Economic Consulting

GT
Total Cost (Energy + Capacity)

CT

CC L
CO A

NUCLEAR Economics of Nuclear Power

Nuclear Power International
Las Vegas – 8 Dec 2009
Capacity Factor

Edward Kee
Vice President

The nature of this panel means that I will present a few slides in a few minutes
 Disclaimer

The slides that follow do not provide a complete

record of this presentation and discussion.
The views expressed in this presentation are mine;
these views may not be the same as those held by
our clients or by my colleagues.

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 111
 Nuclear energy is valuable

ƒ Zero carbon energy

ƒ Low cost energy
ƒ High availability and reliability
ƒ Profitable for unregulated owners
ƒ Low rates for regulated utility and public
power ratepayers

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 222

Existing nuclear power plants are valuable resources

Nuclear energy from these existing units is zero-carbon and low-cost
Existing US nuclear power plants are operating well, with very high availability
Existing nuclear power plants produce:
ƒ significant profits for unregulated utility or merchant generation company owners
ƒ low rates for customers of regulated and public power utility owners
 Nuclear has low production costs
9
8
7
cents / kW h

6
5
4
3
2
1
0
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Coal Gas Nuclear
Source: NEI

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 333

Nuclear’s low and stable production costs are a key advantage

Marginal costs of nuclear energy are even lower, perhaps equal to zero
Short-run marginal costs are the costs that change due to a small change in output for a short
time period – for nuclear power plants, this is at or close to zero

If carbon costs were included in fossil power plant costs, nuclear energy would be even more
competitive

Of course, production costs for gas generation are down this year. If there is a real shale-
based gas bubble, there is a possibility of a return to the low and stable gas prices prior to
2000, but this seems unlikely.
 Nuclear plants have long operating life

Wind

CT

CCGT

Nuclear

0 20 40 60 80

Typical operating life

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 444

The long operating life of nuclear power plants is also a positive attribute.
Nuclear units will have a long period of operation, much of it after capital recovery is
completed
Cash flows more than about 25 years into the future add little to NPV using any reasonable
discount rates
However, a 25-year old nuclear plant is a valuable and profitable asset (whether for
shareholders of a non-regulated company or ratepayers of a regulated utility)
A key challenge for the nuclear industry is how to make today’s shareholders/ratepayers
happy about investing today’s dollars in new nuclear projects, when the upside is 25 years or
more into the future
This combination of high capital costs and a very long stream of benefits is one reason for a
government role; Public utility regulators may make long-term planning decisions and
governments often do so
 How do we get more nuclear energy?

ƒ Increase output of existing plants

–Improve performance
–License renewal / life extension
–Uprate

ƒ Build new nuclear power plants

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 555

The first way to get more nuclear energy is to work existing nuclear plants harder and longer

Companies that developed a superior organizational approach to running nuclear power

plants (e.g., Constellation, Dominion, Entergy, Exelon) were able to make money by
transferring this institutional knowledge to other plants they acquired
This nuclear “fixer-upper” strategy has gone well, but there are few fixer-uppers left in the US.
Is it time for industry leaders to consider an international fixer-upper strategy?
Most US nuclear units have already gotten NRC approval for a 20-year license renewal, most
other units have applications in the review process. 80 year (or longer) life is not out of the
question for existing nuclear plants
Many US units have already received approval for uprates and have implemented them, with
some units including extensive secondary plant re-works to accommodate higher electrical
output. Other units have or will apply for uprates

The second way to get more nuclear energy is to build new units - not so easy!
 Economics of new nuclear plants

ƒ Nuclear plants have high value

–Low energy cost
–Long operating life

ƒ Other factors work against new nuclear

–Long lead time
–High overnight capital cost
–High degree of regulatory oversight

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 666

We have already discussed the reasons that nuclear energy is valuable

However, other factors of a nuclear power project may not fit well into commercial project
development/project finance framework
The long lead time and high overnight capital cost mean that new nuclear projects are:
(a) very capital intensive; and
(b) invested capital is at risk for a long time before revenue is received and before payback

Also, the degree of regulatory oversight of nuclear projects and facilities (i.e., NRC) is much
higher than other commercial power plant technologies. This raises cost and risk for
developers, especially during the long development and construction phase when significant
capital has been spent but before there is any revenue or profits
 Long lead time

PV

CT

Wind

CCGT

Nuclear

0 4 8 12

Years prior to Operation

Development Construction

Source: EIA 2009 Annual Energy Outlook input assumptions for construction (lead time); development period is estimate

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 777

Long lead time brings additional costs and risks

IDC: Interest during construction (IDC) is much higher for nuclear, a combination of high
capital cost and longer development/construction period. For a nuclear plant, the IDC may be
almost as much as the overnight cost. A solution for investor-owned utilities is to get approval
to put IDC into rates as it is incurred, rather than capitalizing the IDC and putting it into rate
base at commercial operation
External changes: The need for new capacity, the market price outlook or other factors may
change during the 11 years (or more) between project inception and commercial operation.
The shorter lead time for other technologies reduces this lead time and lowers this risk; an
investor/utility relying on a CT or CCGT may be able to wait longer to commit, so that
decisions can be made with additional (and better) information.
Disruptions: Once a commitment to construction is made, the longer construction period for
a nuclear plant may mean longer exposure to risk from disruptions
 High overnight capital cost
6,000

5,000

4,000
$ / kWe

3,000

2,000

1,000

NUCLEAR
Wind

IGCC

IGCC w/CCS

PV
Hydro

Wind Offshore
Biomass

Fuel Cells
Conv. Coal
CCGT w/ CCS
CT

CCGT

Geothermal

Solar Thermal
Source: EIA 2009 Annual Energy Outlook; 2008 overnight cost including contingency in 2007 $/kW; nuclear increased from $3,318 to $4,000

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 888

Nuclear is among the most capital intensive technologies, per unit of capacity output
However, nuclear life-cycle costs in $/kWh are relatively low, a result of nuclear base load
operation (high capacity factor due to very low marginal cost) and long operating life
While nuclear overnight capital cost is not as high as some options (e.g., PV and fuel cells), it
is significantly higher than CT, CCGT and conventional coal options
$4,000/kWe used in this chart is only an estimate of overnight costs
Until there is more experience with completed and operational nuclear plants, nuclear capital
costs will be less certain than the capital costs of other generation technologies with
significant completed project experience
 First Wave projects face more hurdles

ƒ First Wave projects

–Face higher risks and higher costs
–Blaze the path for Second Wave projects

ƒ New nuclear unit hurdles and issues

–NRC regulatory process
–State regulation / electricity markets
–Infrastructure and supply chain
–Schedule & capital cost risk

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 999

First Wave units will face higher costs and risks

Later projects will benefit from First Wave experience and have lower risks and costs
We now expect that the First Wave of new nuclear in the US will be only the 4 projects that
get DOE loan guarantees
The timing and number of nuclear projects in the Second Wave is highly uncertain
The reasons that a First Wave nuclear plant project is difficult include:
ƒ NRC regulatory process
ƒ State regulation / electricity markets
ƒ Infrastructure and supply chain
ƒ Schedule & capital cost risk
 EPAct of 2005

ƒ Focused on First Wave

–DOE Loan Guarantees are key benefit

ƒ First Wave will test and refine

–COL & ITAAC process
–Gen III detailed design & EPC contracts
–Financing, infrastructure and supply chain

ƒ Build industry experience and confidence

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 10
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10

EPAct of 2005 provides incentives for a limited number of First Wave projects
DOE Loan Guarantees are a key incentive, even though some see the program as moving
slowly and the important subsidy cost issue remains open
When First Wave projects are completed and placed in commercial operation, industry
confidence and experience will be higher and industry infrastructure/ supply chain will have
been established
Second Wave projects (benefiting from First Wave efforts) may not need these incentives
EPAct of 2005 benefits were defined before recent nuclear capital cost estimates
With higher nuclear capital costs and no carbon benefits, there are two large issues:
1. Will the EPAct incentives be enough for the First Wave?
2. Will the Second Wave need incentives to be developed?
 Different approaches to new nuclear

ƒ Commercial power projects

ƒ Public participation
–State cost-of-service regulation
–DOE Loan guarantees

ƒ Government projects
–Fast and clear commitment
–Government finance
–Fewer parties - lower transaction costs

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 11
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11

Commercial projects (e.g., US)

Merchant nuclear plants will have a hard time, especially those in the first wave
Public participation
State regulators may take the long view, making decisions today that benefit future ratepayers
The low-cost, long-term, high-leverage debt from the DOE Loan Guarantee program will help,
but is now only available to a few First Wave projects
Government Projects (e.g., China, UAE)
Fast and clear commitment – governments can decide quickly and make strong
commitments, unlike commercial nuclear projects that need agreement from multiple
stakeholders (investors, lenders, shareholders, regulators, etc.)
Government cost of capital - lower IDC, lower cost of capital
Lower transaction costs – A government that is builder, owner, regulator and operator can
internalize the multiple transactions (each with risk sharing, contingencies, and profits) that
are in a commercial project, to get lower transaction costs and faster schedules
 Summary

ƒ Nuclear energy is valuable

ƒ Commercial projects difficult
ƒ Limited public involvement in US
ƒ Government role may be key to fast/large
new build

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 12
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All existing nuclear plants were built with some degree of government (or public) support.
In the US, this was mostly through regulated utility investments; in other countries, nuclear
plants were typically built by government utilities

Electricity sector reform and restructuring transformed some existing nuclear assets into
unregulated market assets
Unregulated nuclear companies are doing well in the US, but there is an open question about
whether a new nuclear power plant can be developed as an unregulated power project in a
restructured electricity market environment.
If there is a role for new nuclear in a clean electricity sector, governments may be required to
act if the market fails to deliver nuclear investment.
I think that markets are a good thing, but I also see a role for government in some things, one
of which might be nuclear power.
 Contact us
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Edward Kee
Vice President
Boston Philadelphia
NERA Economic Consulting
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+1 (202) 370-7713
Denver Sao Paulo edward.kee@nera.com
Frankfurt Shanghai www.nera.com
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– the next generation
Madrid Wellington
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© Copyright 2009 National Economic Research Associates, Inc. All rights reserved.

NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 13
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My work combines economics with expertise in nuclear power, electricity markets,

restructuring, regulation, private power, and related issues.

I provide strategic advice to companies and governments on issues related to the nuclear and
electricity industries. I also provide testimony as an expert witness on nuclear and electricity
industry issues.

I invite all of you to join the Linked-In group that I started:

“Nuclear Power – the next generation”

If you are already a member of Linked-In, go to the groups directory and search for “nuclear”