The Nuclear Resurgence and Reasonable Expectations

Over the past few days we've seen a number of announcements that have given some folks pause over the near-term prospects for a resurgence in the American nuclear energy industry. In particular, we've seen both SCANA in South Carolina and a group in Idaho headed by Warren Buffet pull away from plans to build reactors.

For some insight into why these decisions were made, I asked NEI's Vice President of Policy Development, Richard J. Myers, to weigh in with his thoughts:

We’ve seen a couple of announcements over the last few days that various companies are adjusting their plans for new nuclear generating capacity. Mid-American Energy announced that it will not pursue development of a new nuclear plant in Idaho – partly due to concerns about cost, partly because of difficulties in coming to terms with suppliers over risk-sharing. South Carolina Electric & Gas and Santee Cooper also announced that they would defer their application for a construction/operating license for a new reactor at Summer. Again, costs were cited as a factor in the companies’ decision to defer their license application.

No-one should be surprised.

These are tough times in the electric power business. The power industry must invest approximately $1 trillion by 2020 to upgrade and expand our electricity infrastructure – new power plants, efficiency programs, transmission and distribution, environmental control technology – at a time when input costs are increasing dramatically.

A recent assessment by the Brattle Group, a well-regarded consulting firm, shows that between 2004 and January 2007, the cost of steam generation plants, transmission projects and distribution equipment rose by 25-35 percent, compared to an 8 percent increase in the GDP deflator. The cost of gas turbines: Up by 17 percent in 2006 alone. Prices for wind turbines: Up by more than $400/kWe between 2002 and 2006. Prices for iron ore up by 60 percent between 2003 and 2006, and for steel scrap up by 150 percent. Aluminum prices doubled between 2003 and 2006, and copper prices almost quadrupled. Much of this is driven by double-digit economic growth in China and India.

These cost increases hit all new power plants – nuclear, coal-fired, gas-fired and renewables. Small wonder that companies are holding back, waiting to see if input costs moderate, before making billion-dollar investment decisions.

Here at the Nuclear Energy Institute, we’ve always tried to create reasoned expectations about new nuclear plant construction. We believe the renaissance of nuclear power in the United States will unfold over time, relatively slowly at first, particularly given the inputs to the project development process (not the least of which is limited availability of high-quality construction management expertise). We believe that we’ll see 4-8 new plants in the first wave – in commercial operation by 2015-2016. We also know the rate of construction depends on a range of factors (most beyond our control), including electricity market conditions, the capital costs of nuclear and other baseload technologies, commodity costs, environmental compliance costs for fossil-fueled generating capacity, natural gas prices, customer growth, and availability of federal and state support for financing and investment recovery.

If those first 4-8 plants are completed on schedule, within budget estimates, we believe a second wave would be under construction as the first wave reaches commercial operation. The confidence gained by completing the first projects on time and within budget estimates will support the decision-making process for the follow-on projects, and provide incentive for companies to invest in the expansion of the U.S. nuclear component manufacturing sector.

We must also recognize that these are large $5-7 billion projects, that such projects are inevitably subject to schedule delays, that we fully expect project ownership and project structures to change as companies get closer to build decisions, that we may well see new combinations of companies lining up behind certain projects, and that, yes, we may see some decisions not to move forward at this time.

We should also recognize that project cancellations and deferrals are not a uniquely nuclear phenomenon: 28,500 megawatts of new coal-fired capacity was announced in 2006 and 2007; 22,300 megawatts was cancelled.

And finally, decisions to delay or defer new nuclear projects takes nothing away from the inescapable fact that the United States needs more nuclear generating capacity, as part of a diversified electricity supply and demand management portfolio, to help meet the nation’s economic and environmental goals.

Thanks to Richard for sharing his insight with us.