[A US Nuclear Exit? (Part 2) How to close the US nuclear industry: Do nothing]

[A US Nuclear Exit? (Part 2) How to close the US nuclear industry: Do nothing]

March 6, 2013 - By PennEnergy Editorial Staff 
Source: Bulletin of Atomic Scientists

The Bulletin of Atomic Scientists (BAS) has released its third and final issue in its Nuclear Exit series, this time turning its expert focus on the United States. The first two installments looked at Germany and France, countries that share a border but are - for historical, political, and economic reasons - answering the nuclear power question in different ways.

The second editorial piece in this five-part installment to be presented on PennEnergy.com comes from former NRC Commissioner Peter A. Bradford who writes in his engaging and somewhat counterintuitive essay, “How to close the US nuclear industry: Do nothing,” that the overall business-as-usual approach the US has to nuclear power is exactly what could lead to a US nuclear phase-out.

[How to close the US nuclear industry: Do nothing]
By Peter A. Bradford

[[Abstract]]

The United States is on course to all but exit the commercial nuclear power industry even if the country awakens to the dangers of climate change and adopts measures to favor low-carbon energy sources. Nuclear power had been in economic decline for more than three decades when the Bush administration launched a program that aimed to spark a nuclear power renaissance through subsidies and a reformed reactor licensing process. But Wall Street was already leery of the historically high costs of nuclear power. An abundance of natural gas, lower energy demand induced by the 2008 recession, increased energy-efficiency measures, nuclear’s rising cost estimates, and the accident at the Fukushima Daiichi Nuclear Power Station further diminished prospects for private investment in new US nuclear plants. Without additional and significant governmental preferences for new nuclear construction, market forces will all but phase out the US nuclear fleet by midcentury.

Here’s what the US government must do to bring about a gradual phase-out of almost all US nuclear power plants: absolutely nothing. The United States is more or less on course to exit the commercial nuclear power industry, even if the country awakens to the dangers of climate change and adopts broad-based measures to favor low-carbon energy sources. only a massive, government-driven infusion of taxpayer or customer dollars, targeted specifically to new nuclear reactors, will produce a different result.

Dominion Resources Inc. recently announced that it will close the Kewaunee Power Station in Carlton, Wisconsin in 2013. The decision, said Dominion CEO Thomas Farrell, “was based purely on economics”. With that announcement, the 30-year struggle between pronuclear prophets and market realities in the United States appears to be entering a new phase, one in which market forces challenge the economic viability even of existing nuclear plants, while making new reactors hopelessly unattractive as investments.

The Kewaunee shutdown is not an anomaly. Duke Energy has announced that it will not restart the Crystal River unit in Florida, closed since 2009 by construction errors. In late 2012, both the Exelon Corporation and Xcel Energy Inc. canceled plans to expand existing nuclear units, citing declining forecasts of demand for electricity and long-term forecasts of low natural gas prices (Meredith and Benedetto, 2012). In January 2013, industry analysts speculated that several other units might also close in the near future for economic reasons (Maloney et al., 2013).

How could this possibly happen to an industry that was trumpeting a “nuclear renaissance” as recently as five years ago? Well, the nuclear renaissance was always ballyhoo; it was based on the number of reactors for which federal or state governments (or both) would conscript the necessary capital from captive taxpayers or customers, not the number that customers needed or that markets would fund. Absent an extremely large injection of government funding or further life extensions, the reactors currently operating are going to end their licensed lifetimes between now and the late 2050s. They will become part of an economics-driven US nuclear phase-out a couple of decades behind the government-led nuclear exit in Germany.

[[The renaissance that wasn’t]]

To understand why so many observers came for a time to believe in a US nuclear renaissance, it is helpful to review some US nuclear economic history, which has played out in five phases.

In phase one of that history, market forces had relatively little role in deciding what types of power plants were built. Between 1954 and 1978, electric utilities proposed nuclear and other types of power plants to state regulatory commissions that routinely approved them. Their costs were then reflected in the rates charged to customers, who bore the economic risks of overruns, plant cancellations, and poor operations.

In phase two, from roughly 1978 to 1990, rising nuclear construction costs met falling fossil fuel prices, emerging energy efficiency efforts, and the success of independent power generators enabled by the Public Utility Regulatory Policies Act of 1978. The result was an end to nuclear construction in the United States.

Some reactors ordered in the 1970s were finished, but as many were canceled—a few after billions of dollars had been spent on them. During phases one and two, the United States both completed and canceled more reactors than any other two countries ever have.

During phase three in the 1990s, Congress encouraged competition among producers, allowing them to compete for the sale of electricity; the onset of retail customer choice actually caused a dozen or so operating nuclear plants to close, mostly out of fear that they would be unable to compete with cheap natural gas burned in combined-cycle power plants. The 104 surviving reactors upped their output by about 25 percent, lowering operating costs significantly and more than making up for the nuclear megawatts lost to the closures. As gas prices rose and the Nuclear Regulatory Commission (NRC) developed its program for extending licenses, most of the nation’s reactors undertook to extend their licensed lives from 40 to 60 years.

In phase four, at the beginning of this century, nuclear power’s future in the United States seemed brighter than it had for several decades. True, no new reactors had been ordered for 25 years. But the Bush administration took office committed to reviving nuclear construction. The new administration, however, held two core beliefs incompatible with such a revival: that market forces, rather than the government, should determine resource allocation, and that the United States need not take significant action to reduce carbon emissions to combat climate change. In an intellectually untidy alliance with Democrats who believed in fighting climate change and were not averse to picking winners, the Republicans appeared ready to sweep away the antinuclear market verdict of the previous quarter century.

The Bush administration rolled out its “Nuclear Power 2010” program, with a goal of building two reactors by the end of 2010, thereby demonstrating that new designs certified through a reformed NRC licensing process would be credible competitors in the United States and global power markets. The leading nuclear industry trade association embraced a follow-on goal of 50,000 new nuclear megawatts by 2020.

Congress passed a significant taxpayer-backed incentive package for new reactors in 2005. In the Southeast, where electric industry restructuring had never taken hold, customers could not bypass costly utility power plants to buy directly from independent generators. In this region, several state legislatures passed laws providing much greater assurance that customers would pay for new nuclear plants years before receiving any electricity from them1 and that customers would also cover cost overruns and spending on canceled plants. Never before had investors been so sheltered from the economic risks of a company’s choice to build a nuclear plant.

By early 2009, the industry could point to 19 applications to build 29 new reactors on file at the NRC, with several more expected in the next few years. Now it is all in shambles. No further applications have been filed. Of those 29 potential new builds, at least five have been canceled outright. At least six more have been suspended with no real prospect for revival. The NRC carries in its “accepted/docketed” category another dozen reactors that no one has any intention of building.2 Licenses for four new units (of the original 29) were issued in early 2012. only those reactors and a Tennessee Valley Authority unit revived after 20 dormant years are moving forward with serious prospects of completion. Each of these has experienced cost overruns and delays. If they come on line at their current budgets, they will have demonstrated neither competitiveness nor real ability to control costs. Nuclear Power 2010 has joined the Bush administration’s list of missions not accomplished.

The first casualties of the post-2008 nuclear collapse were the reactors proposed for those regions of the country that choose their power generation through competitive market processes, usually from power plants whose prices and profits are no longer regulated by state utility commissions. More than half of all US electricity falls into this category, so Wall Street’s refusal to finance nuclear units in such power markets has ruled out most of the country as a home for new nuclear plants. Eight reactors vanished in Texas alone, as has every reactor proposed for the northeastern United States.

[[Competition killed the renaissance]]

Those who have not followed the development of competitive power markets over the past 35 years sometimes blame the collapse of new nuclear orders on a loss of public confidence and a surge in costly overregulation following the 1979 accident at Three Mile Island. If these were the true causes, the remedies might indeed lie in more political support and a streamlined licensing process, but neither evidence nor experience supports this scenario.

Nuclear power’s economic decline, including numerous cancellations and cost overruns, was well under way before the 1979 accident at Three Mile Island. Numerous operating and construction mishaps were attributable to the rapid growth in both number and size of reactors. These difficulties combined with very high capital costs in the mid-1970s to cause rate increases and corporate reassessments across the country. Irvin Bupp and Jean-Claude Derian’s definitive examination of nuclear economics, Light Water: How the Nuclear Dream Dissolved, was first published before Three Mile Island (Bupp and Derian, 1978).3

Nor is there a serious case to be made that interest in new reactors has been suppressed by decades of overregulation. The candidates for the Nuclear Regulatory Commission since 1980 have almost all been subject to what amounts to a nuclear industry veto.4 In many cases, they have had outright industry endorsement. The idea that these industry-vetted commissioners have overseen 30 years of excessive regulation doesn’t pass the straight-face test. Furthermore, no nuclear unit has so much as bid in a truly competitive power procurement process anywhere in the world. The inability to compete in countries like Britain cannot be traced to overreaction to Three Mile Island.

A 2003 MIT task force published a study titled “The Future of Nuclear Power.” The study did not consider efficiency and renewables to be among nuclear power’s competitors and did not address issues relating to nuclear regulation, but it was the best of several assessments of the fundamental economic status of new reactors. It estimated a new reactor cost of 6.7 cents per kilowatt-hour in a market in which power from new coal plants was thought to cost 4.2 cents, and gas-fired plants produced electricity costing between 3.8 and 5.6 cents, depending on the price of gas. It concluded that nuclear power in 2003 “is not an economically competitive choice” (MIT, 2003: 3).

But there was hope. The study posited four areas of potential improvement (construction time, construction cost, operation and maintenance, and cost of capital) that could together reduce the cost of new nuclear to 4.2 cents, fully competitive with coal and with gas at any but the lowest forecast price for the latter fuel.
To test the feasibility of these four improvements, the MIT study advocated a program of federal incentives (mostly in the form of production tax credits of 1.7 cents per kilowatt-hour) for up to 10 “first-mover plants,” which, presumably, represented several of the advanced designs expected to be certified under the reformed NRC licensing process.

Ten years have passed. The hopes of the MIT task force can now be contrasted with what actually happened to give a sense of the difficulties that nuclear power faces in the years ahead. For one, the relative economics of new nuclear power did not improve. In fact, they got much worse. Reactor cost estimates tripled as more realistic rate-case estimates and rising material costs replaced the lowball claims on which the Bush administration launched Nuclear Power 2010.5 This happened even though Congress in 2005 and 2007 passed incentive packages far more generous than the MIT study had advocated, while several state legislatures went even further.

Wall Street’s sense of the economic risk posed by new reactors was enhanced, not assuaged, by the events of the last decade. The gap between the cost of capital for a new reactor and a new fossil-fuel plant did not decline appreciably. Fukushima was of course the most dramatic illustration of the financial risk of nuclear power, but it was far from the most significant. An abundance of natural gas, lower energy demand induced by the 2008 recession, increased energy-efficiency measures, and nuclear’s rising cost estimates did the real damage. In fact, private capital for new nuclear was not available even before these events occurred. Investors knew that such developments were possible, and the risk of them—not the actual occurrence—was enough to foreclose private investment.

The United States did not adopt cap-and-trade legislation or any other broad-based approach favoring low-carbon energy. Furthermore, the price of carbon that has emerged in other markets was not nearly sufficient to close the cost gap between new nuclear and other low-carbon sources.6

After an initial burst of congressional and state legislative support from 2005 to 2007, further subsidies at the state and federal level were hard to come by. In part this was because the existing subsidies had not yet been put to use. In addition, efforts by the Obama administration and others to expand the subsidies have foundered as the failure of the government-supported Solyndra solar manufacturer, the disaster at Fukushima, and the emergence of abundant gas supplies have undermined both the political support and the economic justification for governmental intervention to prop up expensive energy technologies.

On top of the worsening cost picture for new reactors, the subsidies have proven less useful than the MIT task force had hoped. Production tax credits, which have been the cornerstone of the growth in wind energy production in the last decade, have been of much less use to nuclear power because, after all, they require production. Half of the reactors ever licensed in the United States were canceled before completion, so the promise of tax credits based on output was a sufficient incentive only in the states that had also provided assurances that the customers would pay the costs of canceled plants, and there were only half a dozen of those.

The loan guarantees for nuclear projects came with a requirement that the borrower pay a fee to the federal government consistent with the risk of default on the loans. For the first loan in a part of the United States that used power markets, the federal government set the fee at 11.6 percent of the guarantee, or $870 million for a loan guarantee of $7.5 billion. The would-be borrower of that amount, Constellation Energy, immediately withdrew from the Calvert Cliffs project, effectively killing what had been the flagship project for France’s advanced European Pressurized Reactor design (Wald, 2010).

Only the state laws assuring that the customers will pay for new reactors no matter how unfavorable the economics seem capable of shifting enough risk away from investors that they actually will support new construction. Under shelter of these laws, coalitions led by Southern Company in Georgia and SCANA Corporation in South Carolina are well positioned to complete a total of four new reactors. However, a similar law has spawned a substantial political backlash in Florida, where four more new reactors are now further from completion than when they first filed for licenses, while Florida customers have paid well over $1 billion for them, money that is nonrefundable.7 Efforts to pass this type of legislation outside the South have repeatedly been turned back in campaigns in which the Florida experience has been prominently cited.8

One good measure of the erosion of nuclear power’s political support is its status in the recent presidential campaign, compared to the previous campaign. In 2008, Senator John McCain promised that his administration would assure the completion of 30 new reactors by 2030. Then-candidate Obama set no such quota but often announced strong support for new reactors. In 2012 neither candidate said much about nuclear power. on one telling occasion, former Deputy Energy Secretary Linda Stuntz, energy spokesperson for Republican candidate Mitt Romney, said of undertaking a new nuclear plant: “Right now, I think any board of directors for a utility would have to be nuts to say ‘We’re going to do this’” (O’Neill, 2012: 8).9

[[Picturing a US phase-out]]

The countries that have recently decided to phase out nuclear energy have done so by governmental fiat, complete with statutory deadlines both for individual reactors and for nuclear power in general. But no such sweeping action is really necessary in countries that have chosen to procure power generation through market mechanisms. The US experience demonstrates that absence of governmental intervention will create a glide path, determined in part by how long a country is prepared to allow its oldest reactors to operate, but in fact by the interplay between gas-driven electricity prices and the point in time at which older plants must make significant capital investments.10

Governments in countries with power markets that want to avoid a nuclear phase-out have to intervene just as vigorously to preserve the nuclear option as do governments seeking to close nuclear power down ahead of the economic life of the reactors. Great Britain, for example, has announced a major market intervention in which the government will pay the difference between the market price for electricity and an estimate of the price required by new nuclear plants (as well as by offshore wind towers) in pursuit of a more robust low-carbon energy portfolio. Since the estimated price to be paid for new nuclear is said to be at least 16 cents per kilowatt-hour—or about twice the existing market price for wholesale power generally—and the UK policy contemplates increases in customer bills well before any reactors come on line, the approach has something in common with the aforementioned state laws in the United States that have occasioned both new reactors and growing controversy.

Common to both the United States and the United Kingdom is the oft-stated hope that the projects will come on line “on time and on budget,” finally dispelling the spectacle of gigantic cost overruns and delays that plagued the last round of nuclear construction in the United States. But this hope ignores nuclear power’s deeper problem, which is that “on budget” isn’t going to stimulate much interest if it means “at a price more than twice the cost of getting the same electricity some other way.”

In 2006, MIT economist Paul Joskow created a simple graph on the status of nuclear power and illustrated the duration of nuclear power in the United States if no new reactors were built. The passage of seven years gives it a somewhat different aspect. The chart shows two different futures for the US nuclear industry. In both, no new reactors are constructed, but in one, all plants close at the end of their 40-year licensed lives, whereas in the other, they close after receiving license extensions for an additional 20 years. In the former case, the last US nuclear unit closes in 2038; in the latter, the final plant closes in 2058. Most plants having since received 20-year extensions, the 2058 line seems now to portray the no-new-plants case most accurately. Five plants do seem likely to come on line in the next decade, but this will occur even as equal or greater capacity closes before its licenses expire.11

[그림 Figure 1.] A look at the future? A chart that MIT economist Paul Joskow prepared for his 2006 presentation, “Prospects for nuclear power: A US perspective.” Credit: Paul L. Joskow, MIT.

When Joskow put forth this chart in 2006, few would have argued that it more or less described the US nuclear future. The 2003 MIT report had postulated a trebling of US nuclear generation by 2050. This was to be part of a similar growth spurt worldwide, seen as needed to preserve nuclear power as a significant contributor to the fight against climate change.

What seems much clearer now is that if the US government (and the states) do nothing to give additional strong preferences to new nuclear construction, the United States will more or less phase out its nuclear fleet on a schedule only a decade or two longer than would the government policy that caused such controversy when rolled out in Japan last September.12 Put another way, while the US Energy Department deplores the official nuclear phase-outs adopted by Germany and (sort of) by Japan, it is presiding over policies that will—if left to run their course—produce a remarkably similar result.

What a curious paradox. Every decade couples bullish US governmental forecasts of the nuclear construction surge to come with stentorian rebuke of the skeptics. Then every decade brings disappointing results that neither inform nor discourage the next generation of bullish forecasts. The Nixon administration’s 1973 forecast of 1,000 reactors by the year 2000 was the champion, but only by degree. Even today, small modular reactors are foreseen reversing the recent downward coast, never mind that they are unlicensed and economically unproven.

Meanwhile, other energy sources— efficiency, renewables, natural gas— follow the opposite trajectory, with each decade’s results exceeding the forecasts with which it began.

Imagine the start-up ceremony for the new reactors in Georgia or South Carolina in a few years: the president and the governor in the control room, pushing a symbolic button or two; the dignitaries, the regulators, and the unions hailing the nuclear turnabout just over the horizon; the president of Kazakhstan (a major uranium producer and part-owner of the Westinghouse Electric Co.) promising a lifetime’s reliable fuel supply.

Will anyone who matters tell them that they’re all naked?

[[Funding]]

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

[[Acknowledgements]]

This article is part of a three-part series on the implications of phasing out civilian nuclear power in Germany, France, and the United States. Additional editorial services for this series were made possible by grants to the Bulletin of the Atomic Scientists from Rockefeller Financial Services and the Civil Society Institute.

[[Article Notes]]

↵1 Conventional ratemaking allows recovery of investment from customers only after the plant begins serving them. This is also the financial result in the US states that rely on power markets rather than regulators to determine which plants get built and operate. In such markets, generators get paid only for generating capacity and output actually delivered to the grid, so plants under construction, like other industrial facilities, can’t recover costs until they operate.

↵2 The status of applications pending at the NRC is shown at:www.nrc.gov/reactors/new-reactors/new-licensing-files/expected-new-rx-applications.pdf. The NRC hasn’t updated this page since October 2011.

↵3 For a thorough analysis of the role of Three Mile Island in the context of making nuclear power uncompetitive in the 1980s, see Jonathan Koomey’s blog at: www.koomey.com/post/6868835852?dfa9e800.

↵4 In 1980, the CEO of the principal nuclear industry trade association described the industry’s reaction to Ronald Reagan’s victory over Jimmy Carter as “ecstasy, joy, pleasure, and euphoria” (Emshwiller, 1980). The next decade was the worst in nuclear power’s US history, with no new reactor starts, several dozen cancellations, the abandonment of the Clinch River breeder reactor, and the beginning of decades of slippage in the spent fuel disposal program.

↵5 The first two advanced reactor projects in Europe experienced dramatic delays and cost overruns as well.

↵6 The 2003 MIT study estimated that carbon taxes in the range of $100–$200 per ton would significantly affect the relative economics of nuclear compared to coal and gas, though with low gas prices the tax had to be at the upper end of the range for new nuclear to be competitive. In 2011, the Exelon Corporation released a review of the cost of low-carbon electricity generation that ranked new nuclear as more expensive than various combinations of efficiency, renewables, uprates of existing nuclear plants, and conversions of coal to gas.

↵7 See, for example, the Tampa Bay Times, “Progress Energy raises price tag, delays start date of Levy nuclear plant,” one of many excellent articles by Ivan Penn describing Florida’s recent nuclear experience (Penn, 2012).

↵8 Missouri and Iowa were the most prominent examples in 2012. North Carolina has a law only slightly less supportive than Florida’s, but when Duke Energy sought to make the North Carolina provisions identical, opponents were quick to cite Florida’s experience and the accompanying political turmoil. Duke was unsuccessful.

↵9 The Romney campaign did indicate support for improving nuclear prospects through licensing reform and a more effective waste disposal program.

↵10 By this standard, units at Crystal River and San onofre—currently closed by major equipment failures—appear to be serious shutdown candidates, though they may survive because they are located in Florida and California, respectively, states in which regulators can override market verdicts and impose their repair costs on customers.

↵11 Indeed, the next US nuclear unit that closes on the date that its license expires will be the first to do so. Most plant closings to date have been because expected profitability was insufficient to support necessary future expenditures.

↵12 The Innovative Strategy for Energy and Environment adopted by Japan’s Energy and Environment Council (but not by the Cabinet) in September 2012 commits to mobilizing all possible resources to phase out nuclear power during the 2030s. Since the government that propounded this policy has since been voted out of office, this document now lacks even the ambiguous status that it had in late 2012.

[[References]]

↵ Bupp I, Derian J-C (1978) Light Water: How the Nuclear Dream Dissolved. New York: Basic Books. Search Google Scholar
↵ Dominion Resources (2012) Dominion to close, decommission Kewaunee Power Station. Press release, October 22. Available at:http://dom.mediaroom.com/2012-10-22-Dominion-To-Close-Decommission-Kewaunee-Power-Station .
↵ Emshwiller J (1980) Nuclear power industry pins hopes for survival on Reagan presidency. Wall Street Journal, December 15, p. 27. Search Google Scholar
↵ Maloney P, Doley S, Ostroff J (2013) Operators do not plan merchant unit retirement. Nucleonics Week, January 10, p. 2. Search Google Scholar
↵ Meredith E, Benedetto G (2012) Glum economics skewer plans for nuclear uprates. Nuclear Intelligence Weekly, November 26, p. 4. Search Google Scholar
↵ MIT (2003) The future of nuclear power: An interdisciplinary MIT study. Available at: http://web.mit.edu/nuclearpower/ .
↵ O’Neill L (2012) Candidates tout pronuclear stances. Nuclear Intelligence Weekly, July 20, p. 8. Search Google Scholar
↵ Penn I (2012) Progress Energy raises price tag, delays start date of Levy nuclear plant. Tampa Bay Times, May 2. Available at:www.tampabay.com/news/business/energy/progress-energy-raises-price-tag-delays-start-date-of-levy-nuclear-plant/1227830 .
↵ Wald ML (2010) Fee dispute hinders plan for reactor. New York Times, October 10, p. A21. Available at:www.nytimes.com/2010/10/10/business/energy-environment/10reactor.html .

[[Author biography]]
Peter A. Bradford teaches nuclear power and public policy at Vermont Law School. He chaired the New York and Maine utility regulatory agencies and served on the US Nuclear Regulatory Commission. He advises and testifies on utility regulation and nuclear issues in the United States and elsewhere. He is a member of the Texas–Vermont Low-Level Radioactive Waste Compact Commission and New York’s Moreland Commission on Utility Storm Preparation and Response.