Nuclear Energy Loses Cost Advantage

Nuclear Energy Loses Cost Advantage


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
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<>
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 the University of Vermont Law School’s Institute for Energy and

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
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
“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

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

“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
“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
in January that it would not proceed beyond licensing with plans to build
two new reactors at its Turkey Point site, after the FloridaPublic Service
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.
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
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

“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.”