2009 12 08 Nuclear Power International Ed Kee Slides & Notes

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Slides and notes on Economics of Nuclear Power, presented at the Nuclear Power International conference; contact me at edward.kee@nera.com for more information

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2009 12 08 Nuclear Power International Ed Kee Slides & Notes

  1. 1. 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
  2. 2. 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
  3. 3. Nuclear energy is valuable Zero carbon energy Low cost energy High availability and reliability Profitable for unregulated owners 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: significant profits for unregulated utility or merchant generation company owners low rates for customers of regulated and public power utility owners
  4. 4. 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.
  5. 5. 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
  6. 6. How do we get more nuclear energy? Increase output of existing plants –Improve performance –License renewal / life extension –Uprate 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!
  7. 7. Economics of new nuclear plants Nuclear plants have high value –Low energy cost –Long operating life 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
  8. 8. 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
  9. 9. High overnight capital cost 6,000 5,000 4,000 $ / kWe 3,000 2,000 1,000 0 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
  10. 10. First Wave projects face more hurdles First Wave projects –Face higher risks and higher costs –Blaze the path for Second Wave projects 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: NRC regulatory process State regulation / electricity markets Infrastructure and supply chain Schedule & capital cost risk
  11. 11. EPAct of 2005 Focused on First Wave –DOE Loan Guarantees are key benefit First Wave will test and refine –COL & ITAAC process –Gen III detailed design & EPC contracts –Financing, infrastructure and supply chain Build industry experience and confidence NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009 8 Dec 2009 10 10 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?
  12. 12. Different approaches to new nuclear Commercial power projects Public participation –State cost-of-service regulation –DOE Loan guarantees 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 11 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
  13. 13. Summary Nuclear energy is valuable Commercial projects difficult Limited public involvement in US 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 12 12 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.
  14. 14. Contact us Auckland New York City Beijing Paris Edward Kee Vice President Boston Philadelphia NERA Economic Consulting Brussels Rome Washington, DC Chicago San Francisco +1 (202) 370-7713 Denver Sao Paulo edward.kee@nera.com Frankfurt Shanghai www.nera.com Geneva Sydney Ithaca Tokyo London Toronto Los Angeles Washington, D.C. Nuclear Power – the next generation Madrid Wellington Melbourne White Plains © 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 13 13 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”

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