nuclear-news

Cost of building nuclear plants, and the risk of time and cost overruns

 the issue of shifting the risk from the banks back to convincing consumers that they must bear the risk…. 

 the Vogtle project for two AP1000 reactors supplied by Toshiba/Westinghouse, is in a state (Georgia) where the regulator is already allowing cost recovery, even before the start of serious construction…. It is unlikely there will be many more states with regulators willing and able to commit consumers to repay all the costs, especially if things go wrong at these sites

Prospects for Nuclear Power in 2012, The Energy Report, 5 April 12 “…..Gen III+ Claims The nuclear industry would probably like to forget the claims it made for Generation III+ designs. In short, Gen III+ reactors would achieve the dream combination of being both safer and simpler, making them cheaper and easier to build. The expected overnight (excluding finance charges) construction cost was forecast to be no more than $1,000/kilowatt hour (KWh), so that a typical 1,500-megawatt (MW) nuclear power plant would cost $1.5 billion (B). This was much less than the few plants completed in the 1990s and, not by coincidence, a figure that meant power from new nuclear reactors would be competitive with power from gas-fired plants.

However, the $1,000/KWh promise quickly began to unravel, when the first order for a Gen III+ design, Olkiluoto in Finland, was priced in 2004 at more than double that level. Construction of the European Pressurized Reactor (EPR) supplied by French company Areva, and its only successor so far in the West, Flamanville in France, has descended into farce. Both plants are now five years over their expected construction time and the latest cost estimates are about double the level forecast at construction start. Most recent serious cost estimates and bids in the past few years for Gen III+ designs have been of the order of $6,000/KWh.

However, finance is only partly about build cost. The main issue is risk and comes from the poor record of nuclear plants being built to time and cost, a reputation only worsened by Olkiluoto and Flamanville. The banks have signaled that they are unwilling to bear this risk, leaving three sets of interests that might be able to take it on: the utilities, the vendor or the consumer, in some form, via the state.

In the past, nuclear power plants have been built with the assumption that consumers would bear the risk because electricity tariffs would recover whatever costs were incurred. When U.S. regulators became unwilling to pass on all these costs in the late 1970s, under pressure from the financial community, ordering there came to an abrupt halt and many plants already ordered and under construction were abandoned. A decade later, as competitive electricity markets began to replace monopolies in Western Europe, nuclear mainly ceased to be a financeable option there too. Although Finland is part of a competitive electricity market, Olkiluoto was fully insulated from it by PPAs lasting the lifetime of the plant, priced at whatever costs were incurred. Similarly, while France is theoretically an open electricity market, EDF, the builder of Flamanville, remains a de facto monopoly supplier.

The attempted U.S. revival dating back to 2002 was based on shifting the risk from the banks to taxpayers by granting loan guarantees for nuclear projects. Even in today’s economic situation, sovereign debt is good enough to convince most banks to lend, allowing borrowing at not much more than base rate. However, there are other problems with loan guarantees in addition to the likely reluctance of vendor countries to add to their debts.

First, according to international agreements, there should be a premium on the loan cost, either a fee or a higher interest rate that reflects this risk. If the size of this premium accurately reflects the risk, logically, the cost of this premium should be the same as if the private sector was taking the risk. So if loan guarantees are economically priced, they may offer no financial advantage. Second, if the project does go wrong and costs escalate, the utility will have to go to the market to borrow more money to support a failing project, a situation unlikely to impress shareholders. The possibility that the plant vendor will shoulder the risk no longer exists following Olkiluoto.

When the project started to go badly wrong, Areva quickly refused to honor its “turnkey” contract and the issue of who will pay the extra billions of euro costs will be settled in a court of arbitration. No vendor is now likely to offer a turnkey contract and, even if they did, banks are unlikely to place any value on such a contract.

This brings the issue of shifting the risk from the banks back to convincing consumers that they must bear the risk. The most likely project in the U.S. to go ahead, the Vogtle project for two AP1000 reactors supplied by Toshiba/Westinghouse, is in a state (Georgia) where the regulator is already allowing cost recovery, even before the start of serious construction. The other project with a reasonable chance of success, the Summer project, also for two AP1000s, is also in a state (South Carolina) with a compliant regulator. It is unlikely there will be many more states with regulators willing and able to commit consumers to repay all the costs, especially if things go wrong at these sites. The two U.S. projects that were in states with competitive electricity markets were quickly abandoned.

In the UK, despite the political rhetoric that a new nuclear program would receive no public subsidies, what is now likely to be on offer are feed-in-tariffs and long-term contracts for differences (CfDs). These effectively ensure that all power from nuclear plants is guaranteed to be sold at a predictable price set outside the market.

EDF is the most likely developer in the UK. Whether it will go ahead with an EPR in the UK is likely to depend on whether the design can survive the problems at Olkiluoto and Flamanville and on how fully the CfDs are guaranteed to cover costs. Since the terms of these contracts will be regarded as commercially sensitive, the public will never know what it has signed up to. But, if construction goes ahead, it can be assumed strong cost-recovery guarantees are in place. How the European Commission will view such contracts, which are blatantly unfair state aid and therefore presumably illegal, remains to be seen.

April 5, 2012 - Posted by Christina Macpherson | business and costs, Reference, UK, USA