Making the Business Case for Nuclear Renaissance

by Arun Mani, Huron Consulting Group

The national unemployment rate in February, according to the U.S. Department of Labor, was 8.1 percent–the highest since 1983–and some economists predict it will reach or exceed 9 percent by 2010. Gross domestic product is expected to contract more this year than since the Great Depression. U.S. businesses are closing, municipal budgets are tightening, banks and other industries are clamoring for bailouts. Recently, some utilities have dramatically lowered their electricity demand estimates and scaled back generation expansion plans from levels forecasted a few months ago. Should utilities continue channeling multibillion-dollar spends pursuing the so-called nuclear renaissance that started a few years ago when the economy was different?

There is an array of possible focal points–from the need for new generation to environmental impacts–for nuclear energy proponents and opponents to debate.

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During the past few years, the electric utility industry has laid a foundation for a nuclear renaissance. The industry’s confidence in nuclear is evidenced by new nuclear development applications to the Nuclear Regulatory Commission (NRC). Developers have proposed constructing 35 new reactors at 24 sites throughout the United States (see Figure 1).

Despite the financial meltdown, the U.S. electric utility industry remains bullish on the prospect of constructing new nuclear plants. The NRC expects three new nuclear power plant applications in 2009 and another three in 2010, according to its Web site. Several factors support the interest in new nuclear and resulting new nuclear construction projections:

  1. Nuclear power appeal has grown as companies have improved the economic performance including expected payback on new build and the reliability and safety of existing U.S. plants.
  2. Concern over climate change and the potential requirement to build large-scale, carbon-free, electricity-generating plants makes the nuclear energy option attractive.
  3. The regulatory approval process for new nuclear plant licensing has been restructured since the most recent wave of U.S. nuclear plant construction nearly 30 years ago. The most notable change is the advent of the NRC’s new combined construction and operating licensing application process.
  4. The passage of state legislation supporting new construction and rate-making bodies’ allowing construction work in progress demonstrate a shift in local perception of nuclear power and a willingness to help fund such projects.
  5. The U.S. Department of Energy’s (DOE’s) loan-guarantee program authorized under the Energy Policy Act of 2005 is expected to reduce financing costs for qualified utilities.

Despite these developments and resulting interest in new nuclear projects, many issues must be considered by prudent managers of new projects to support a business case for what many consider a bet-the-company decision. Typically the top three areas for making the business case are establishing the need, pinpointing the costs and financing the build.

Establishing the Need

Need for new generation is the result of load forecasts and capabilities of existing generation to meet those forecasts. Severe U.S. recession, worldwide economic downturn and the aggressive use of demand-side management strategies mean plans to build a new power plant must be re-examined because of the potential overestimate of projected customer demand for electricity. Economic conditions have changed, but no one expects the malaise to continue in perpetuity. To capture the aspects of the economic cycle and its impact on customer demand, utilities evaluating new generation resources are identifying regional customer demand expectations under hypothetical scenarios and matching them with potential new generation options. On the supply side, existing generation capabilities continue to degrade, and the cost to bring existing fossil plants into compliance with expected environmental requirements could require new plant additions regardless of load growth projections.

The next step is to define and select the best generation option given current and projected economic and political scenarios. Coal, long the baseload generation of choice, has come to be viewed as a major contributor to greenhouse gas emissions. It will become increasingly difficult to construct new coal-fired power plants as carbon-free electricity policies are formulated. Existing generation plants might have to be taken out of service. Build out of renewable energy technologies still lags in scale and reliability of output compared with baseload generation options. Uncertainty regarding implementation of a carbon dioxide emission-pricing mechanism combined with a lack of affordable clean-coal technology starts to make the nuclear option viable as a baseload generation option.

Natural gas prices have been volatile, ranging from $2.60 per million British thermal units in 1998 to more than $13 during summer 2008 before trending down to less than $6 in early 2009, according to a March Standard & Poor’s Report, “U.S. Utilities Make Some Progress on New Nuclear Power, But Hurdles Still Linger.” Therefore, selecting any particular period to demonstrate the viability of nuclear power plants vis-à-vis natural gas can be subjective.

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Assuming that demand for energy and environmental safeguards will rise concurrently in the long term, several utilities have made the case that nuclear power should be considered the most practical baseload option to meet the need.

Pinpointing Cost Estimates

At $8 billion to $14 billion, according to Huron new nuclear generation cost analysis, new nuclear plants are expensive. As Figure 2 indicates, new nuclear generation cost projections have varied during the past few years. This has been the result of wide swings in commodity pricing for such commodities as copper and steel. Pricing estimates also have increased as more new plants are announced and the industry recognizes increased demand on limited nuclear vendor capabilities. There are indications that the current economy might result in decreased commodity pricing and a reduction in the projected impact on nuclear vendors. In the face of such wild cost swings, there has been technology and engineering vendor reluctance to undertake such projects under a fixed-price engineering, procurement and construction contract that is acceptable to the utility. This requires increased due diligence of the utility to understand all cost uncertainties as well as building appropriate contractual parameters that will enable it to proceed deliberately.

Some utilities are embracing sophisticated decision-analysis tools and techniques to vet assumptions, test alternative scenarios, evaluate and re-evaluate changing corporate circumstances and project net present value and develop planned off-ramps to take if conditions change. These tools have provided them with a better understanding of potential risks and the impact upon the total expected project cost. While this might not result in a pinpoint cost estimate, the decision-analysis process enables the utility to establish a reasonable range of costs to be factored into the business case, to analyze cost changes under various scenarios and to identify the risk areas where management should focus attention and contracting strategies.

Financing the Build

Financing new nuclear build is often most difficult. Such an undertaking can stress a firm’s cash flow and stock price to its credit rating and liquidity. While financial challenges vary among regulated utilities and merchant generating plants pursuing new nuclear build, the potentially deal-breaking point that must be made is how to meet these challenges. Two solutions come in federal and state government assistance. The ability to tap these resources for credit support from the federal loan-guarantee program or for rate treatment from state regulators is critical for many new-build projects to move forward.

The loan-guarantee program appeals to all participants because it can lower borrowing costs. Therefore, utilities are experimenting with business and operating structures and are trying to take advantage of the DOE’s loan-guarantee program. While it looks appealing on paper, it is unclear whether the DOE will raise the authorized amount above the current $18.5 billion to accommodate all 19 applications submitted as of Oct. 2, 2008. Those applications represent $188 billion in requested support of 14 nuclear power plants that would add 28,800 MW of new nuclear generation, according to the DOE.

As a potential backstop to any loan program funding shortfall, especially in states that provide cost-recovery frameworks, utilities are working with regulators for three key financial and regulatory safeguards: allowance to receive pre-approval for construction costs and schedules; accommodation for recovery of a cash return on construction work in progress; and prevention of future regulatory commissions from reviewing the prudence of previously approved spend.

In addition to the financing mechanisms described, companies also are turning toward export credit agencies, municipal power authorities and generation and transmission cooperatives for debt financing.

No matter what financing option is pursued, utilities are demonstrating a thorough understanding of balance sheet exposure during various phases of new nuclear build. They are using tools to quantify risk exposure from various sources, developing risk registers to identify mitigation strategies and regularly communicating this information with stakeholders.

Determining whether nuclear is an appropriate future generation source is a company- and project-specific, decision-analysis exercise. Whether for a regulated utility or merchant developer, risks are significant, but potential benefits also can be substantial for rate payers and the developer. Utilities that have made such commitments have relied upon comprehensive analyses that have withstood skeptical scrutiny of boards of directors and commission regulators. Typically their business cases are characterized by a framework that incorporates risk, objectivity and transparency in the analysis, off-ramps if conditions change and involvement of key stakeholders (including state regulators) in the process. Anything less would be imprudent.


Arun Mani is a managing director in Huron Consulting Group’s Utilities consulting practice. He specializes in assisting clients with large capital project and business operations decisions using decision-analysis methodology.

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