Nuclear Energy Loses Cost Advantage
By DIANA S. POWERS
Published: July 26, 2010
PARIS — Solar photovoltaic systems have long been painted as a clean
way to generate electricity, but expensive compared with other
alternatives to oil, like nuclear power. No longer. In a “historic
crossover,” the costs of solar photovoltaic systems have declined to the
point where they are lower than the rising projected costs of new
nuclear plants, according to a paper published this month.
“Solar photovoltaics have joined the ranks of lower-cost alternatives
to new nuclear plants,” John O. Blackburn, a professor of economics at
Duke University, in North Carolina, and Sam Cunningham, a graduate
student, wrote in the paper, “Solar and Nuclear Costs — The Historic
Crossover.”
This crossover occurred at 16 cents per kilowatt hour, they said.
While
solar power costs have been declining, the costs of nuclear power
have been rising inexorably over the past eight years, said Mark Cooper,
senior fellow for economic analysis at Vermont Law School’s Institute
for Energy and Environment.
Estimates of construction costs — about $3 billion per reactor in
2002 — have been regularly revised upward to an average of about $10
billion per reactor, and the estimates are likely to keep rising, said
Mr. Cooper, an analyst specializing in tracking nuclear power costs.
Identifying the real costs of competing energy technologies is
complicated by the wide range of subsidies and tax breaks involved. As a
result, U.S. taxpayers and utility users could end up spending hundreds
of billions, even trillions of dollars more than necessary to achieve an
ample low-carbon energy supply, if legislative proposals before the U.S.
Congress lead to adoption of an ambitious nuclear development program,
Mr. Cooper said in a report last November.
The report, “All Risk, No Reward for Taxpayers and Ratepayers,” was a
response to a legislative wish list developed by the Nuclear Energy
Institute, an industry group. The institute has called for a mix of U.S.
subsidies, tax credits, loan guarantees, procedural simplifications and
institutional support on a large scale.
At the state level, the industry has also pressed the case for
“construction work in progress,” a financing system that requires
electricity users to pay for the cost of new reactors during their
construction and sometimes before construction starts. With long
construction periods and frequent delays, this can mean that electricity
users start to pay higher prices as much as 12 years before the plants
produce electricity.
The institute’s Web site says the financing system “reduces the cost
ratepayers will pay for power from the plant when it goes into
commercial operation,” by lowering interest payments on capital costs
and spreading the costs over time.
“The utilities insist that the construction work in progress charged
to ratepayers also include the return on equity that the utilities
normally earn by taking the risk of building the plant — even though
they have shifted the risk to the ratepayers,” Mr. Cooper said. “If the
plant is not built or suffers cost overruns, the ratepayers will bear
the burden.”
History suggests that the risk of this is not negligible. In 1985,
Forbes magazine dubbed the construction of the first generation of U.S.
nuclear plants “the largest managerial disaster in business history.”
The first round of plants resulted in write-offs through bankruptcies
and “stranded costs” — investments in existing power plants made
uncompetitive by deregulation — which essentially transferred nearly
$100 billion in liabilities to electricity users, said Doug Koplow, an
economist and founder of Earth Track, based in Cambridge, Massachusetts,
which campaigns against subsidies it considers environmentally harmful.
“Although the industry frequently points to its low operating costs as
evidence of its market competitiveness, this economic structure is an
artifact of large subsidies to capital, historical write-offs of
capital, and ongoing subsidies to operating costs,” Mr. Koplow said.
From 1943 to 1999 the U.S. government paid nearly $151 billion, in
1999 dollars, in subsidies for wind, solar and nuclear power, Marshall
Goldberg of the Renewable Energy Policy Project, a research organization
in Washington, wrote in a July 2000 report. Of this total, 96.3 percent
went to nuclear power, the report said.
Still, these costs pale in comparison with the financial risks and
subsidies that are likely to accompany the next wave of nuclear plant
construction, Mr. Cooper said.
A November 2009 research report by
Citigroup Global Markets termed the construction risks, power price
risks, and operational risks “so large and variable that individually
they could each bring even the largest utility to its knees.”
Those risks were mentioned in a 2009 report by the
credit rating agency
Moody’s. “Moody’s is considering taking a more negative view for
those issuers seeking to build new nuclear power plants,” the report
said. “Historically, most nuclear-building utilities suffered ratings
downgrades — and sometimes several — while building these facilities.
Political and policy conditions are spurring applications for new
nuclear power generation for the first time in years. Nevertheless, most
utilities now seeking to build nuclear generation do not appear to be
adjusting their financial policies, a credit negative.”
Adding to the risks facing any reactor construction program, only one
of five proposed designs under consideration by U.S. utilities has ever
been built, the
Nuclear Regulatory Commission said.
“No one has ever built a contemporary reactor to contemporary
standards, so no one has the experience to state with confidence what it
will cost,” said Stephen Maloney, a utilities management consultant. “We
see cost escalations as companies come up the learning curve.”
Market risk has been heightened by the recent
recession. “The current crisis has decreased energy demand even more
than the 1970s oil price shocks,” Mr. Cooper said. The recession
“appears to have caused a fundamental shift in consumption patterns that
will lower the long-term growth rate of electricity demand.”
Meanwhile, most of the projects that have created the increase of
license applications to the regulatory commission have already
experienced difficulties. “About half of the projects that have been put
forward at the start of the next generation of reactors have been
delayed or canceled,” Mr. Cooper said. “Those that have moved forward
have suffered substantial cost escalation and several have received
negative financial reviews.
“Of the 19 applications at the N.R.C., 90 percent have had some type
of delay or cancellation, run into a design problem, suffered cost
increases and/or had the utility bond rating downgraded by Wall Street.”
Despite the economic challenges, the nuclear power industry remains
unfazed.
“This is not a hospitable environment in which to commission any
large base-load power plant,” said Marvin Fertel, president and chief
executive of the Nuclear Energy Institute, in a briefing to the
financial community. Still, he said: “Fortunately new nuclear plants
won’t be in service until 2016 or later, so today’s market conditions
are not entirely relevant.”
Mr. Cooper said the industry’s equanimity was based, at least
partially, on the supportive cushion provided by loan guarantees and
work-in-progress financing. “With such financing the utility is making a
one-way bet, allowing it to make a profit even when the project fails,”
he said. “The people bear the risks and costs; the nuclear utilities
take the profits. Without loan guarantees and guaranteed construction
work in progress, these reactors will simply not be built, because the
capital markets will not finance them.”
Without public guarantees, nuclear projects often cannot get
financing. AmerenUE, the Missouri utility, suspended in April 2009 plans
to build a $6 billion, 1,600-megawatt reactor at its Callaway County
nuclear site, after trying unsuccessfully to get the State Legislature
to repeal a longstanding ban on work-in-progress financing. The
continued existence of the ban “makes financing a new plant in the
current economic environment impossible,” the utility said.
Similarly,
Florida Power and Light said in January that it would not proceed
beyond licensing with plans to build two new reactors at its Turkey
Point site, after the Florida
Public Service Commission rejected its request to pass on a $1.27
billion cost increase to its users.
Yet, despite episodic resistance at the local level, financial
support for the industry at the U.S. government level has been
increasingly evident in successive versions of climate and energy bills
before the U.S. Congress, including the most recent, the American Power
Act, which is delayed in the Senate until after the summer recess.
Nuclear subsidies in the Senate proposal include five-year
accelerated depreciation; tax credits for investments and production and
eligibility for the advanced energy tax credit; an increase in
government insurance against regulatory delays; access to private
activity bonds; and a $36 billion increase in loan guarantees, bringing
the total to $56 billion.
That remains less than the Nuclear Energy Institute’s goal of $100
billion, an amount it describes as “a minimal acceptable loan volume.”
Still, Mr. Fertel said in his financial briefing that “‘strong political
support’ understates our position.”
Federal loan guarantees cut nuclear construction financing costs by
allowing the utilities to sell bonds at a lower interest rate. But at
the same time the guarantee means that “the
U.S. Treasury, and therefore the taxpayers, are on the hook for the
value of the loans should they go bad,” Mr. Cooper said.
According to the U.S.
Government Accountability Office, the average risk of default for
such Department of Energy loan guarantees is about 50 percent, which is
the historic rate for the nuclear industry.
Mr. Koplow of Earth Track said two of the other subsidies in the
Senate bill, the investment tax credit and five-year accelerated
depreciation, would together “be worth between $1.3 billion and nearly
$3 billion on a net present value basis per new reactor.
“This is equivalent to between 15 and 20 percent of the total all-in
cost of the reactors, as projected by industry.”
Over all, Mr. Koplow said, the proposed subsidy package would
undermine the equity requirements of the nuclear loan guarantee program,
designed to ensure that investors have a strong interest in the
long-term success of the venture. “Although investors will get all the
profit if the reactor project is successful, they will bear virtually
none of the financial risk if the project fails,” he said. “This is a
disastrous incentive structure.”
By distorting energy markets, these subsidies would “effectively make
the government the chooser of which energy technologies will be winners
and which will lose,” he said. The American Power Act “does not build a
neutral policy platform on which all energy technologies must compete.”
The tax breaks for nuclear would “greatly impede market access for
competing energy sources,” Mr. Koplow said.
He said handing out huge subsidies would also cloud the transparency
of decision-making. “This approach,” he said, “which replaces price
signals with decisions by a handful of often unnamed individuals within
the
U.S. Department of Energy, plays to none of the inherent strengths
of the U.S. market system to spur innovation and effectively allocate
risks and rewards. Further, the basis, and sometimes scale, of these
subsidy decisions is largely hidden from the public view.”
For Mr. Cooper, the core issue at stake is one of opportunity cost.
“While the cost estimates of nuclear power continue to rise, the
potential for energy efficiency measures to reduce the need for energy
are far cheaper,” he said.
Lower-cost, low-carbon technologies are already available, and cost
trends for several others indicate that a combination of efficiency and
renewable technologies could meet projected power needs while also
achieving aggressive carbon-reduction targets, Mr. Cooper said.
In a June 2009 report drawing on several earlier studies, Mr. Cooper
said that energy efficiency, cogeneration and renewable sources could
meet power needs at an average cost of 6 cents per kilowatt hour,
compared with a cost of 12 cents to 20 cents per kilowatt hour for
nuclear power.
Choosing the nuclear route, and constructing 100 new reactors, would
translate into an extra cost to taxpayers and electricity users of $1.9
trillion to $4.4 trillion over the 40-year life of the reactors,
compared with the costs of developing energy efficiency and renewable
sources, the report said.
Mr. Cooper said it would make sense for policy makers, standing in
the place of the market, to choose the least costly alternatives first.
“In an attempt to circumvent the sound judgment of the capital
markets, nuclear advocates erroneously claim that subsidies lower the
financing costs for nuclear reactors and so are good for consumers,” he
said. “But shifting risk does not eliminate it. Furthermore, subsidies
induce utilities and regulators to take greater risks that will cost the
taxpayers and the ratepayers dearly.
“The risks that have dismayed Wall Street should be taken seriously
by policy makers because they would cost not just hundreds of billions
of dollars in losses on reactors that are canceled, but also trillions
in excess costs for ratepayers when reactors are brought to completion
by utilities that fail to pursue the lower-cost, less risky options that
are available.
“The frantic effort of the nuclear industry to increase federal loan
guarantees and secure ratepayer funding of construction work in progress
from state legislatures is an admission that the technology is so
totally uneconomic that the industry will forever be a ward of state,
resulting in a uniquely American form of nuclear socialism.”
Copyright 2010 The New York Times
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