THE TOO, TOO COSTLY CASE OF NUCLEAR POWER

Report: If Congress Ignores Wall Street's Warnings on New Nuclear Reactors, New Industry 'Meltdown' Will Leave Taxpayers and Ratepayers at Grave Risk; Market Refusal to Finance New Reactors Reflects Unacceptable Financial Risks That Should Not be Ignored by Lawmakers; Taxpayers and Ratepayers Beware:
Loan Guarantees and Other Subsidies Will Not Turn 'Uneconomic' Reactors Into
Sound Investments
November 5, 2009 (PRNewswire via Reuters)
and
Mark Cooper, Senior Fellow for Economic Analysis, Releases New Report
November 2009 (Vermont Law School Environmental Law Center Institute for Energy and the Environment)

SUMMARY
Nuclear power is just plain bad business.

In All Risk, No Reward for Taxpayers and Ratepayers: The Economics of Subsidizing the ‘Nuclear Renaissance’ with Loan Guarantees and Construction Work in Progress, Dr. Mark Cooper demonstrates clearly just how bad that business is.

With conservatives in Congress talking about using taxpayer money to facilitate 100 or more new nuclear power plants in the next 2 decades, it is crucial to heed Dr. Cooper’s advice, which is simple: Not even Wall Street is reckless enough to buy into nuclear power, so why is Congress trying to sell it to the American people?

While the slow growth of New Energy is a classic case of market failure and requires intervention, the poor economics and high risks associated with nuclear projects are a classic example of the wisdom of the market and taxpayers and ratepayers should not be forced to bear that burden.

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COMMENTARY
In The Economics of Nuclear Reactors (June 2009), Dr. Cooper’s analysis found that new nuclear reactor’s cannot be built at a price of less than 12-to-20 cents per kilowatt-hour while New Energy and Energy Efficency can be built at 6 cents per kilowatt-hour. 100 new nuclear reactors would cost from $1.9 trillion to $4.1 trillion more over the lifetimes of the plants than would building the same capacity with New Energy and Energy Efficency.

As a result, private capital has largely abandoned the nuclear industry.

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Cooper’s calculation of the cost of new nuclear power was based on an analysis of some 36+ proposed new projects. It found that the price of building has quadrupled since 2000. This repeats the seven-fold increase in the cost of nuclear power projects in the 1960s and 1970s that resulted in the abandonment or cancellation of half the planned reactors.

Intent on capturing a share of the federal impulse to drive the growth of emissions-free power generation in the face of global climate change and an anticipated huge increase in demand for domestic sources of electricity, the nuclear industry and its political allies seem intent on bypassing the market’s wisdom.

Direct subsidies sought from taxpayers and ratepayers by the nuclear industy, potentially amounting to hundreds of billions of dollars:
1-A major increase in loan guarantees and new rules allotting funds for New Energy to nuclear power;
2-Elimination of taxpayer protections against loan defaults;
3-Major increases in tax and insurance subsidies; and
4-Construction work in progress provisions allowing for accelerated and guaranteed construction costs recovery from ratepayers.

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Even with such subsidies, according to Dr. Cooper’s calculations, nuclear would still be more expensive than New Energy and Energy Efficiency. Should the federal government provide such subsidies to new nuclear projects, however, it would induce utilities to buy nuclear, costing ratepayers still more in over-runs and lost opportunities.

Because of the enormous risk in financing a nuclear project that is essentially not market-worthy, the nuclear industry has devised a strategy, supported by its political allies, to shift the risk to taxpayers and ratepayers by (1) having the federal government guarantee inordinately high loans over inordinate periods of time, and (2) having ratepayers pay stipends on their utility bills to support construction in progress.

One of the most severe blows yet dealt to the nuclear industry, and one of the clearest indicators of how hardnosed Wall Street investors regard it, were the ratings given nuclear projects pursuing financing by Moody’s and Standard & Poor’s. The venerable bond rating agencies listed more than three dozen specific risk factors in six categories (technology, policy, regulatory, execution, marketplace, financial) that make investments in nuclear projects little more than gambles.

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The judgment of investors leaves the fate of the nuclear industry in the hands of the federal government and the big utilities. The study enumerates 5 ways underwriting nuclear projects is bad for ratepayers and taxpayers:
1-If a utility invests in generation that is more expensive, it means higher bills for the ratepayer.
2-Federal subsidies induce utilities to invest in the nuclear projects with which they are familiar rather than familiarizing themselves with the less costly and less risky New Energies.
3-The over-run costs common to nuclear projects are shifted to the ratepayers.
4-The poor performance of nuclear investments results in utilities getting financial downgrades, making them less able to effectively serve their customers and making future projects more expensive due to the higher interest rates charged to lower-rated utilities.
5-The cost of money unnecessarily spent by ratepayers and of taxpayer money unnecessarily tied up in unnecessarily expensive investments reverberates through the economy in lost opportunities of literally inestimable value.

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Nothing speaks more precisely to the unaffordability of nuclear power than the pro-nuclear 2009 MIT study that concluded the only way an economic case could be made for it would be if (1) a cap&trade system or carbon tax makes greenhouse gas emissions (GhGs) very expensive, AND (2) the cost of fossil fuels gets out of control, AND (3) the price of nuclear project construction drops, AND (4) the federal regulatory process is streamlined.

As the Cooper paper and the bond rating agencies’ evaluations make clear, none of those 4 conditions is in sight.
(1) The cap&trade system working its way through Congress is designed to keep GhG prices moderate for the foreseeable future so as to bring a broad array of players into the market. A carbon tax remains politically unlikely;
(2) A drop in demand and newfound natural gas reserves and a rise in New Energy capacities has kept fossil fuel prices low to moderate;
(3) The cost of nuclear projects continues an upward trend unabated; and,
(4) The nuclear project licensing process is laborious and inefficient because plant designs are poorly conceived and site specific.

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As a result, most states refuse to subsidize nuclear reactors or allow utilities to do so with ratepayer money and special concessions.

Nevertheless, nuclear industry advocates continue to argue that subsidized financing through loan guarantees from the taxpayer and construction work in progress funding from the ratepayer will lower project financing costs and pay off in the long run. This shifting of risk, however, will inevitably end up costing taxpayers and ratepayers:
1-in higher electricity prices,
2-in incentives to utilities to make bad investments,
3-in unanticipated cost and schedule over-runs that will drive up utility bills,
4-in bad credit ratings for utilities that will force them to pay higher interest on project loans that will end up creating higher electricity prices and utility bills, and
5-in lost opportunities to use taxpayer and ratepayer monies in more economy-building ways.

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The actual cost to taxpayers and ratepayers can only be estimated. It will be the result of:
1-The number of the proposed new nuclear projects put into construction, which could be as low as 45 and could be as high as 187 and is most often mentioned by Congressional advocates as 100 or 125;
2-The cost of new projects, which keeps going up;
3-The number of projects that begin but get cancelled or abandoned, which is usually a substantial percentage of those planned;
4- At what point in the projects the cancellations and abandonments occur;
5-The options lost due to investment in nuclear projects.

Indications of a bad nuclear project investment:
1-The project is far bigger than prudent or necessary;
2-The utility taking on the project cannot find partners;
3-There is a bad report from the governing federal agency on the risk of the loan guarantee, which occurs about half the time;
4-A large risk premium is recommended by the nuclear industry consultant, often twice the normal rate of return; and
5-There are delays and downgrading of financial ratings, often before concrete is poured.

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The risk factors listed above were the ones that emerged in the last wave of nuclear enthusiasm in the 1960s and 1970s when:
1-half of the reactors ordered were cancelled or abandoned;
2-completions took twice as long as projected and cost twice the original estimate;
3-80% of utilities that took on nuclear projects were downgraded financially; and,
4-significant investor owned and publicly owned utilities were bankrupted.

A repeat of that history now would cost hundreds of billions in losses for taxpayers and trillions in excess costs for ratepayers.

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It is possible, from Dr. Cooper’s point of view, to use federal incentives and subsidies to drive nuclear research, development and demonstration (RD&D) without repeating the blunders of the past by:
1-Not using loan guarantees for deployment of mature, expensive, and risky
technologies;
2-Making loan guarantees subject to rigorous fiscal, technology and administrative oversight; and
3-Structuring loan guarantees with maximum taxpayer protections and transparency.

States utility commissions can protect themselves by:
1-Rejecting construction work in progress and similar plans that make ratepayers fund construction;
2-Fixing the costs of construction and making contractors rather than ratepayers responsible for over-runs; and
3-Imposing hard incentive/penalty mechanisms to control cost overruns.

Most importantly, nuclear energy is a mature technology and nuclear project financing should be left to private capital markets. Nuclear advocates are typically among the strongest supporters of free markets and the most vociferous critics of government interference. Let them live by their principles instead of running to U.S. taxpayers and ratepayers for "socialized" nuclear power.

Leave federal incentive programs to the New Energies which, despite a playing field tilted against them by Big Oil and Big Coal, have - by the sheer undeniability of their superiority and inevitability - clawed their way into the the game and require only the rectification of the market failures now supporting the Old Energies to take their rightful place and power the world.

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QUOTES
- From the report: “On the basis of historical and contemporary data, a recent analysis of The Economics of Nuclear Reactors concluded that nuclear reactors are uneconomic, in fact vastly more expensive than a wide range of alternatives that are currently available. Recent studies from the National Research Council7 and the California Energy Commission support that finding. The National Research Council concluded that unsubsidized power from nuclear reactors is between three and four times as costly as reducing the demand for electricity through investments in energy efficiency. The California Energy Commission identified a dozen supply-side options that produce power that is at least 40 percent lower in cost than the power from nuclear reactors…”

Two last points: (1) Accounting for all their radioactive accidents makes the economics of nuclear projects even worse. (click to enlarge)

- Moody’s, May 2008: “We remain concerned over the absence of details regarding key elements associated with the decision process to proceed with a project of this scale. Information is needed regarding the all-in construction costs and break-down of those costs; the construction timeline and schedule; the Engineering, Procurement and Construction (EPC) contractual arrangements and the allocation of fixed versus variable costs within those arrangements; the financing structure, expected sources of financing and pro-forma capitalization; and, the ultimate impact on consumer rates…”
- Moody’s, June 2009: “Given these long-term risks, a company’s financial policy becomes especiallycritical to its overall credit profile during construction. In general, we believe a company should prepare for the higher risk associated with construction by maintaining, if not strengthening, its balance sheet, and by maintaining robust levels of available liquidity capacity…”

Two last points: (2) With no disrespect for Dr. Cooper, the great and brilliant Amory Lovins has been preaching this sermon for a long time. (click to enlarge)

- From the report: “From the societal point of view, the push to subsidize dozens, if not hundreds, of reactors in the next couple of decades is not compelling. While it can be argued that a few of the challenges that nuclear reactors face can be seen as “market failures” that might justify government intervention, most of the obstacles are not market failures; they are a reflection of the market’s sound judgment about the nature of the technology and the economic conditions [for] new nuclear reactors. The rejection of new reactors by financial markets is not a case of market failure, it is an example of market success, markets properly assessing risk and acting accordingly by refusing to underwrite unacceptable risks. The existence of numerous lower cost, lower-risk options to meet the need for electricity in a low-carbon environment undercuts the claim that nuclear reactors are the solution to the externality problem of climate change.”