Saturday, May 17, 2008

Nuclear Power Cost Over-runs

The United States (and many other countries, such as Britain) faces an energy crisis of its own making. Due to a variety of bone-headed "deregulation" schemes, there is now no financial incentive for companies to build new large, baseload generating plants (nuclear, coal, hydro) and there are massive dis-incentives in the form of zealous greens and myopic regulators that will fight them every step of the way should they attempt to solve this problem.

While these facts are on the ground and manifestly self-evident (no new nuclear plants have been built in decades, not counting the TVA re-powering one site) and new baseload coal plants are extremely few and far between, journalists have been touting the "re-emergence" of nuclear power based on almost no hard evidence. As soon as these articles came out, I immediately pointed out the immense difficulties in building one of these plants, which range from the fact that there are 1) no financial incentives large enough to offset the massive risks 2) these estimates are "pie in the sky" and not backed up by cases of building in the USA 3) the history of these sorts of projects, on the other hand, is well documented and grim. This type of "reporting" is typical when reporters have only the barest knowledge of the facts at hand; as such they "humanize" the story and take uninformed or biased opinions verbatim without challenging the facts.

The Wall Street Journal had an article in their May 12, 2008 issue titled "New Wave of Nuclear Power Plants Faces High Costs". Per the article:

"A new generation of nuclear power plants is on the drawing boards in the U.S., but the projected cost is causing some sticker shock: $5 billion to $12 billion a plant, double to quadruple earlier estimates."

It is good that the WSJ, normally a home for fine reporting, is reporting on these new estimates, which still would turn out to be optimistic, in my opinion (but no one really knows since nothing has been built for years). However, the next sentence shows that even the WSJ has a long way to go...

"Nuclear power is regaining favor as an alternative to other sources of power generation, such as coal-fired plants, which have fallen out of favor because they are major polluters."

HUH? What does "regaining favor" mean? No one has seriously started work on even a single nuclear power plant, and the financial structure and incentives to do so aren't there. Does the fact that some greens, in between NIMBY rants, started "theoretically" comparing nuclear plants to other modes of generation imply "regaining favor"? Nuclear power in the USA is DEAD DEAD DEAD as far as new construction is concerned; a couple of studies and talk by various entities (which could be done for a variety of motives, not explored here) does not constitute "regaining favor". It is just unsupported talk, like you'd see in a message board or in an on-air candidate debate.

But let's move on, since this is a serious issue, and inter spaced with unsupported statements there are many interesting facts in this article.

"Nuclear plants haven't been built in the meaningful numbers in the U.S. since the 1980s. Part of the cost escalation is bad luck. Plants are being proposed in a period of skyrocketing costs for commodities such as cement, steel and copper, amid a growing shortage of skilled labor, and against the backdrop of a shrunken supplier network for the industry."

AARRGH! While it is a manifest fact that commodity prices like steel and cement are growing, the reporter has no grasp of the history of the PREVIOUS batch of nuclear power plants. They were built in the 70's. And what was present in the 70's? Remember stag-flation, or a combination of inflation and high interest rates? Interest rates peaked at almost 20% in that era, and building a long-term construction project in an era of high interest rates makes costs rise immensely, due to the crushing burden of "capitalized interest". Just like the "magic" of compound interest when you put your kids' money in a piggy bank, it works in reverse when you are building a major project like a nuclear plant over a ten year period - costs double during that time just due to the fact that you have to borrow large amounts of money at the front of the project and then earn those costs back out over the life of the project (once completed). I remember when I was in the industry I was told that almost 50% of the cost of those nuclear plants was in "capitalized interest", which is why there was immense sticker shock when they came on-line. Thus as far as rising commodity prices go, the situation today is probably about the same as it was in the 70's and far more favorable in terms of long term interest rates, so the author should have said that luck was OK, better than the 70's, but not perfect.

And the fact that there is no supplier network - is that bad luck? What supplier would hang around for THIRTY YEARS waiting for new orders? No one. The US deliberately abandoned nuclear construction, and all the vendors died, went overseas, or went into the replacement part business. In no way was this luck, since it is irrational to assume that vendors would somehow thrive with no new orders for thirty years.

"The price escalation is sobering because the industry and regulators have worked hard to make development more efficient, in hopes of eliminating problems that in the past produced harrowing cost overruns. The Nuclear Regulatory Commission, for example, has created a streamlined licensing process... nuclear vendors have developed standardized designes for plants to reduce construction and operating costs. And utility executives, with years of operating costs behind them, are more astute buyers."

OK, there is a bit of truth here. The NRC is not trying to actively stifle plant approvals, and has taken their demented two-phase approval process down to one phase. But what has happened in the interim? NIMBY's are manifestly more powerful today than they were in the 70's, and the internet allows them to rally their supporters much more forcefully. While the NRC's efforts help make a terrible situation less bad, the rise in power of the NIMBY's (of which nothing has been done to address) more than overrides these gains.

Nuclear vendors are developing standard designs. Once I worked at a water plant built in the 70's and it was a maze of complicated pumps and piping, and also at a relatively new design, which uses gravity for most functions and was far simpler. The new designs are simpler and likely more effective, with less parts likely to fail. But unfortunately these gains are unlikely to be felt since none will be built.

As far as "utility executives" being more astute buyers, that makes NO SENSE. Let's think about this - the utility executives TODAY never participated in BUILDING these plants - the plants were completed in the 70's and early 80's and it is 30 years later - and OPERATING a previously designed plant (think your 1970's car vs. today's car, for example) is NOTHING like building a new, simplified design from scratch. One element in which they are savvier is that they are (mostly) proposing building plants on the same sites as existing plants, which reduces NIMBY risk, since the immediate neighbors already have a nuclear plant in their midst and are more likely to favor the construction jobs and higher property tax base that these plants will bring.

Later in the article they discuss PAST cost overruns at nuclear plants:

"The existing Vogtle plant, put into service in the 1980's, cost more than 10 times its original estimate, roughly $4.5 for each of two reactors" (in Georgia).

NOW we are talking. Look at the past - all of these plants had monstrous cost overruns and schedule delays, so there should be no "surprise" that today's plants are facing huge cost escalations.

"Exelon, the nation's biggest nuclear operator, is considering building two reactors on an undeveloped site in Texas, and said the cost could be $5 billion to $6.5 billion each."

Don't bet on this happening. For one - the site is not an existing nuclear power site, so the NIMBY's would be out of their minds on this one. Even though Texas is a "red" state, any trip through Austin will show that there are lots of "weird" people (their description) who would fight this tooth and nail. Another problem is that the Texas grid is effectively blocked from the rest of the country because it uses a different voltage (except for El Paso, which might as well be part of New Mexico), so they won't be able to take advantage of high power prices in neighboring states. The costs will go up, and Exelon has a bunch of financial people that will likely pull the plug as soon as the numbers won't add up. Exelon is likely just trying to keep the (illusory) momentum going since they are a massive nuclear player in the US.

"Some states are clearing a path for nuclear-power development, even before costs are fully known. they are inspired by a growing fear of climate change. 'The overwhelming feeling in Florida is that nuclear power is popular and that's why it's going to go ahead... our main fear is the tremendous cost.'

I do think that Florida is a pretty strong candidate for a nuclear plant, one of the 2-3 that MIGHT get built (a fraction of the 103 that are going to go out of service since most had a 40 year life and they were built in the 1960's - 1980's). The state is low lying so people can understand the impact of rising sea levels. And the state is (obviously) a geographic "dead end", so you can only bring so much transmission into the state. They only partially deregulated, so they have the ability to pull $ from consumers to finance construction of generation.

The article ends with a realistic comment and interview, which goes un-analyzed by the writer.

"Ralph Izzo, chief executive of Public Service Enterprise Group Inc. in New Jersey, said his company may not be big enough to build a nuclear plant even though it is a nuclear operator. 'We're concerned with the rise in construction costs,' he said.

Here is a realistic assessment of the entire situation. PSEG is major utility in a major market, operating utilities today. But do they have $10-$20 billion on hand or available via financing to build a plant? Is the regulatory structure there to help this process (of raising funds) along? He is saying no, and I guess this is what the author is referring to as a "savvy" utility executive - he is figuring out that nuclear power is a non-starter.

THIS QUOTE should have been at the start of the article, because all of the "sentiment" towards nuclear power isn't worth a hill of beans if there isn't money and dedication to match. Then the article could have talked about the latest (and sure not to be the last) cost-overrun, and how commodity prices are rising (like the 70's, partially offset by lower interest rates). And then the author could have said the obvious:

- very few (1-2) public utilities could afford to build a nuclear plant
- some strangely regulated government utilities like the TVA might build 1-2
- generally cost trends and NIMBY's will strangle even this non-rise in sentiment
- the existing plants will fall out of service at a faster rate than this, making the 'rise' of nuclear power more of a decelerating 'fall'
- our generating capacity is not rising to keep up with demand and we should expect to see impacts on reliability, such as the East Coast and California blackouts
- no "real" solutions are on the horizon

END OF STORY

Cross Posted at Chicago Boyz

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