Nuclear Fever Breaks

Excitement over an expected nuclear renaissance reached fever pitch over the past decade. Today, the original volume of announced projects has been sifted, leaving just a few serious ones that may match well with the level of loan guarantees recently announced as part of the president’s budget proposal. The pace of progress is slow, yet progress is almost certainly unavoidable.

Since Congress passed the 2005 Energy Policy Act, the U.S. nuclear power industry has been riding an emotional and business roller coaster. The initial reaction was euphoria, as Congress included in the new law virtually everything the industry said was needed to kick-start new reactor construction. Production tax credits. Noncompletion insurance. Loan guarantees for up to 80% of the debt needed to finance the plants. The new law had it all.

Anxiety soon followed as the Bush administration lagged in getting the all-important loan guarantees off of administrative clipboards and into contracts with builders. The Department of Energy (DOE) for four years repeatedly raised expectations of imminent action, and then dashed them with disabling delays. On the nuclear front, the Bush administration turned out to be, in the words of that familiar Texas putdown, “all hat, no cattle.”

When the new Democratic Obama administration arrived in Washington in 2009, it faced high nuclear anxiety. Many in the industry regarded the new crew as reflexively anti-nuclear. One of the administration’s first acts on the nuclear front—pulling the plug on the moribund, politically tainted Yucca Mountain high-level nuclear waste site—seemed to justify industry mavens’ anxiety. (For an in-depth look at the past and possible future of Yucca Mountain, see “The U.S. Spent Nuclear Fuel Policy: Road to Nowhere,” in the May 2010 issue or online at https://www.powermag.com.)

In 2008, the business environment had soured. A housing bust morphed into worldwide recession. Meanwhile, the estimated costs of new reactors escalated faster than in the bad old days of the 1970s; the $18.5 billion in loan guarantee authority suddenly looked puny. Soon, confounding the skeptics, the new team in Washington managed to work a deal with Southern Co. for an $8.5 billion guarantee for two new units in Georgia (Figure 1). The industry beamed. Then, in this compressed version of recent nuclear history, Constellation Energy’s plan for a new reactor in Maryland collapsed. One step forward, one step back.

1. Vogtle under construction. Workers were compacting backfill for Unit 4 on November 4, 2010, when this image was shot. The Modular Assembly Building (far right) and the operating Units 1 and 2 are shown in the background. Courtesy: Southern Company

Annual Group Therapy Meeting

As the years since 2005 passed, this whole emotional history got chronicled each February at the Platts Nuclear Energy conference. This event, located at a Maryland hotel just across a busy intersection from the towering headquarters of the U.S. Nuclear Regulatory Commission (NRC), has been the place to feel the pulse of the industry.

So it was this February, as the nuclear illuminati assembled again in White Flint to ponder the past and preview the future of generating electricity by splitting atoms.

This year, mania was absent. The industry appears to have adopted a posture of calm rationality.

After all, the original intellectual renaissance (literally, “born again”) wasn’t built in a day; it spanned the 14th to 17th centuries. The first U.S. flowering of nuclear power was the equivalent of a desert spring—evanescent: The plants flowered quickly, produced showy blooms that attracted widespread interest, then just as quickly dropped off. The glory years of commercial nuclear power in the U.S. really lasted only about eight years (1966–1974) and were over well before the landmark Three Mile Island catastrophe. As it turned out, that first flowering was, to use a term much favored by environmentalists, “unsustainable.”

Today, the meaning of the 2005 law is becoming clear, and the industry has what looks like real friends in the White House. Said one nuclear industry veteran, privately and ironically, “The Obama administration is probably the best thing the nuclear industry has seen since Richard Nixon.”

Peter Lyon, acting DOE nuclear power chief (and an aide to former New Mexico Republican Senator Pete Domenici), described the administration’s proposed Fiscal Year 2012 budget, unveiled just the week before the nuclear industry assembled in Maryland, as “very, very strong.” A year ago, Energy Secretary Steven Chu wrote in the Wall Street Journal, “If we are serious about cutting carbon pollution then nuclear power must be part of the solution.” The Obama administration says it is very serious about carbon.

Feds Show Support

The White House appears to be ready to put real money behind its rhetoric. For the second year in a row, the administration says it will try to expand the nuclear loan guarantee pool by $36 billion, to a total of $54.5 billion. By most industry estimates, that ought to be enough to finance six to eight new reactors, Lyon said. The White House also is asking Congress for $67 million to finance a competition among developers of small, modular reactors. The goal is to pick two light-water designs that would move forward into the commercial market.

On top of that, the administration is proposing substantial funding for a range of existing nuclear power research, development, and deployment activities: next-generation reactors, spent fuel disposal, and research on getting uranium from seawater. Overall, the administration’s proposed nuclear energy budget is $852 million, down insignificantly from the 2011 proposal for $858 million.

Industry and government veteran Bill Magwood, now a member of the NRC, told the meeting that attitudes in the immediate post-2005 period were unrealistic, but they have evolved. “Some years, we were very upbeat,” he said. “Some years we have been very down.” He noted that, back in the mid-1990s, there just wasn’t much discussion about a future for nuclear energy. But the price of natural gas spiked, ending the 1990s “dash-to-gas,” the worldwide climate became an issue, and interest in nuclear power rebounded.

Describing the immediate post-2005 period, Magwood borrowed from former Federal Reserve Chairman Alan Greenspan, characterizing the time as one of “irrational exuberance.” Now—after hydraulic fracking has moved shale gas onto the energy stage, the Congress has made it clear there will not be a government price on the head of carbon dioxide, and a prolonged recession has taken the wind out of electricity demand and reduced the need for new baseload capacity—the industry has entered a period of what Magwood describes as “cool, rational analysis.”

Many Approvals Remain

Four years ago, the NRC reported that it had “expressions of interest” from 16 companies for 32 new nuclear units that would be reviewed under the agency’s new combined construction and operating license (COL) process. Today, according to Magwood, the agency has merely a dozen active applications in hand (see sidebar), representing 20 units. These, unlike the flood of four years ago, represent “serious efforts. They are not for show.” Magwood’s clear implication was that a lot of the early applications were atomic window dressing.

The NRC’s highly touted new licensing process—designed to streamline regulators’ review—compresses the traditional review under Title 50 of the U.S. Code of Federal Regulations, which provides for one license to build the plant and another license to operate it once built, with a provision in Title 52 of the code. The new title allows the NRC to issue a “one-stop” license, combining construction and operation reviews. That makes taking a plant critical nearly automatic once it is built. So far, the new COL remains untried in its entirety.

The day the Platts nuclear conference opened, the NRC announced final plans for how it will conduct mandatory hearings under the COL process. While the law provides for hearings on contested licenses, the NRC decided some time ago that it will also hold separate hearings on all license applications, whether contested or not. In mid-February, the NRC said it will begin the mandatory hearings after its staff issues a final “Safety Evaluation Report and Environmental Impact Statement” for a COL application.

The NRC in a press release says it “intends to issue a decision on the uncontested issues within four months of the issuance of those reports, unless the reactor design referenced in the application is the subject of an ongoing design certification rulemaking. In this case, the commission would issue its hearing decision if and when the commission affirms the related design certification rule.”

Tennessee Valley Authority (TVA), which did so much to light the rocket under the first nuclear lift-off, will be a leader in the second expedition, TVA nuclear chief Jack Bailey made clear. TVA plans to resume construction on mothballed units at its Watts Bar plant in Tennessee (Figure 2) and at the Bellefonte site in Alabama. TVA held onto the construction license for Watts Bar, so resuming that project will be largely roadblock-free. The agency must apply for a new license for the Bellefonte project, because, Bailey explained, TVA relinquished the license when it stopped work at Bellefonte. Bellefonte was designed to use a Babcock & Wilcox pressurized water reactor, of the same basic design as the doomed Three Mile Island plant. TVA wants to replace that reactor with an advanced Westinghouse AP1000 unit.

2. Renovating Watts Bar 2.  In August 2007, Tennessee Valley Authority (TVA) began the $2.5 billion project to complete Unit 2 of Watts Bar Nuclear Plant by 2013 in order to add 1,180 MW to the TVA grid. Unit 1 was the last nuclear plant to enter commercial service in the U.S., in 1996. Construction on Unit 2 originally began in 1973 but was suspended in 1988. Courtesy: TVA

TVA can more easily get into new (or resurrected) nuclear projects than other utilities for several reasons. The first is size. The power agency, which generates and transmits power (as well as providing for flood control and economic development in the region), spans seven southeastern states and supplies 9 million consumers through public power distribution utilities, has annual revenues exceeding $10 billion, and has no shareholders with an economic claim on the proceeds.

The second factor giving TVA a boost in building nukes is structure. TVA is a federal government agency, although it uses no tax revenues. Because of its parentage, TVA has a perfect credit rating, allowing it to borrow at lower interest rates than for-profit businesses or even other public power utilities.

Size and structure also may be the determining characteristics of winners and losers in the reborn U.S. power industry, according to James Asselstine, a Barclays Capital investment banker and former NRC commissioner (1982–1987).

The Cost of New Builds Is Skyrocketing

Building a new nuclear unit, Asselstine noted, takes a lot of money, probably in the range of $7 billion to $9 billion per unit. That’s quite literally a bet-the-company proposition for even the country’s largest electric generators. It’s a migraine-inducing prospect for some of the smaller players. NRG Energy, Asselstine noted, which is backing the proposed (and faltering) South Texas Project expansion, has a market capitalization of $5 billion. So does South Carolina’s SCANA Corp., which has said it wants to build two new Westinghouse AP1000 units at its V.C. Summer plant and share it with the Santee Cooper state-owned public power agency.

The prospectively largest electric company in the U.S., the combined Duke-Progress enterprise (assuming the merger is approved), will have a market capitalization of $37 billion, meaning that even for it, a single new nuclear unit remains a mighty big bite. Progress CEO Bill Johnson confirmed at the White Flint meeting that his company is interested in acquiring Santee Cooper’s 45% of the Summer expansion.

By contrast, Asselstine noted, Exxon-Mobil, which routinely commits $10 billion to $20 billion to multi-year construction projects, has a market cap of $416 billion. “It’s much easier to finance $10 to $20 billion if your market capitalization is over $400 billion,” he said dryly. The size issue, Asselstine said, “is one of the imperatives driving consolidation in the electric industry.”

Structure is also important for new projects, Asselstine added. The route for financing new merchant nuclear plants, such as the South Texas Project and Constellation’s Calvert Cliffs stumbling project, is far more difficult than lining up the money for a plant to be built and operated by a state-regulated monopoly utility, such as Southern Co., which is well on its way with the Vogtle project.

Federal loan guarantees, which Asselstine says were the most important nuclear component in the 2005 energy law, don’t make that much difference for projects such as Vogtle. The U.S. electricity market is half-regulated under historic practices and half-regulated under competitive markets that were restructured in the 1990s. Southern Co. still lives in the state-regulated monopoly market. It will be able to recover construction expenses and a return on investment while Vogtle is being built and will have a virtually guaranteed return on investment once that plant is in the rate base. A Southern Co. executive last year told the ELECTRIC POWER Conference in Baltimore that his company would go forward with the two-unit project even if it did not get a DOE loan guarantee. Asselstine told the Platts meeting that, for these sorts of projects, the federal loan guarantee “is useful, but not necessary.”

For merchant companies, on the other hand, the loan guarantee is essential. Asselstine noted that lenders are unlikely to put up the billions needed without solid assurance that they will get their money back. Merchant nukes, Asselstine said, represent “high single-asset risks that preclude traditional nonrecourse project financing.” So it comes as no surprise that the merchant projects are having the most trouble getting financial traction and need the security blankets that loan guarantees provide.

The bursting of nuclear’s nascent post-2005 bubble may turn into a positive development. Going forward with a smaller number of stronger projects—Asselstine predicts four to eight new units in service in the 2014–2020 time frame—means that the industry can work deliberately, “focus carefully,” respond to developing challenges, and get it right from the beginning, something that largely eluded the industry during its first blooming. “It is critical that the very first new plants succeed,” he said.

Small Nuclear Is Big Business

While many in the industry consider the COL essential for a rebirth of nuclear power in the U.S., the original two-step process remains on the books. TVA intends to use that original process in pursuing a license for a small, modular reactor to be built on the old Clinch River Breeder Reactor site near Oak Ridge, Tenn. TVA is looking seriously at putting a Babcock & Wilcox 125-MW mPower light-water reactor on the site to supply the federal agency’s largest single direct-service customer, the USEC uranium enrichment plant. The small modular reactor project would displace coal-fired power from the agency’s 10-unit Shawnee generating station at Paducah, Ky., which was built between 1951 and 1957.

TVA’s Bailey told the Platts meeting that the elderly two-step process provides more flexibility for a first-of-a-kind technology such as mPower, allowing the builder “to make changes during the construction.” Under the COL, the builder is locked into the approved final design in the license.

Lessons Learned

Nobody was more enthusiastic about nuclear power in the 1970s than TVA, which ended up scrubbing twice as many nuclear projects as it was able to bring to commercial operation. TVA had multiple projects under construction simultaneously, all using different reactor technologies, and was using multiple vendors and contractors.

Bailey told the February meeting that the giant power agency has no plans to repeat that unpleasant experience. “We are going to be careful to do it one at a time,” he said. “We will have only one project under construction at any one time.” TVA in the late 1970s and 1980s learned the lessons of irrational exuberance, and Bailey said the utility does not wish to repeat them.

TVA and the rest of the nuclear players seem to have come to their senses and realized that, while not as exciting as manic exuberance, calm rationality gets the job done.

Kennedy Maize is a POWER contributing editor and executive editor of MANAGING POWER.