion that nuclear power's business risks and costs proved excessive.
With global warming concerns now taking traditional coal plants off the table, U.S. utilities are risk averse to rely solely on natural gas for new generation. Many U.S. utilities are diversifying through a combination of aggressive load reduction incentives to customers, better grid management, and a mixture of renewable energy sources supplying zero-fuel-cost kWh's, backed by the KW capacity of natural gas turbines where needed. Some U.S. utilities, primarily in the South, often have less aggressive load reduction programs, and view their region as deficient in renewable energy resources. These utilities are now exploring new nuclear power.
Estimates for new nuclear power place these facilities among the costliest private projects ever undertaken. Utilities promoting new nuclear power assert it is their least costly option. However, independent studies have concluded new nuclear power is not economically competitive.
Given this discrepancy, nuclear's history of cost overruns, and the fact new generation designs have never been constructed any where, there is a major business risk nuclear power will be more costly than projected. Recent construction cost estimates imply capital costs/kWh (not counting operation or fuel costs) from 17-22 cents/kWh when the nuclear facilities come on-line. Another major business risk is nuclear's history of construction delays. Delays would run costs higher, risking funding shortfalls. The strain on cash flow is expected to degrade credit ratings.
Generation costs/kWh for new nuclear (including fuel & O&M but not distribution to customers) are likely to be from 25 - 30 cents/kWh. This high cost may destroy the very demand the plant was built to serve. High electric rates may seriously impact utility customers and make nuclear utilities' service areas noncompetitive with other regions of the U.S. which are developing lower-cost electricity.
I am not saying here that nuclear power will play no role in the fight to stay below 450 ppm of atmospheric CO2 concentrations and avoid catastrophic climate outcomes. Indeed, I have been including a full wedge of nuclear in my 12 to 14 wedges "solution" to global warming here. It may, however, be time to reconsider that, since it is increasingly clear achieving even one wedge of nuclear will be a very time-consuming and expensive proposition, probably costing $6 trillion to $8 trillion and sharply driving up electricity prices.
Given the myriad low-carbon, much lower-cost alternatives to nuclear power available today-such as efficiency, wind, solar thermal baseload, solar PV, geothermal, and recycled energy (see "An introduction to the core climate solutions")-the burden is on the nuclear industry to provide its own detailed, public cost estimates that it is prepared to stand behind in public utility commission hearings.
What is unique about this new analysis is its transparency: "all assumptions, and methods of calculation are clearly stated." As Severance explains:
In contrast to this transparency, many nuclear promoters have adopted a "Black Box" approach. It has unfortunately been the case over the last couple of years that some utilities have begun to claim that even rudimentary basics of their nuclear cost estimates must be hidden from the public as "trade secrets." For instance, in the South Carolina Electric & Gas proposal to build two reactors now under consideration by the South Carolina PSC, there is literally a large "box" obscuring the bulk of the calculations in the SC E&G Exhibit which presents the utility's projection of construction and financing costs for the proposed two-unit facility. In a different case, Duke Energy claimed that it does not even have to disclose its new cost estimates for a proposed nuclear facility in Cherokee County, S.C.. In the Duke case, C. Dukes Scott, South Carolina's consumer advocate, who represents the public in utility rate cases, noted, "If the cost wasn't confidential in February," Scott said, "how is it confidential in April?"
Even when no effort to conceal information is apparent, the very terminology used when projections are presented can be confusing or misleading. For instance, in 2007 when a number of new nuclear proposals began to advance, it was common for "Overnight Cost" estimates to be quoted. For a project (such as solar or wind) whose construction period may be as short as several months, the difference between an "overnight" cost and the full cost to complete the project may not be significant. However, for a nuclear project that may typically take a decade to complete, cost escalations that occur during this long construction period, plus the financing costs during construction, may easily double the total cost of a project compared to its "overnight" cost. When the full picture is presented, some may perceive the total cost estimate has mysteriously doubled. However, it simply should have been stated clearly to begin with that major escalation and financing costs cannot be avoided when it takes a long time to complete a project. Failure to do so is tantamount to selling someone a house with "teaser" initial mortgage payments and failing to make clear that the mortgage payments will later reset to a much higher level.
Another mysterious "black box" presentation method is to fold the overall costs of the new facility into the general rate base of the utility, without ever mentioning what the generation costs per kWh of the nuclear unit will be. Instead, it is often only presented how total costs per kWh for all ratepayers will increase-which includes kWh's generated by existing generation units. (For instance, if a nuclear unit is to supply 20% of the kWh's for the utility when it comes on line, any cost increase per kWh appears to only be 1/5 as large because the additional costs are also spread over the 80% of kWh's generated by other facilities, even though those other facilities did not cause the rate increase.) While it is important to know the impact on final overall retail electric rates, it is also important to know the generation costs per kWh from the nuclear facility. If this step is "skipped" in public presentations, the nuclear units (or any new generation power source that is more expensive than existing units) can appear far cheaper than their real impact.
The Paper takes the approach that it is best to lay out in detail "how you got that number" at each step of the way. All parties can then proceed to have discussions based upon real numbers rather than mysterious "Black Box" secrets.
So feel free to criticize the analysis, but anyone offering different all-in cost estimates for power from new nuclear plants should detail their own assumptions and calculation. And simply pointing to the operating costs of existing paid-off nuclear plants doesn't count as detailed analysis-my home would be very cheap to live in if I didn't have a mortgage.
Also, it's fine to call for aggressively developing fourth generation nuclear plants (asJames Hansen does)-I'm all for such R&D-but that won't help us meet 2020 climate targets, and probably won't help us significantly meet 2030 targets. In any case, it is impossible to accurately project the real world all-in costs of noncommercial technologies that are still largely sitting on the drawing board.
Warning to Taxpayers, Investors: Nukes May Become Troubled Assets
Part Two in a Series on a New Nuclear Cost Study

SOURCE: Flickr/iluvcocacola
The Exelon Nuclear Power Station on the Rock River in Byron, Illinois.
By Joseph Romm | January 7, 2009
Part One: The Staggering Cost of New Nuclear Power
Part Two: Warning to Taxpayers, Investors: Nukes May Become Troubled Assets
Nuclear plants with such incredibly expensive electricity and "out of control" capital costs, as Time put it, obviously create large risks for utilities, their investors, and, ultimately, taxpayers. Congress extended huge loan guarantees to new nukes in 2005, and the American people will be stuck with another huge bill if those plants join the growing rank of troubled assets (see "Nuclear energy revival may cost $315 billion, with taxpayers' risking over $100B").
The risk to utilities who start down the new nuke path is also great. A June 2008 reportby Moody's Investor Services Global Credit Research, "New Nuclear Generating Capacity: Potential Credit Implications for U.S. Investor Owned Utilities" (PR here), warned that "nuclear plant construction poses risks to credit metrics, ratings," concluding:
The cost and complexity of building a new nuclear power plant could weaken the credit metrics of an electric utility and potentially pressure its credit ratings several years into the project, according to a new report from Moody's Investors Service....
Moody's suggests that a utility that builds a new nuclear power plant may experience an approximately 25% to 30% deterioration in cash-flow-related credit metrics.
And this would likely result in a sharp downgrading of the utility's credit rating.
The application by Florida Power & Light (FPL) for a large nuclear plant came in at a stunning $12 to $18 billion, and the utility concedes that new reactors present "unique risks and uncertainties," with "every six-month delay adding as much as $500 million in interest costs."
The report Climate Progress published this week, "Business Risks and Costs of New Nuclear Power" by power-plant cost expert Craig Severance, has an extended discussion of the business risks to utilities and hence investors:
In its 2003 study "The Future of Nuclear Power", MIT included a 3% risk premium in its calculations of projected Cost of Capital for nuclear projects, because of the extra business risks projected for nuclear. MIT's concerns were valid.
Florida Power & Light has stated: "In general, the rating agencies (such as Moody's Investor Services) view new nuclear construction as a higher risk than other technologies. This view is primarily driven by the long approval and construction process associated with new nuclear construction as well as the size of the capital requirements in relation to the utility as compared to capital requirements for other generation technologies. Rating agencies also recall the difficulties of the 1970's and 1980's."
On June 2nd of this year, Moody's Investor Services Global Credit Research issued a public announcement entitled "Moody's: Nuclear Plant Construction Poses Risks to Credit Metrics, Ratings." Per the Announcement: "Moody's examines the effects of a new nuclear facility on the credit metrics of "NukeCo", a hypothetical electric utility. Through this illustrative model, Moody's suggests that a utility that builds a new nuclear power plant may experience an approximately 25% to 30% deterioration in cash-flow-related credit metrics. In the case of "NukeCo", cash flow from operations as a percentage of debt falls from roughly the 25% level to the mid-teens range."
The Moody's simulation begins with the fictional utility "well-positioned within the single-A ratings category before building a nuclear plant....", however " ... in years 5-10, when construction costs reach their peak and key credit metrics begin to deteriorate significantly, the fictional company would be better positioned in Baa-rating category."
In today's nervous credit climate, downgrading a corporation to a more risky Baa rating (the lowest tier of investment grade debt) may carry serious consequences. Moody's Seasoned Baa Corporate Bond Yield: Percent [], shows that in October 2008, the Baa yield climbed to 8.88 percent, compared to only 7.31 percent in September 2008, the highest relative monthly jump since the table began in 1919, indicating investors have extreme default risk concerns. The fact a Baa bond will have a higher effective interest rate is not even the biggest concern. The very ability to sell downgraded bonds in a credit market already termed "dysfunctional" may be the more critical factor.
The Moody's Announcement also notes a risk to the shareholders of the utility: "The technology is very costly and complex, and the 10- to 15-year duration of these construction projects can expose a utility to material changes in the political, regulatory, economic and commodity price environments, as well as new alternatives to nuclear generation. These potential changes in the landscape could prompt regulators to disallow certain cost recoveries from ratepayers after a plant is built, or lead to market intervention or restructuring initiatives by elected officials."
Industry commentators have also noted these financial risks. Nuclear Engineering International noted on 22 August 2008: "Companies that build new nuclear plants will see marked increases in their business and operating risks because of the size and complexity of these projects, the extended time they take to build, and their uncertain final cost and cost recoveries. To the extent that a company develops a financing plan that overly relies on debt financing, which has an effect of reducing the consolidated key financial credit ratios, regardless of the regulatory support associated with current cost recovery mechanisms, there is a reasonably high likelihood that credit ratings will also decline. So ‘thinking caps' must now certainly go on amongst US boards of management - credit ratings are important and taking a punt on a new nuclear plant may not be the first priority of a CEO in his late 50s with a distinguished career behind him."
Severance's conclusion:
Credit ratings are very important. The prospect that undertaking a single project could have such a major impact on a utility company's balance sheet and cash flow that company credit ratings would be downgraded, should give pause to any executive, or oversight regulator, contemplating the wisdom of undertaking such a project.
The full study is here:

Part One: The Staggering Cost of New Nuclear Power
Part Two: Warning to Taxpayers, Investors: Nukes May Become Troubled Assets

This article was originally published in Climate Progress.