U.S. Nuclear Perspectives–Opportunities for a Sector in Renaissance

by Jim Haried and Bob Ford, Ernst & Young LLP

With the recently announced construction loan guarantees making investment in nuclear plants more promising, Ernst & Young LLP has reviewed prospects across the United States.

Ernst & Young found that government support is critical, as are resolving issues around safety, trust and waste.

As the U.S. seeks to meet its growing energy needs, deal with climate change concerns and reduce its dependence on overseas fuel supplies, nuclear generation has become a credible option again.

Forty of 48 utilities that issued debt for nuclear projects until 1979–when Three Mile Island happened–suffered credit downgrades of up to four levels as a result of 17 percent interest rates in the late 1970s and early 1980s and the expensive, time-consuming safety retrofits that the U.S. Nuclear Regulatory Commission (NRC) required after 1979, according to Moody’s Investors Service.

The situation resulted in no new U.S. nuclear plant construction since 1979. Nonetheless, the U.S. remains the world’s largest nuclear power producer, accounting for more than 30 percent of global nuclear generation.

To regain the worldwide lead in developing new power sources, the U.S. nuclear industry is investing considerable resources to license newer, safer and more reliable designs.

In its latest “World Energy Outlook,” the International Energy Agency projects that under current trends and policies, 568 gigawatts (GW) of new electric generating capacity will be added in the U.S. between 2008-2030, costing $2 trillion.

Nuclear’s role will remain relatively small (currently about 20 percent of the total electricity generated) compared with coal and fossil fuels.

Key Drivers

Recently, the U.S. nuclear power generation industry has seen its profile and prospects improve dramatically.

As primary energy policy drivers are more closely aligned with the characteristics of nuclear power, we can expect it to become a growing part of several utilities’ generation mix. At the highest level, the drivers include:

  • Acceptability. Public acceptance for nuclear power has risen, while a new directive to reduce carbon dioxide emissions has emerged. Gallup Inc.’s annual environment poll of 1,012 U.S. adults in March 2009 found that 59 percent of Americans favor nuclear power as one way to provide energy for the U.S., surpassing the previous high of 56 percent.
  • Availability. Countries, including the U.S., seeking to reduce their dependence on imported fossil fuels see that nuclear power can provide a steady baseload supply as part of a balanced fuel mix, complementing intermittent renewable and more flexible fossil fuel plants.
  • Affordability. Fossil fuel price instability has helped highlight one of the benefits of nuclear power: It is much less prone to fuel price volatility. Despite high per-gigawatt capital costs, fuel costs per unit generated are low, and less exposed to the turbulent commodity markets. In the short term, low power demand and prices are slowing all forms of generation investment.

Operational improvements also have contributed to the importance of nuclear power in the U.S. generation fleet.

In the past 15 years, improved nuclear plant capacity factors have increased generation of electricity equivalent to building 10 new 1,000-MW plants.

Likewise, technology advancements have driven renewed interest in nuclear investment.

Next-generation reactor designs promise to be safer and more economical than older designs.

Modular construction promises uniformity of as-built plants and reduced construction costs compared with existing plants.

The U.S. Department of Energy (DOE) is working with industry teams, including GE Hitachi Nuclear Energy, Westinghouse and General Atomics, to solve the practical and technical challenges for safe, environmentally responsible and economical methods for recycling used nuclear fuel.

Potential Players

Several utilities have expressed interest in pursuing next-generation nuclear, as evidenced by the approximately 30 reactor license applications before the NRC.

For instance, the South Texas Project, a partnership between NRG Energy and Toshiba, recently announced that NRC approval of a combined construction and operating license and a full notice to proceed are anticipated in 2012.

State Positioning Map

What makes a market attractive for investment in nuclear power? How can opportunities in different states be addressed?

While the criteria differ by investor, Ernst & Young research indicates three key factors:

  • Scale of Opportunity: both the amount of capacity needed and urgency for new investment,
  • Government Support and Regulatory Capacity: including the regulatory framework, previous experience with nuclear across regulatory and licensing bodies, levels of government support and public opinion, and
  • Market Conditions: including ease of access to capital markets, power market competitiveness and available economic incentives for nuclear.

Clusters

Ernst & Young analyzed 21 states with significant potential for nuclear power and identified four clusters of states sharing similar drivers:

  • Lone Star. Texas represents a large, competitive market opportunity, supported by a constructive regulatory environment.
  • Frontrunners. Frontrunners are composed of selected southeastern states and Michigan. The frontrunners cluster is characterized by sizable market opportunities, vocal support for nuclear development and generally constructive regulatory environments, which often permit construction work in progress in rate base.
  • Pragmatists. Pragmatists range from Louisiana to New York and Pennsylvania. The pragmatists cluster generally recognizes that nuclear may afford long-term baseload supply in a carbon-constrained world but has mixed public and regulatory support compared with the frontrunners.
  • Onlookers. Onlookers are the states in the lower left of the map. They are characterized by smaller market opportunities, less public support for nuclear and often less constructive nuclear regulatory environments.

Outlook

The nuclear renaissance will not be sustained by environmental and fuel security issues alone.

The industry also must apply past lessons and establish its role as one of a balanced range of components in an effective energy mix, based on its performance at each stage of the nuclear value chain.

Regulators and legislators have a vital role. The role of government regarding nuclear power is threefold:

Policymaking. Federal and state governments are able to send important investment signals, particularly in the pragmatists and frontrunners groups. Government support often is linked to public support. In groups such as onlookers, opportunity could improve if public and political support increases.

Regulation. Ideally, a regulatory framework will create an open, accountable and predictable environment in which rules are applied consistently and transparently. This is especially important for pragmatists and frontrunners.

Financing. Government support, primarily through production tax credits, loan guarantees and arrangements to share the risks of waste and decommissioning arrangements, is essential to promote the next wave of U.S. nuclear investment. In February, President Barack Obama requested that the nuclear loan guarantees be increased from $18.5 billion to $56 billion in fiscal year 2010, and the DOE awarded the Vogtle Electric Generating Plant (Southern Co.’s Georgia Power owns 45.7 percent) in Georgia with the first $8.3 billion of nuclear loan guarantees. The loan guarantees will help Vogtle obtain funds for up to 70 percent of the construction costs through loans from the Federal Financing Bank. The total cost of the new Westinghouse standardized AP1000 twin reactors, including financing, is expected to be $14 billion, with secure cost recovery in a state-regulated market.

Safety, Standard Designs

The license applications before the NRC are all for standardized designs. In February, three utilities–Tennessee Valley Authority, First Energy Corp. and Oglethorpe Power Corp.–hired The Babcock & Wilcox Co. to design and license a new, smaller modular reactor for commercial use in the U.S.

Utilities are betting that these smaller, simpler reactors can be manufactured quickly, operated more safely and installed at existing nuclear sites to replace carbon-emitting, coal-fired plants.

The industry must avoid major safety issues through an unwavering commitment to quality and safety standards. This applies from the design stage through the local regulatory and licensing processes, construction and contracting relationships and into operational and environmental performance standards, transparency and eventual decommissioning.

Trust

Reactor vendors and supply chain companies must engender confidence and trust in every step.

Public trust and regulatory scrutiny demand the highest standards, and repeats of past issues, redundant first-of-a-kind costs and delays or failures to satisfy reasonable requirements will be costly, not just for the projects concerned, but for all projects.

Waste, Decommissioning

Recent industry submittals to the DOE’s Advanced Fuel Cycle Initiative have detailed the technology to economically reuse nuclear fuel.

The next steps are for demonstration projects funded by the $21 billion in nuclear waste disposal tax already collected by the Treasury Department.

Overall, funding and loan guarantees are vitally important, but utilities must work closely with regulators, policymakers and the general public so each project remains viable long term.

Authors

Bob Ford is Ernst & Young LLP’s Power & Utilities Sector leader.

Jim Haried is a senior manager with Ernst & Young LLP’s Fraud Investigation & Dispute Services in Chicago.

 

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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