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Exelon’s Rowe: Low gas prices and no carbon price push back nuclear renaissance a “decade, maybe two”

By Joe Romm  

"Exelon’s Rowe: Low gas prices and no carbon price push back nuclear renaissance a “decade, maybe two”"

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And a new Maryland nuke bites the dust

Exelon Corp. Chief Executive Officer John Rowe said he expects natural-gas prices to remain low, pushing back the construction of new U.S. nuclear power plants by a “decade, maybe two.”

“We think natural gas will stay cheap for a very long time,” Rowe said in an interview today at Bloomberg’s headquarters in New York. “As long as natural gas is anywhere near current price forecasts, you can’t economically build a merchant nuclear plant.”

Absent a price on carbon dioxide emissions, gas would have to rise to $9 or $9.50 to make the reactors economically attractive, Rowe said.

nuke-costs.jpgReports of the death of the long-heralded nuclear renaissance have not been exaggerated.  The industry has helped ruin itself by failing to either standardize its product or stop costs from escalating out of control (see “Intro to nuclear power” and “Nuclear Bombshell: $26 Billion cost “” $10,800 per kilowatt! “” killed Ontario nuclear bid“).

And the pro-nuke conservative movement finished off the renaissance by killing the climate and clean energy jobs bill, which would have priced carbon and boosted all low-carbon forms of energy.

As a result, the nuclear industry — perhaps the most heavily subsidized source of power in U.S. history (see “Nuclear Pork “” Enough is Enough“) — has been staking its hopes for building even a few plants on the American public taking virtually all of the risk.  CAP’s Richard W. Caperton explains why even that isn’t working:

In a setback for the American nuclear renaissance, Maryland’s Constellation Energy announced on Friday that they would no longer be pursuing a new reactor at their Calvert Cliffs site.  The move isn’t entirely unexpected, as the economics of the project have been in question for some time.

The most interesting aspect of the announcement is that Constellation and the Department of Energy (DOE) were unable to come to terms on a critical loan guarantee.  Without the guarantee, financing the project would be prohibitively expensive.

DOE has the authority to issue loan guarantees under a program created by the Energy Policy Act of 2005.  This program is unique among government loan guarantees, though, in that it requires the borrower (Constellation) to reimburse the government for the risk that the government takes on.  This payment, known as the “credit subsidy fee,” is at the center of the disagreement between DOE and Constellation.

The credit subsidy fee is calculated by DOE and the Office of Management and Budget (OMB) using a proprietary model.  The fee is intended to cover the expected payouts on the guarantee (in the event that Constellation is unable to pay back a loan) minus any proceeds from a liquidation (such as selling a nuclear reactor to a new buyer).

I have previously estimated that this fee should be about ten percent of the total size of the guarantee for a generic nuclear reactor project.  To arrive at this conclusion, I used publicly-available estimates of both the default rate and recovery rate for a new reactor.  Both government and non-government sources indicate that a new reactor has about a 50 percent chance of defaulting on a loan.  In addition, similar sources indicate that the government will only recover half of the outstanding loan in liquidation proceedings.  (This calculation is discussed more fully in my Congressional testimony, “Taxpayer Protection and the Nuclear Loan Guarantee Program.”)

DOE and OMB told Constellation that the credit subsidy fee for the Calvert Cliffs project would be $880 million, or 11.6 percent of the total guarantee.  This fee accurately represents the risk of building a new nuclear reactor and fully covers the cost of the guarantee to the government.  By law, Constellation must pay the fee that OMB and DOE calculate in order to receive a loan guarantee.

In a letter to DOE, Constellation said that this fee would be “unreasonably burdensome and would create unacceptable risks and costs for our company.”  The purpose of the credit subsidy fee is to shift risk from the taxpayer to the borrower.  Clearly, if the risk is unacceptable for Constellation, then asking taxpayers to carry that same risk is equally unacceptable.  The unfortunate reality of this project is that several factors have combined to make it uneconomical.  Cheap natural gas, the dynamics of competitive wholesale electricity markets, the lack of a price on carbon, and cost overruns that have plagued the reactor design they planned to use all make this project a risky investment.  Exelon’s John Rowe has concluded cheap natural gas and inaction on pricing carbon will push back the construction of new merchant nuclear plants – like Constellation’s – by a “decade, maybe two.”

OMB has been under fire recently for their perceived slowness in evaluating loan guarantee applications.  Under this intense political pressure, the fact that OMB was unwilling to make accommodations to a borrower that would have shifted risk to taxpayers deserves a hearty applause.  In fact, OMB appears to have gained a much better appreciation of the financial risk involved in a new nuclear reactor.  There are reports that OMB had previously signed off on a credit subsidy fee in the range of 1 to 2 percent, so they have fended off political pressure and lobbying from loan applicants to arrive at the 11.6 percent fee for Constellation’s reactor.

At the same time, no one should cheer the fact that a project that would have created 4,000 jobs is now in extreme doubt.  (There is an outside chance that EDF, Constellation’s partner in the project, could move forward, but that seems highly unlikely.)  Hopefully Constellation uses this as an opportunity to refocus their efforts to other low-carbon solutions, such as wind, geothermal, or solar.  These technologies compare favorably with nuclear in terms of job creation, and may make more financial sense for Maryland.

In addition, OMB and DOE should continue reminding people that the loan guarantee program is bigger than just nuclear.  Constellation’s announcement overshadows DOE’s announcement of a loan guarantee for what will be the biggest wind project in the world on Friday.  While it was slow to get off the ground, the DOE loan guarantee program is starting to turn out success stories.

Richard W. Caperton is a Policy Analyst with CAP’s energy opportunity team.

As a mechanical engineer once told me, you can’t make chicken salad out of chicken sh!t.   Taxpayer dollars should go where they create the most benefit for the buck — and for the foreseeable future that certainly is not nuclear power.

‹ Energy and Global Warming News for October 12th: Largest geothermal hotspot in eastern US found in West Virginia; 20% electricity by wind in 2030?

Anatomy of a Senate climate bill death ›

22 Responses to Exelon’s Rowe: Low gas prices and no carbon price push back nuclear renaissance a “decade, maybe two”

  1. Sasparilla says:

    It’s nice to see common sense (from a financial standpoint in a highly political arena) asserting itself here, although that longterm low price of natural gas will be undercutting the other energy options (good and bad) as well.

    It will be interesting to see if natural gas prices stay unlinked to oil as it continues its slow march higher in the future. Exelon’s John Rowe seems to think its going to stay unlinked now for a long time.

  2. DavidCOG says:

    Analysis like this is almost a weekly occurrence and yet the nucular fan club remain in denial of it as much as any ACC denier is of ACC.

    Here’s a couple more telling similar stories:

    - State Lawmakers Do Not Share Congress’ Nuclear Love: Shoots 0-8 in State Legislatures During 2010. “Loan Guarantee Fever” in Congress not repeated by states. Kentucky to Arizona, industry lobbyists fail to overturn bans, pass costs on to consumers or get nuclear classified as “renewable energy”. http://www.prnewswire.com/news-releases/its-not-just-vermont–state-lawmakers-do-not-share-congress-love-for-the-nuclear-industry-which-gets-shut-out-0-8-in-state-legislatures-during-2010-93695774.html

    - Nuclear: New dawn now seems limited to the east. The renaissance of nuclear power is a much fabled beast that is often talked about but rarely seen. Industry executives and analysts suggest most of the planned new reactors are unlikely to be built on their proposed schedules, if at all. http://www.ft.com/cms/s/0/ad15fcfe-bc71-11df-a42b-00144feab49a,dwp_uuid=8992c4a2-bc70-11df-a42b-00144feab49a.html

  3. Colorado Bob says:

    Couple of years ago Lovins made a great comment about nuclear power. Comparing it to a dead man , being given electro-shock. ” It will bounce, but it won’t come back to life “.

  4. Teemu says:

    Somehow in France they managed to $800/kW with nuclear plants. Part of it is due to benefit of the scale, the other part is due to that French didn’t listen to anti-nuclear environmentalists after Three Miles and Chernobyl. Copy your nuclear regulations from France and with enough of economics of the scale from of dozens of new plants price will be considerably lower.

  5. Turboblocke says:

    I think you’re wrong about current estimates for French construction costs: http://www.vermontlaw.edu/News_and_Events/Press_Releases/VLS_Study_Widely_Misunderstood_in_US_the_French_Nuclear_Miracle_is_Plagued_by_Fast-Rising_Reactor_Costs_and_Crowding_Out_of_Renewables.htm

    “French costs increased to the range of $2,000-$3,000 in the mid-1980s and $3,000 to $5,000 in the 1990s.”

  6. It is with sad amusement I observe the anti-nuclear crowd’s implied belief that it is more or less acceptable to store teratons of greenhouse gases in the atmosphere (while waiting for wind and solar), while storing a few kilotons of nuclear waste is not an option.

    [JR: Ain't no implied belief at all. The stated belief is it the only hope for averting climate catastrophe is to invest as much money as possible as fast as possible straight up the carbon-mitigation cost curve. Best buys first, worst buys last -- and that means nuclear power has a long wait.]

  7. Anne van der Bom says:

    The reason why the future of nuclear power looks so shaky is: uncertainty. The time between the moment that the decision is made and the first kWh’s flow into the grid is easily 10 years. Nobody at this point can predict how the market will look 10 years from now and what the price for electricity will be.

    The genie is out of the bottle: PV has reached grid parity for consumers in many places, with prices expected to drop much further. You can’t stop 100′s of millions of consumers putting panels on their roofs to lower their energy bills. That’s what nuclear power has to compete against 10, 20 years from now.

    Uncertainty is what investors hate the most.

  8. JR
    Like this one?
    http://www.epa.gov/oar/caaac/coaltech/2007_05_mckinsey.pdf

    It shows nuclear as being low. Am I reading it wrong? Is there something more recent?

    [JR: That would be 2007.]

  9. Mark says:

    Regarding the size of the DOE loan fee – the key issue is that Constellation was building the plant merchant – they did not have a power buyer. The proposed fee was very high, but the reality is no bank wants to finance a merchant power plant these days and these issues are related.

    Constellation would love to have a long term contract and buyer for the power from the plant because then it could move forward and the DOE loan fee would be significantly lower.

  10. quokka says:

    @Beam Me Up Scotty

    “It shows nuclear as being low. Am I reading it wrong? Is there something more recent?”

    Try the IEA. (2010). Projected Costs of Generating Electricity – 2010 Edition

    The executive summary is available here: http://www.iea.org/Textbase/npsum/ElecCost2010SUM.pdf

    With a $30 a tonne carbon price, the IEA projects that nuclear is at least competitive in all regions and in Asia markedly cheaper than anything else. Which should come as some relief as there is very little chance that China or India will ever be powered mainly by solar or wind.

    New nuclear in China is being built at around $1.5 – $1.8 billion per GWe and in Sth Korea around $2.2 billion.

  11. James Newberry says:

    Thanks to all the whole cost economists (aka anti-nukers) for unfolding the hypocrisy of the Ponzi scheme of atomic fission through all these years. Not only is nuclear ideology economically unfeasible under “free market enterprise,” since this includes free market risk assessment (which is presently indemnified under federal law of 1957), but it is the basis of weapons systems which destabilize international security. One might say nuclear is an economic (and security) bomb.

    True nuclear energy comes from the sun, we call it solar and wind and hydro power. The rest is poison in oh so many ways. The atomic “industry” and its current promoters should be shunned. Go solar. Go peace.

  12. John Bailo says:

    Nuclear is a horrible option compared to the nascent Hydrogen Economy that is now sprouting. Relatively low tech and easy to deal with and absolutely no pollutants or residuals when created from renewables like wind and solar, Hydrogen is the all around best choice for 21st century energy needs.

  13. Nobody can make reasonable decisions if the choices are based on studies and if said studies are useless almost before they are released.
    This rings like all the arguments deniers rely on.

    The hydrogen economy has issues. The footprint is less than desirable. It is also true that we can’t manufacture anything at all without fossil fuels.

    There is no magic bullet. But while we dither, the oceans are dying.

  14. Actually, we are definitely cheering the end of Calvert Cliffs-3. Those 4,000 jobs? According to Constellation Energy testimony to the Maryland Public Service Commission, fully 1/2 of those would be very temporary–lasting less than one year. Only 360 permanent jobs would have been created.

    Calvert Cliffs-3 would have cost, according to their own estimates, more than $10 billion (they had arranged an additional $2.9 billion in financing from the French export-import bank). That works out to more than $2 million per job created, and 1/2 of those are good only for a few months.

    It would be difficult to deliberately design a less effective jobs creation program….

  15. Anne van der Bom says:

    John Bailo,

    I’ve been following the scene for quite some time, and the ‘hydrogen economy’ has been on the back burner lately. It was once much hyped, but at this point we’re heading to an electricity economy. I think the car is the key technology here. Which one will win: the electric car or the hydrogen car? Next year various affordable electric cars will come onto the market. The hydrogen car will have to wait until at least 2015, probably later. By that time the second generation of ev’s will be ready. I think the hydrogen car will never catch up.

  16. paul says:

    Excellent combination of argument and sourcing, as usual.
    I have a different take on energy(http://mitigatingapathy.blogspot.com/)
    but I take nuclear to be very bad value for money.

  17. Bill Woods says:

    It’s interesting to compare the numbers on the two projects–

    Calvert Cliffs 3:
    ~$10 billion; 1,600 MW; 90% capacity factor;
    ~12 million tonnes per year of avoided CO2 emissions

    ~$6,900 /kW(average); ~$900 /t_CO2/yr

    Shepherds Flat wind project:
    $2 billion, 845 MW, 27% capacity factor, 1,215,991 t_CO2/yr avoided

    ~$8,800 /kW(average); $1,600 /t_CO2/yr

    So what makes the latter the better buy?

  18. Crank says:

    I don’t get it. Why is ~$11k / kW (with 90%+ utilization factor) a bad deal?

    This isn’t by any stretch wildly outside the range of PV solar or wind power (when you account for the capacity factor, rather than just comparing the nameplate power output). There are many wind projects spending $2k / kW (nameplate) in regions expecting 20% capacity factor, and a planned large scale PV plant that hopes to realize $2k / kW through large scale (and hit a capacity factor of maybe 22%). The $11k/kW quoted for the Ontario plant is hardly outlandish by comparison.

    Not only that, but solar and wind today can’t deliver baseload power. So what am I missing?

    For sure, we should build as much solar and wind (and geothermal, and anything else we can think of) as fast as we can. But surely priority #1 has to be taking coal fired plants offline? How are we supposed to do that with solar or wind power?

    Build everything. Build it now. Stop looking for the silver bullet that avoids the need to make difficult choices; it isn’t there.

  19. Lewis C says:

    Crank – while silver bullets seem scarcer than hens teeth, I’d not be surprised to see major new large scale baseload non-fossil energy technologies developed IF the R&D effort is well enough funded and mandated.

    Beside the baseload potentials of solar thermal and geo-thermal, there is also the distributed-scheduled power of tidal currents hardly touched thus far, as well as the distributed long-period energy of offshore wave that is still almost virgin territory. The latter was researched for the EU Commission back in the ’80s and was shown to have potential to supply 80% of EU-15 power needs at 30% collection efficiency.

    These four options are all capable of city-scale outputs ranging from lapped 6-hr periods (tidal) through to continuous (geothermal), and would potentially be sufficient to remove the need for fossil-fuelled ‘spinning reserve’ in Europe. All are emerging or pre-emergent technologies with decades of potential design advances for capital cost reduction.

    By contrast, Nuclear is a >50-yr old technology facing massive capital cost inflation due, not least, to rising understanding of the supreme imperative of avoiding design failures. From this perspective alone it has no serious chance of attracting sufficient investment even to replace the present nuclear fleet, let alone to build additional plants to displace coal power. Too much can change during their decade-long lead time.

    Hoping this helps resolve your puzzlement,

    regards,

    Lewis

  20. Crank says:

    Lewis,
    no, it doesn’t.

    “…IF the R&D effort is well enough funded and mandated.”

    “From this perspective alone it has no serious chance of attracting sufficient investment even to replace the present nuclear fleet, let alone to build additional plants to displace coal power. ”

    Aren’t we judging by different standards here?

    The fact is, nuclear power is something we can deploy right now. Betting on some future as yet undeveloped technology that will solve our problems seems like the wrong thing to do.

    We’re out of time, and we need to choose between the options which are available to us right now.

  21. Lewis C says:

    Crank -

    no, we are not judging nuclear and non-fossil baseload energies “by different standards here.” The investors know full well that nuclear has enjoyed vast R,D&D subsidies around the world for over half a century, and that it still fails to make any coherent case for their investment.

    It is both wrong and misleading to claim that “nuclear power is something we can deploy right now.” We cannot do so, given that it takes a decade or more to achieve an operating nuclear station. And ‘we’ cannot, given that a/. we are not multi-billionaires and b/. that western governments are near-bankrupt following 2008 (and are waiting for the other shoe to drop in 2012 when we next consume the ~1.0 Mbbls/day oil-market cushion between supply and demand) so there is no prospect whatsoever of taxpayer funding of a nuclear renewal.

    By contrast, we are seeing rising investment both in geothermal (the UK starts its belated drilling program in the spring) and in plans for massive solar thermal deployments in the Saraha are proceeding apace. These are not bets on “some future as yet undeveloped technolgy” as you claim; these are current baseload options that are attracting serious commercial investment, unlike nuclear. And unlike nuclear their project lead-times are a year or two.

    Emergent technologies such as tidal and offshore wave are only now starting to attract investment, but within the ten-year lead time for a single nuclear station it is pretty obvious that they too may be very attractive technologies for the energy investor, not least due to the ongoing lack of investment in nuclear to which Exelon’s Rowe refers and thus to the further critical decline of its skills base and construction capacities.

    I gather from your distortions of where we stand that you may have an undisclosed material interest in the selection of energy technologies. I would point out that the attempt to bounce society into a nuclear renewal to control GW has failed – as Rowe observes, it faces “a 10 to 20 year” dearth of orders, during which time already preferable technologies will further advance their profiles and additional emergent technologies will gain competitive status.

    With respect, you are flogging a dead horse, and we here on CP are not buying it any more than are energy investors.

    Regards,

    Lewis

  22. Crank says:

    The investors know full well that nuclear has enjoyed vast R,D&D subsidies around the world for over half a century, and that it still fails to make any coherent case for their investment.

    Why in the world does it matter how much money might have been invested in developing the technologies now available to us? It’s sunk cost. Doesn’t matter. The playing field for each potential technology isn’t level, because of prior investments, for sure. But it doesn’t matter; we have to start from where we are, not from some hypothetical point where everything is fair.

    If there’s investment available for whatever “emerging technologies” we need to develop, then there’s no problem, is there? Great, the investors can go build it. What I’m objecting to is your statement that we need the “R&D to be well enough funded and mandated”. Funded and mandated by whom?

    If it isn’t the investors that you mentioned needed to be standing by before nuclear is a supportable option, then you’re applying different criteria to each.

    If you’re talking about federal funding, then fine: I support that too. I doubt it will ever happen, but great if it can be so. What we do know, though, is that federal support for nuclear power is entirely politically feasible if the President decided to support it and was able to get congressional Democrats on board.

    Whatever you think of the available solutions, we need to do something that isn’t waiting around for something better. All the time congress goes around in circles approving none of the above, the clock is ticking.

    I gather from your distortions of where we stand that you may have an undisclosed material interest in the selection of energy technologies.

    Wow. That really is the lowest form of argument. No, I don’t have any “undisclosed interest” in the selection of energy technologies.

    So, what, I guess James Hansen must have “undisclosed material interests” in the nuclear industry, too?

    My attitude towards US support of building nuclear power plants is simple: we need to do everything we can to take coal fired plants offline. This has to be priority #1. Nuclear power is one of the things that we could do (and which is actually politically feasible) and so we should do it.

    By the way, if you think that the investment doesn’t exist to build new nuclear plants anyway, what is your objection to the US federal government providing them with subsidies and tax breaks? I mean, if they’re not going to be built, it’s kind of a no-op anyway, isn’t it?

    I’ll repeat what I said originally:

    Build everything. Build it now. Stop looking for the silver bullet that avoids the need to make difficult choices; it isn’t there.