Suddenly, It's Alive and Kicking

Jenny Weil, Managing Editor, Platts Nuclear Margaret Ryan, Director, Platts Global Nuclear & Coal

Confronting rising baseload demand, energy security worries, and potential carbon limitations, the U.S. power industry is joining Asia and Europe in finding nuclear power a viable option. But the industry must regain Wall Street and public confidence in its ability to manage huge new nuclear projects, without the overruns of 25 years ago, and in 2007-2008, it's put up or shut up for nuclear. Will the big players ante up big money for parts and federal licenses?

AFTER HIS OBITUARY WAS MISTAKENLY published in 1897, Mark Twain famously cabled U.S. newspapers, "Reports of my death are greatly exaggerated." The nuclear industry can now say the same.

Since the Three Mile Island-2 accident in 1979 in the U.S. and the Chernobyl-4 accident in 1986 in Ukraine, the nuclear industry has had countless obituaries run, with expert pronouncements that the nuclear power age was over. As 2007 approaches, they appear to have been, indeed, greatly exaggerated.

Nuclear building never ceased in Asia, where governments pursued nuclear to ensure supply security and moderate their fossil fuel import bills as well as meet burgeoning demand. In Europe and the U.S., full grids left more time to consider alternatives, but everywhere, as the need for new baseload has become more apparent, nuclear has re-emerged, now as the only greenhouse-gas-free baseload choice, since renewables offer no baseload option.

By the time Exelon Corp. announced on September 29 that it was considering building two new reactors in Texas, a state where it has no nuclear plants and only a few natural gas and oil generating assets, the bigger question was what took the largest U.S. nuclear operating company so long to decide it might take the plunge into construction.

Exelon was just the latest major U.S. nuclear operator to declare it was working on new plant applications, joining Entergy Corp., Dominion Resources Inc., Southern Company, Constellation Energy Group Inc., Florida Power & Light Company, South Carolina Electric & Gas Co., Duke Energy, Progress Energy Inc., NRG Energy, Tennessee Valley Authority (TVA), and TXU Corp. A Texas entrepreneur and one-time nuclear welder for the architect-engineering firm Bechtel Corp. also is spearheading a project dubbed "Amarillo Power" to possibly build twin 1,350-MW units in the Texas Panhandle.

These are not trivial decisions, since pursuing a combined construction permit-operating license, or COL, from the U.S. Nuclear Regulatory Commission (NRC) is estimated to cost $30 to $50 million. Moreover, the companies are being asked to put up substantial deposits on orders for heavy forgings, which can be made in just a few factories worldwide, ahead of deciding whether to build. But the NRC says Exelon will not be the last entity planning on major steps toward ordering a new reactor.

While the U.S. has only recently become serious about expanding nuclear generation, construction of nuclear plants in Europe and Asia continued during the 1990s, with 22 plants starting operation since 2002 and another 16 reactors slated to come online through 2011 (Figure 1).

1. Nuclear Units Commissioned, 2002-2006 & Nuclear Units Under Construction, Fall 2006. Source: Platts

All but one of those being built now is in Asia. That may change: on New Year's Day 2006, the Russian Federation administered shock therapy to European nuclear power. It cut off Ukraine's natural gas supply.

The cutoff only lasted three days, but it jolted Western Europe with the realization of the degree of its dependence on gas, and particularly on Russian gas. Suddenly, Finnish industry's decision to have Areva build a new nuclear plant at Olkiluoto, expected in operation in 2010, looked quite different. In 2006, the UK government began a hard look at replacing its aging nuclear units. Swedes elected a new government that halted long-term plans for a nuclear phase-out. German politicians and utilities have been openly maneuvering to stop shutdowns scheduled under the previous government's phase-out. Even Italy, which shut its nuclear plants after Chernobyl, cast a new eye at its dependence on North African fossil imports. And Electricité de France, as expected, announced it will build its 59th reactor.

In the U.S., the passage of the Energy Policy Act of 2005 served as the starter's gun for serious consideration of new reactors. A variety of incentives—production tax credits, government-backed loan guarantees, and risk insurance to cover any delays caused by federal regulators or extended litigation—is providing the stimulus that legislators and the Bush administration envisioned. Electric companies are scrambling to meet the December 2008 deadline for filing an application with NRC, since the first six reactors in operation by December 2020 will qualify for the tax credits.

In late 2005, NRC was gearing up for the possibility of two new plant license applications in 2007. As of mid-October, the agency was bracing for 19 COL applications between 2007 and 2009 for as many as 25 new units. NRC Chairman Dale Klein says he expects the number of potential reactors soon to climb above 30.

But the nuclear industry's comeback has been in the works for some years. It started in the mid-1990s as operating utilities finally brought outages and costs under control. With old debts accelerated or written off in deregulation, nuclear power became the cheapest available in many areas, averaging around $17/MWh in this decade.

There were more than a few skeptics when the Nuclear Energy Institute, the industry's association, delivered its "Vision 2020" plan in 2001 calling for 50,000 MW of new nuclear generation to be built over the following two decades. The goal still appears to be a stretch, since it would mean building 35 to 50 new reactors.

But few doubt now that there will be some nuclear power plants built in the U.S. With its isolated grid and growing demand, Texas is shaping up as the most sought-after location for new reactors. By fall 2006, four projects with as many as 12 units were focused there, in equal parts because of forecasts for population boom and shrinking reserve margins of electricity. Most other projects are scattered around the southeastern U.S. because of population growth and because most of those states retain a traditional rate-base regulatory structure, which insulates the builders to some extent from pure market forces.

Most important for nuclear's future will be avoiding the mistakes of the last nuclear building boom, when poor design control collided with double-digit inflation and weak project management, leading to runaway costs. One federal calculation put the average budget overrun after 1980 at 300%; finished costs with financing ranged from $2 billion up to $6 billion a unit. The last reactor completed in the U.S., TVA's 1,210-MW Watts Bar-1, came online in 1996 after nearly 23 years of on-again-off-again construction and at a final cost of about $7 billion.

Many companies are looking to finance the new plants through a combination of debt and equity. Both NRG and TXU are seeking partners to share the cost burden of new plant projects, and TXU says it will bargain vendors down 30% to 40% from current estimates, which run $1,600 to $2,000 per installed kilowatt (Figure 2). Southern Company and Duke Energy have set up special accounts to track expenses related to new plant licensing and are seeking state regulatory permission to recover these costs from ratepayers.

2. New Unit Cost Estimates. Source: Platts

The industry has been getting state regulators and the financial community comfortable with the idea of investing $2 billion to $3 billion in a reactor with construction goals as short as four years, after a licensing process now estimated at 42 months. The best construction time anywhere so far is Atomic Energy of Canada Ltd.'s 54 months in China. The industry is also seeking to short-circuit what it refers to as "regulatory uncertainties." Costly delays in building existing U.S. reactors stemmed in part from incomplete designs and major design changes demanded by utilities and regulators. For the next round of reactors, companies expect to work with fixed, regulator-approved designs and standardized license applications. Industry officials estimate that 75% or more of the content in license applications will be virtually identical for each plant technology, with the balance specific to a plant site.

U.S. companies are focusing on four designs. Two have already been certified by the NRC—General Electric Co.'s 1,350-MW Advanced Boiling Water Reactor (ABWR), and Westinghouse's 1,100-MW AP1000. The ABWR is operating in Japan but the AP1000 has never been built. GE has developed a larger 1,550-MW design called the ESBWR, and Areva has adopted its European PWR to a 1,600-MW Evolutionary Power Reactor, or U.S. EPR, for the U.S. market. The European EPR version is being built in Finland, and a unit will start building next year in France.

Mitsubishi Heavy Industries Ltd. recently introduced a new plant concept, a 1,700-MW Advanced Pressurized Water Reactor (APWR). The U.S. APWR is a larger version of its APWR design than has been built in Japan. So far, no U.S. utility has announced an interest in this design.

Although Westinghouse has completed NRC's certification process, it is preparing a package of design changes to incorporate more specifics on instrumentation and control and seismic resistance, among other topics. Westinghouse left out this level of detail when it was seeking certification in the late 1990s but had no customers for the reactor.

The design for GE's ABWR might need some changes as well, since it was certified in May 1997 after a seven-year NRC mechnical review. GE's certification of its latest design, the ESBWR, has gotten off to a bumpy start. The original submittal in August 2005 was found too incomplete for the NRC staff to begin a mechanical review. GE filled in some holes and re-filed two months later; but agency staff has issued more than 2,000 requests for additional information.

NRC officials say some licensing uncertainties, like those with GE's application, are not within the agency's control. NRC's Klein defends the agency as doing everything possible to make its requirements clear and review applications in a timely manner, and has said he wants to reduce COL review time below the current 42 months expected.

But other factors could send everyone's plans awry, chief among them limited worldwide component fabrication capabilities and looming shortfalls in both engineering specialties and craft labor. Competition for all three could wreak havoc with project budgets.

For components, the squeeze means lining up orders years in advance of breaking ground on a plant. A Progress Energy Inc. official estimated such long lead-time equipment could cost in the range of $100 to $150 million. For Progress Energy to meet its goal of having new nuclear baseload in commercial operation by 2015 to 2016, it must place an order for these components in 2007 or 2008, since it can take two to four, or more, years for the largest components to be fabricated and shipped to a site.

A Constellation executive says his company has to order in 2009 the digital system for a future U.S. EPR's control room. But no plant in the U.S. operates solely on digital instrumentation and control, and it's uncertain whether NRC will require an analog backup system, as Finnish regulators have for Olkiluoto-3.

Constellation, through its UniStar Nuclear business venture with Areva, hopes to avoid waits for large components, such as steam generators and reactor pressure vessels, through an agreement UniStar signed in August with BWX Technologies Inc. (BWXT) to invest in reviving manufacturing capabilities at BWXT's Mount Vernon, Indiana facility. In August, Areva ordered, on behalf of UniStar, heavy forgings needed for four steam generators and a pressure vessel for a U.S. EPR.

For labor, nuclear construction will be competing with new coal and pipeline construction also on the U.S. drawing boards, and labor officials say they're already talking with large constructors about lining up the specialties needed. But, they warn, wages in construction have dropped, in real terms, over the last 25 years, and the needed new personnel won't be there without higher pay scales.

Nuclear engineers are also suddenly at a premium, with universities finding new popularity for graduate programs that bright young engineers were spurning a decade ago. But a wave of retirements is hitting the nuclear power industry, and there's real question whether there will be enough newcomers to both replace the retirees and staff the new work.

The nuclear industry is far from dead, but its new look will still be evolving worldwide in 2007.