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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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The U.S. Government Should Treat Nuclear Plants Like Military Jets

  • The need for stable, reliable, and local power sources has been made painfully clear in recent months, and nuclear power is an obvious example of such a power source.
  • Unfortunately, nuclear power is not commercially viable due to the significant up-front costs and a not insignificant resistance from certain groups.
  • In order to revive the U.S. nuclear industry, the government would have to put the projects on its balance sheet in order to make the industry viable.

A few weeks ago the Chinese government announced an audacious plan to build 150 new nuclear plants. No specifics were announced but we assume they were planning to build copies of the Chinese-designed 1,000 MW Hualong One reactor, considered an alternative to Westinghouse’s AP1000. No doubt aware of French and US difficulties completing new reactors on time and within budget, they estimated a per reactor cost of between $2.5-3 billion. The question for us here is: what would a comparable US commitment to build several hundred new nuclear reactors over the next two decades look like?

Our target number of new reactors for the US is 250 assuming roughly 1,000 MW sized units as opposed to small modular reactors (SMRs), enough to maintain nuclear energy’s 20% share of US-installed electric generating capacity (roughly 1.1 million MWs) while aging reactors could be retired on schedule.

Financing such a project is way beyond the balance sheet capacity of most investor-owned utilities. And more importantly, we believe there is no appetite among utility executives for new nuclear construction after SCANA’s multi-billion dollar nuclear plant cancellation and Southern Company's eventual completion of Plant Vogtle at multiples of its original cost estimate. And this is before one even considers the potential influence of anti-nuclear groups and plain old NIMBYs. Given the present lack of interest and inertia regarding this technology, it is not unreasonable to think that, unless something changes, nuclear power in the US may slowly decline to irrelevance.

We think a nuclear program should be viewed the same way as a new weapons system, such as a fighter jet being ordered by the Pentagon. In this situation, a private-sector contractor submits a bid, has it approved, and then builds the system. Massive cost overruns in this context provide fodder for an occasional headline but, otherwise, they are either assumed or ignored as a result of a bipartisan consensus in Congress that routinely authorizes funds for these types of projects. The underlying assumption here is that our leaders mostly agree that these things, regardless of cost, are necessary. And everyone basically moves on.

One underlying assumption here is that manufacturing many units of the same design lowers costs even if the first few models are way over budget. This makes perfect sense when thinking in terms of building several hundred airplanes. Who cares if the first five planes are way over budget if the next 95 are on budget? It’s the average cost of the entire fleet that matters. Same with nuclear plants. However, unlike France, the US has never taken this standardized approach. There has been a bespoke aspect to nuclear power plant construction almost from the beginning in the U.S. The mistaken assumption here was that the plant builder, simply by offering local market prices for materials and labor, could complete these enormously complicated projects expeditiously. However, a shortage of skilled labor, critical materials, or architects unfamiliar with new and often changing designs caused delays, or worse, required that previously completed work be totally redone.

One way to diminish the public’s obsession with nuclear new build costs is to place these systems’ development costs on the federal government’s balance sheet so that popular outrage over massive cost overruns does not completely stifle our nuclear program. Then hopefully a bipartisan consensus emerges that the program is necessary, it develops a constituency of beneficiaries, new build costs decline, and bureaucratic momentum does the rest.

The politics of new nuclear construction are also difficult for investor-owned utilities to contend with because a new nuclear plant inevitably entails large, unpopular electricity price increases.   It is axiomatic in the industry that no one likes inordinately large rate increases. The enhanced public scrutiny via the public service commission or simply from politicians eager to latch on to a popular issue would worry industry executives and shareholders alike. In addition, with the emergence of so-called “cord cutters”, those installing solar and battery systems and exiting the utility network entirely, the pressure to avoid outsized rate hikes has increased. 

The other obvious reason to exclude investor-owned utilities from our proposed program of nuclear new build is geography. The IOUs are by definition geographically constrained. They only operate within a given franchise area. Granted, that area may cover several states. But to us, this is clearly a case where our present, Balkanized electricity ownership system is an organizational and structural impediment to progress. A program of this scale, given the amounts of incremental energy contemplated, should be viewed as a regional or national endeavor. In addition, we would emphasize the need for transmission upgrades that facilitate increasing inter-regional power transfer. The existing ISO/RTO could be allocated multi-reactor nuclear stations based on the prospects for future energy needs and plant retirements.

Related: Big Oil Is No Longer “Unbankable”

If increased electrification is the goal, then emphasis should be on low prices. Basically, we would turn the concept of the reserve margin on its head. Reserve margins of excess generating capacity are supposed to be adequate but not too big so as to impair profits. This is profit-maximizing corporate behavior. A government on the other hand can take into account far broader societal benefits. If as a society we want to continue to encourage the use of cleaner electricity versus fossil gas and coal, then the price has to remain reasonable so as to permit substantially increased usage. Otherwise, consumer acceptance becomes that much harder. We would advocate for much larger regional reserve margins for two reasons. First, just look at summer peaking in Texas where the electrical grid failed due to an extreme winter peak. It appears that climate change for electric utilities means increasing exposure to wild swings in weather-related demand. Higher reserve margins would only improve reliability at a time when electric utilities are growing and encouraging customers to abandon natural gas in their homes and businesses. This is an intra-utility competition. 

Lastly, we want to address one aspect regarding concepts for small modular reactors. First, the name itself is problematic. These next-generation reactor designs contemplate up to eight separate reactors at a single station producing amounts of power almost comparable to those of our present gigawatt-scale plants. While the actual physical footprint of these SMRs is smaller, the cost is still expected to be way above natural gas or renewable electric generation. Our main point is that these are not small, simply small-er. But it is their modularity that is unique and most important. Given manufacturing difficulties with large nuclear reactors, the hope here is that the smaller (and hopefully standardized size) of the individual units makes the manufacturing easier, cheaper, and faster. The goal is for all major components to be manufactured at a facility rather than “hand” built on the job site. Will this address the current problem of runaway nuclear construction costs? We have no idea. But a techno-friendly approach would suggest building and operating several prototypes and then re-evaluating them.

This also requires a change in mindset. With respect to the adoption of new, costly technologies like nuclear, we would recommend the government adopt a “smorgasbord” approach. Imagine facing a long table filled with equally delicious items. One good strategy would be to pick very lightly on the first pass and then load up our plates after deciding which is our favorite. We would suggest the same approach with new nuclear technologies. Encourage the development of every competing nuclear technology and then invest heavily in the most promising prototype technologies while recognizing that the “also-rans”, such as nuclear fusion, may yet offer promising results in the future. Recall that the electric vehicle, which is gaining increasing public acceptance by the day, as a technology, was first available in 1899 and accounted for over 25% of new vehicles sold then.  

Our last point concerns the political environment in the US. One of the two major political parties, the Republicans, has pretty firmly embraced the concept of climate change denialism. Former President Trump articulated his party's view the other day at a political rally claiming the climate change issue is a complete hoax and that what we are experiencing is simply changing weather. Regardless of our personal views, the point is that a large percentage of the public may agree with this and that their political party may again be in full control of the federal government in a few years. Unlike in Europe, pro-nuclear advocates cannot offer a new nuclear development program as an appropriate response to ameliorating the harm of increasing CO2 or methane levels. If one denies climate change, nuclear advocates are only offering a high-cost solution to an environmental issue that for many Republicans doesn’t exist. Interestingly the poles here have reversed. We previously would have expected the greatest opposition to new nuclear from the political left as in Europe. Now it could come from the political right as well. 

For many years, we have argued that nuclear power is not and never was a commercial technology. The nuclear industry and nuclear builders and operators pretended that it was, but relied on government research and development, government insurance, government regulation, and lately, direct government subsidy. US investors no longer buy that story.  If we really want a nuclear revival, the government will have to do the reviving directly.

By Leonard Hyman and William Tilles

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