Post # 86: Nuclear Power – Staring The Dragon In The Mouth

Caution:  this post is extremely "U.S. - centric".  My musings below are focused strictly on the U.S. energy situation.  Things look different outside the U.S....

I am a believer in the "portfolio" approach to energy supply.  You know – spread your dependency across several supply options.  Reduce your vulnerability to problems in any one supply sector.  Some are fond of calling this the "all of the above" approach to energy supply.  And I'm strongly pro-nuclear energy.  I believe it is the only energy source in hand that has the capacity to meet our global energy challenges.  But...

According to the U.S. Energy Information Agency (EIA), based on the last 12 months of electricity generation data, the current U.S. generation mix is approximately 39% coal, 29% natural gas, 19% nuclear, 7% conventional hydro, 6% "other renewables" (primarily solar and wind).

An interesting detail buried in this data is that, despite a very successful industry-wide power uprate program that has yielded ~ 1950 MW of new generation capacity between 2007 and 2012, and expects to add another 500 MWe between 2013 and 2017, nuclear power's slice of the electrical generation portfolio in the U.S. seems destined to diminish over the coming decade.

I really, really hate to say it, but: Nuclear power is in serious trouble in the U.S. 

Why?  Three inter-related drivers:

• Natural Gas – the new "King of Enegia".  Barring the unforeseen, it appears the wonder-tech of fracking (thank you George Mitchell) is destined to deliver natural gas (in the U.S.) at  $4 to $6 /MMbtu for a long, long time.  (Of course an accident in which fracking is proven to contaminate a major groundwater aquifer, or an explosive growth in construction of U.S. LNG export terminals that allows us to economically export our gas might change that.)  Now don't get me wrong.  Cheap natural gas is a good thing.  In fact, the combination of reduced energy demand, improved energy utilization efficiency, and the on-going switch from coal to natural gas-based electricity production enabled the U.S. to achieve a remarkable feat in 2012.  According to EIA data,  U.S. carbon dioxide emissions in 2012 were almost 12% below our 2005 emissions level.  Remarkable! (See here for a penetrating analysis of this achievement.)

• Aging Nuclear Fleet – the cost of maintaining 40+ year old nuclear plants is rising and appears destined to continue to do so. The recently-announced retirements of Crystal River (~860 MWe),  Kewaunee (~ 550 MWe), and San Onofre 2 & 3 (~ 2150 MWe) are, at the risk of over-simplification, a likely harbinger of things to come.  Depending on whom one believes, as many as 10 to 12 plants additional plants are also under intense financial pressure due to the combined effect of cheap natural gas and plant maintenance costs.  Mark Cooper, at the University of Vermont, recently released a particularly interesting analysis.  He identifies ten plants he believes are unlikely to weather the financial pressures of today's "Gas is King" environment. It's a sobering picture whether or not one agrees with every element of Cooper's analysis.

• High Capital Cost of Nuclear Plant Construction – Five new nuclear plants are "under construction" in the U.S.: Watts Bar 2 (@ $4.5B), Vogtle 3 & 4 (currently estimated to be ~ $14B to $15B by Georgia Power), and Summer 2 & 3 ($10B+).  Given the current market capitalization of the U.S. electrical generating utility industry, this is simply too expensive for all but a few utilities to seriously consider.  (Only five U.S. utilities have current market values in excess of $25B : Duke, Southern, Dominion, Excelon and NextEra Energy.)  A choice in plant sizes would help (a la Small Modular Reactors). Regulated markets help by reducing financing risk and bolstering investor confidence.  But with the capital cost of combined cycle gas turbine plants hovering around $1000 / kWe (see EIA Report here), and natural gas at anything approach $4-$5/MMBtu, nuclear isn't going anywhere fast at a buy-in cost of ~ $6,000+/kWe).  And everyone is watching to see if these new plants can actually be delivered at costs close to their current projected levels.

Possible game changers for nuclear?

I can think of a few:

• As previously mentioned, should there be a case in which fracking is shown to pollute a ground water aquifer, a change in regulatory regime would almost certainly lead to a higher cost of natural gas.

• Another major accident at a commercial nuclear power plant.  Nail in coffin...  Game over.

• A major expansion in domestic LNG export terminals and the associated LNG supply infrastructure would open international markets for our natural gas and would almost certainly lead to an increase in domestic natural gas prices (presuming production levels did not increase in a manner to off-set the international demand).

• The promise of Small Modular Reactors to be more affordable from the capital cost standpoint could prove to be true.  (I'm not sure how this happens if no one is ordering them.)

• New nuclear reactor technology might dramatically reduce the capital and operating cost of nuclear power plants (I'm not sure how this happens when, in real terms, there's almost no significant investment in game-changing nuclear power technology.)

• Regulated electricity markets could expand in the U.S. – lowering investor risk and making large electricity generating capital projects more attractive from the investor standpoint (what are the odds?)

• A radically new, more attractive investment model could be developed, in which more investors come together to finance a nuclear power plant and share the risks – similar to the petroleum platform financing model long used in the oil industry.  Sounds like a "White Knight" scenario...

• Watts Bar 2 and the new Vogtle and Summer plants could come in on schedule and cost.   This would bolster industry and investor confidence.  But I'm not sure that's a game changer.

• Nuclear power could be "socialized" in much the same way other "civil infrastructure" (such as the interstate highway system) has been.  (I don't think so...)

It would be fascinating to apply a supercomputer and some game theory analysis to evaluate various scenario combinations.  Barring that, and based strictly on the computer between my ears, I'm having trouble coming out of this analysis with a picture that bodes well for nuclear power in the U.S. over the next couple of decades.

Sometimes you just have to stare the fiery dragon in the mouth.  Yes, you will probably be burned.  But you'll have a much better understanding of the challenges you face...  Now where did I put those flame-proof goggles?

Just thinking...