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Issues In Focus. Nuclear Power Plant Construction Costs With the improved performance of the 104 operating U.S. nuclear power plants, increases in fossil fuel prices, and concerns about global warming, interest in building new nuclear power plants has increased. Because no nuclear plants have been ordered in the United States in nearly three decades, the costs of a new plant are uncertain. To assess the economics of building new nuclear power plants, EIA conducted a series of workshops and seminars focusing on key factors that affect the economics of nuclear power—primarily, the cost of building power plants and the financial risks of constructing and operating them. History of Nuclear Power Construction Costs As was typically the case with fossil-fuel-fired power plants, many of the first-generation U.S. reactors were constructed on a fixed price, turnkey basis. Under this type of contractual arrangement, the vendor assumed all the risk associated with cost overruns and scheduling delays. In total, about 12 units were ordered on a turnkey basis in the early to mid-1960s. Although the costs of the reactors were never made public, one study estimated that the vendors lost more than $1 billion [71]. As a result, they eventually stopped offering turnkey contracts to build nuclear power plants and instead went to cost-based contracts. Factors affecting the costs of non-turnkey U.S. reactors have been the subject of a number of analyses. An EIA analysis found that realized real overnight costs grew from about $1,500 per kilowatt for units beginning construction in the 1960s to about $4,000 per kilowatt for units beginning construction in the early to mid-1970s (all costs in 2002 dollars, except where noted). Lead times also increased, from about 8 years to more than 10 years. Much of the growth in overnight costs and lead times was unforeseen by those preparing the estimates, and overruns in real overnight costs and lead times ranged from 70 to 250 percent [72]. Because of severe data limitations and the inherent difficulty in measuring regulatory impacts, there is only qualitative agreement that the following factors caused the growth in nuclear plant costs and lead times [73]:
Historically, the deployment of nuclear plants abroad lagged behind that in the United States. Thus, there was a tendency for utilities in Europe and Asia to learn from the U.S. experience. Now, just the opposite is occurring—the next generation of U.S. nuclear power plants will benefit from foreign learning. Accordingly, EIA’s present cost estimates used realized costs of nuclear power plants in Asia as a starting point. Building New Nuclear Plants in the United States One of the major uncertainties in building new nuclear power plants involves the regulatory and licensing process. Regulatory actions were one of the factors that contributed to the cost growth in the 1970s and 1980s, and as a result there were significant efforts to reform the process. In the late 1980s, the U.S. Nuclear Regulatory Commission (NRC) modified backfit regulations to make it more difficult to order changes in a plant’s design during construction. Additionally, with the passage of the Energy Policy Act of 1992, the licensing process was also changed substantially. Before 1992, a utility needed one license to begin construction and another to begin commercial operation. Public hearings were a prerequisite for both licenses, and in some cases they proved to be very contentious. Now, as long as a firm follows all the agreed-upon procedures, tests, and inspections, separate hearings are not required. The 1992 legislation also allowed for the pre-approval of various designs; as a result, many technical engineering issues can be settled before the licensing process begins. Beginning in the mid-1990s, the nuclear industry began to design new Generation III (or III+) reactors. In general, the new designs represent incremental improvements over the current generation of light-water reactors. They are simpler and include more “passive” safety features. As discussed below, these design changes have cost implications. The vendors of two Generation III reactors—the Advanced Boiling Water Reactor (ABWR) and an Advanced Pressurized Water Reactor (the AP1000)— have provided estimates of construction costs. GE’s estimate for the ABWR ranges from $1,400 to $1,600 per kilowatt (2000 dollars) for a large, single-unit plant (1,350 megawatts or more). British Nuclear Fuels Limited (BNFL), the manufacture of the AP1000, has estimated that construction costs for the first two-unit 1,100-megawatt reactors will range from $1,210 to $1,365 per kilowatt (2000 dollars). GE’s estimate assumes that the government would pay for 50 percent of the first-of-a-kind engineering costs, and BNFL’s estimate assumes that the government (or someone other than the purchaser of the plant) would pay for all the first-of-a-kind costs. BNFL also assumes that, because of learning, a third two-unit plant could be built for about $1,040 per kilowatt (2000 dollars) [74]. A state-owned Canadian firm, Atomic Energy Canada Limited (AECL), has also stated its intention to market an advanced CANDU reactor, the ACR-700, in the United States. The ACR-700, a design that uses heavy water to moderate the reaction, is substantially different from the AP1000 and ABWR [75]. One major advantage of CANDU reactors, which have been built worldwide [76], is the ability to refuel the unit while it is operating. Light-water reactors must be taken out of service before they can be refueled. On the other hand, the use of heavy water raises nuclear proliferation issues. The total cost of building “third of a kind” twin-unit plants has been estimated by AECL at about $1,100 to $1,200 per kilowatt. All the above estimates are much lower than the capital costs that have been realized in the past for nuclear power plants built in the United States and abroad [77]. As noted above, the average construction cost of U.S. units that entered commercial operation in the 1980s was about $4,000 per kilowatt. On average, light-water and CANDU reactors have been built in the Far East and elsewhere abroad at costs that are in the low $2,000s per kilowatt. The AP1000 has never been built anywhere in the world. If the vendors are able to achieve their projected costs, their plants are likely to be competitive with other generating options. The key question is whether cost reductions of the magnitude projected by the vendors are achievable. There is reason to believe that new reactors will be less costly to build than those currently in operation in the United States. Over the past 30 years, there have been technological advances in construction techniques that would reduce costs. In addition, the simplified, standardized, and pre-approved designs clearly result in cost savings. The newer plants have fewer components and therefore would be less costly. At least in the United States, only a few previously built plants were based on standardized designs, and in most cases construction began before the unit was totally designed. The construction of customized units, with the design work being done during the plant’s construction, is clearly expensive. Because the designs of advanced reactors are (or will be) pre-approved by the NRC, much of the design work will be done before their construction begins, and this will lower costs. Regulatory changes will also lower regulatory costs and risk. Although it is reasonable to expect lower construction costs for the new reactors, EIA and other organizations have questioned the size of the cost reductions [78]. This is particularly true of the vendors’ estimates relative to recently realized costs in Asia. All the cost estimates from nuclear vendors assume savings from building large multi-unit plants. The estimates for the AP1000 and CANDU reactors assume two unit sites, and those for the ABWR deal with a 1,350- to 1,500-megawatt reactor. As discussed below, the size of these projects has financial implications that cannot be overlooked. Moreover, there is some evidence that cost overruns for earlier U.S. reactors resulted from misestimation of the savings from building large or multi-unit plants. There are four major parties (and numerous secondary ones) involved in the construction of a nuclear power plant: a firm that manages the construction of the plant, a firm that supplies engineering and architectural support, a firm that supplies the reactor or Nuclear Steam Supply System, and the firm that purchases the unit. All incur costs, and it is important that all their costs be included in the estimate. It is possible that some reported estimates might deal only with the costs to two or three of the parties; in such cases, the estimates would not be inclusive. Results of EIA-Sponsored Workshops and Seminars and Derivation of EIA Estimates In addition to sponsoring several workshops and seminars on the subject of nuclear construction costs, EIA also commissioned a series of reviews of the vendor estimates. All the reviewers generally found that the estimates included the costs to the four parties involved with the construction of a nuclear power plant, but they also found that the estimates were not sufficiently detailed to permit verification of their accuracy. Indeed, the only way to verify the estimates would be to reproduce them—an effort that is prohibitively expensive. EIA’s reviewers were forced to use their subjective judgment, and there were differing opinions about the estimates. The reviewers and workshop participants from the nuclear industry think that the cost reductions are achievable, making arguments similar to the ones presented above. One reviewer who is an outside observer of the industry, one workshop participant who is a financial analyst, and some outside researchers were more skeptical. For example, in a recent study from the Massachusetts Institute of Technology (MIT), researchers used $2,000 per kilowatt as a “base case” and employed a 25-percent cost reduction as “unproven but plausible.” The procedure used to derive nuclear construction cost estimates for AEO2004 is as follows. For non-nuclear technologies, EIA uses cost estimates consistent with realized outcomes for the construction of new generating capacity in the United States. However, because no reactors have been built recently in the United States, EIA’s cost estimates are based on foreign cost data. There are two marketable Generation III light-water reactors currently in operation, and another four are under construction in Asia [79]. Thus, the starting point for an estimate of building the “next” new U.S. advanced nuclear power plant was the realized cost of the two operating light-water nuclear units in Asia. In AEO2004, $2,083 per kilowatt (inclusive of all contingencies) is used as the realized cost for these two reactors [80]. The four units that are under construction in Asia will be completed over the next 5 years. The first new U.S. plant could not become operational until 2012 at the earliest. Thus, the construction of the first U.S. plant will benefit from experience gained in the construction of the four units in Asia. For all advanced technologies that are in the early stages of commercialization, EIA assumes that, because of learning, U.S. capital costs will fall by 5 percent for each of the first three doublings of newly built capacity. The same learning factor is applied to the costs of the four advanced light-water reactors under construction in Asia. Thus, the cost reduction from learning in building four additional reactors (roughly 1.5 doublings of capacity) is about 8.5 percent. As a result, the assumed realized cost, inclusive of contingencies, of the sixth advanced light-water reactor in Asia when it is completed is $1,928. This is the estimate used in the projections [81]. As new U.S. nuclear plants are built, because of learning, EIA assumes that costs will continue to fall. For example, if 10 new units were constructed in the United States, costs would continue to fall to about $1,719 per kilowatt (inclusive of all contingencies) as a result of learning. Even if no nuclear plants were built in the United States, EIA assumes that costs would fall to about $1,752 per kilowatt by 2019. As shown in Figure 36, the AEO2004 cost estimates are below realized costs for older U.S. plants and plants recently built abroad. The vendors’ estimates of construction lead times are generally about 36 to 48 months from the date of the first concrete pour to the date of initial system testing (or fuel loading). This definition of lead time is often used, because most of the funds are expended over that period. To compute interest costs, EIA uses a slightly different definition of lead times—namely, the time between the commencement of the licensing process to the date of commercial operation. The licensing process will take 12 to 24 months, and there will be an additional 6 months between fuel loading and commercial operation. Thus, EIA assumes a 6-year lead time. In one of EIA’s workshops, the issue of the time and cost for preparing a license application and the expenses incurred in obtaining the license were discussed. Some within the industry think an additional 4 years would be needed to prepare the application and license the first few plants, resulting in a 10-year total lead time. A small cost premium (up to 5 percent) is added by EIA to the cost of just the first four units built. This is called the “technological optimism factor.” Because this factor gradually goes to zero as new nuclear plants are constructed, there will be an additional reduction in costs over and above the learning effects. This cost reduction, in part, captures the reduction in expenses associated with the 4-year reduction in lead times as a result of improvements in the licensing process. Summary of the Projections Over the past few years, most economic analyses of nuclear power have tended to compare the cost of generating electricity from nuclear technology with the cost of producing power from a combined-cycle natural-gas-fired power plant. As long as natural gas prices remain in the range of $2 to $3 per thousand cubic feet, the cost of building and operating a new gas-fired plant will be much less than the cost of a new coal-fired plant. Therefore, the assumption has been that nuclear power would compete with combined-cycle gas plants. With natural gas prices rising, however, new coal-fired power plants and, to some extent, renewable energy are becoming competitive with new natural gas units in many parts of the United States. The AEO2004 reference case assumes that nuclear power plant construction costs will fall from $1,928 per kilowatt to $1,752 in 2019. On that basis, no new nuclear power plants would be built before 2025 in the reference case. In two advanced nuclear cases, vendor estimates for the AP1000 and ACR-700 reactors are used. In both advanced cases, the current level of nuclear capital costs is assumed to be lower than in the reference case, and cost reductions are assumed to be greater than in the reference case. Specifically, one advanced case—the vendor estimate case—is based on an average of the AP1000 and ACR-700 reactor first-of-a-kind and nth-of-a-kind costs [82]. In this case, costs would fall from $1,555 per kilowatt in 2004 to $1,149 in 2019. The second advanced nuclear case—the AP1000 case—uses just the vendor cost estimates for the AP1000. In this case, costs would fall from $1,580 per kilowatt to $1,081 in 2019. In the AP1000 case, where costs fall to about $1,081 per kilowatt in 2019, EIA projects that about 26 gigawatts of new nuclear power plant capacity would be constructed and become operational by 2025. The 26 gigawatts of new nuclear power plant capacity would displace 19 gigawatts of coal-fired capacity and 7 gigawatts of mainly fossil-fuel-fired capacity. In the average cost case, where costs fall to $1,149 per kilowatt in 2019, 12.8 gigawatts of new nuclear power capacity would be built and become operational by 2025, displacing about 9.4 gigawatts of coal-fired capacity. If the projections were extended beyond 2025, or if the cost reductions occurred more rapidly than assumed in the two advanced nuclear cases, the projected amount of new nuclear capacity would be much greater. The total assumed capital cost of a pulverized coal plant in 2005 is $1,170 per kilowatt—about 10 percent higher than the vendor’s estimate of the AP1000 costs [83]. Coal and nuclear fuel costs are 10 mills and 4 mills per kilowatthour, respectively. Historically, non-fuel operating and maintenance costs are roughly the same for the two technologies. Given a nuclear capital cost estimate of $1,081 per kilowatt, both the capital and operating costs would therefore be less for nuclear than for coal-fired power plants. If the $1,081 per kilowatt estimate could be realized, it is possible that nuclear power could eventually be used to satisfy virtually all the baseload demand in the United States in future years. The Issue of Risk Another issue that received considerable attention in the EIA workshops was the financial risk in constructing and operating any power plant. There are risks associated with the use of natural gas, coal, and nuclear power. Natural-gas-fired power plants can be built in a few years and are relatively inexpensive, and thus there is little risk in their construction; however, because natural gas prices are volatile, there are risks involved with the operation of gas-fired power plants. Indeed, a number of the workshop participants noted that nuclear power can be used to hedge fuel price risks associated with gas plants. Environmental factors aside, coal prices are relatively stable, and thus the fuel price risks associated with coal-fired power plants are small. Environmental regulations could change, however, especially with respect to global warming, with major impacts on the economics of operating coal plants. Thus, there are regulatory risks associated with the operation of coal-fired power plants. One workshop participant noted that firms have been able to finance the construction of coal-fired plants because of a perception that changes in environmental regulations will not occur for another 10 to 15 years, and by then the loans will have been repaid. There are also regulatory risks involved with the construction and operation of nuclear power plants. According to a number of workshop participants, the financial community clearly has not completely discounted the cost overruns that occurred in the 1970s and 1980s. Thus, all the participants agreed that the nuclear industry must demonstrate that a nuclear power plant can be built on time and on budget. Further, the new licensing process has yet to be tested, and there is considerable uncertainty about how it will work. In fact, all the participants agreed that some type of support from a third party (the Federal Government) would be needed before the first few plants could be built. If nuclear power plants are built in a deregulated environment, their owners—like the owners of any power plant—will be exposed to output price risk. Electricity prices might be lower than anticipated, resulting in insufficient revenues to cover all the operating costs, loan repayments, and returns to shareholders. As a result of market deregulation, electricity is now a commodity, and like any other commodity, in the short run electricity prices are extremely volatile and subject to “boom and bust” cycles. The events of the past few years suggest that if plants become operational in the “bust” part of a cycle, the result can be financial ruin. Although all units are subject to output price risk, nuclear power plants are affected differently because of their relatively high capital costs and longer lead times. That is, because of nuclear power’s relatively high capital costs, relatively more capital is “at risk.” Moreover, the uncertainty of any forecast of electricity prices increases as the length of the forecast period increases (a 6-year forecast is more uncertain than a 2-year forecast). Because of nuclear power’s relatively long lead times, electricity prices must be anticipated over a relatively long period, leading to more uncertainty. All the workshop participants outside the nuclear industry argued that stable and predictable revenues resulting from long-term, fixed-price power purchase agreements or other financial or regulatory instruments are crucial to the financing of a nuclear power plant. Long-term (10 to 20 years) firm fixed price purchased power contracts are, however, very difficult and expensive to obtain. Moreover, as a recent EIA report noted, until some structural flaws in electric power markets are corrected, the use of financial derivatives to manage electricity price risk is limited [84]. Thus, at least in the short run, it is not clear whether it will be possible to obtain a stable stream of revenues from a nuclear (or other) power plant. The advanced nuclear cases summarized above and presented in detail in the “Market Trends” section of this report assume that institutional and financial arrangements can be used to mitigate (or shift) output price risk at very little cost to decisionmakers. A fixed-price purchased power contract is one possible financial arrangement that would shift the risk to those holding the contract. Another possible institutional arrangement would be a consortium formed by a group of utilities and vendors to build nuclear power plants. In such a case, the risks would be spread among all the consortium members.
Released: January 2004 |
