There is now a huge range of numbers in the public domain about the costs of new nuclear build. It has become clear that estimates produced by vendors a few years ago of below $2000/kWe on an overnight basis (ie without interest costs) were wide of the mark, at least for initial units in a market such as the USA. It is also clear that such estimates were presented on a very narrow basis, ignoring important cosy categories such as necessary investment in local power grids, while costs have recently been spiralling upwards, owing to a variety of important influences. Recent public filings and announcements suggest that there is now a ‘sticker shock’ in US new build, with cost estimates now commonly in the $3000-7000/kWe installed range, depending on what is being included. Progress Energy’s estimates for its new planned AP1000 units in Florida were particularly startling – a price tag of $14 billion plus another $3 billion for necessary transmission upgrades.
Indeed, it would be fair to credit Moody’s Investors Service for being ‘ahead of the game’ on assessing this, as in October 2007 they produced a report entitled New Nuclear Generation in the United States: Keeping Options Open vs Addressing An Inevitable Necessity, which estimated the all-in costs of a nuclear plant to be between $5000 and $6000/kWe. The report did however provide a note of caution, stating: “While we acknowledge that our estimate is only marginally better than a guess; it is a more conservative estimate than current market estimates.” Explaining the shortcomings of cost estimates in more detail, the report stated: “All-in fact-based assessments require some basis for an overnight capital cost estimate, and the shortcomings of simply asserting that capital costs could be ‘significantly higher than $3500/kWe’ should be supported by some analysis.”
What is clear is that it is completely impossible to produce definitive estimates for new nuclear costs at this time. The fact that the USA and other leading nuclear nations have not been building plants for some time, and also that most current reactor designs have not yet been built to completion, suggests there is considerable uncertainty with respect to the capital cost of new nuclear and other generating technologies. Companies may decide not to proceed with financing and construction unless they have satisfied themselves (and, where necessary, their boards and regulators) that the investment is justified and that the plant can produce electricity and recover costs at a price that will not be overly burdensome to consumers.
Clearly some of today’s increased cost estimates can be attributed to including more things than before – but to what extent have costs risen owing to the lack of skilled workers, supply bottlenecks for imported heavy components, significant increases in key commodity prices and, in the case of the USA, perhaps the devaluation of the dollar against other leading currencies?
Rising commodity prices seem to have taken a lot of the blame for the increased cost estimates, but this seems rather unfair. Steel, cement, copper and other important components have indeed risen rapidly in price, but these only account for a small proportion of the costs of a modern nuclear power plant, perhaps less than 5% of the total. What really matters is the competence and capability of the manufacturers and vendors in the supply chain, where there is huge value added. Take, for example, the ultra-heavy forgings needed to make reactor pressure vessels. Japan Steel Works (JSW) has an effective monopoly on this business, at least for now. The raw steel for these may cost only $1 million, but the price of the completed forging, sitting at the heart of the reactor, may well be $100 million and above. Pinch points in the current supply chain are having an obvious influence on costs. The number of suppliers in many key areas is now rather small and few have surplus capacity, hence prices will be marked upwards. Only a good run of reactor orders will likely change this position, as companies invest in new facilities to mop up demand.
Turbine equipment makers are also very busy, with strong global demand for new power stations of all kinds. The International Energy Agency (IEA) has estimated that the power generation sector will require some $10 trillion of investment worldwide in the period to 2030. This is a huge sum and vendors will be able to extract premium prices until demand slackens. Labour cost estimates for new nuclear build are also rising sharply – not so much to do with wage inflation as higher estimates of the hours of labour input needed to complete a plant. It is reasonable to assume that new reactors in the USA will likely take longer to build than the most recent Japanese reactors, which have been as low as 40 months, given the lack of recent build experience. The delays at both EPR projects in Finland and France also suggest that caution is needed in this area.
In time, it should prove possible to control some of these costs, through a combination of skill and luck. The global economy may cool, cutting demand, and causing the commodity price increase to reverse, while production capacities of those in the supply chain will likely increase, stimulating price competition. The skill will lie in designing for using less materials and labour input.
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“Vendors will be able to extract premium prices until demand slackens” |
The key questions are: do the increases matter and, if so, how can they be handled in a way that still allows new build to proceed? On the first of these, it is pointed out that rival generating plant options have similarly been subject to similar cost escalation, hence nuclear’s competitive position may not have deteriorated so much. Indeed, with the increase in world oil and gas prices, nuclear competitiveness on the operating cost side has received a significant further boost. This is very well, but the magnitude of the capital cost estimates (and moreover the risks and uncertainties) are certainly material in the context of US power companies. The integrated European operators like EDF, RWE, E.ON, Iberdrola and Suez, with strong balance sheets and supply outlets for power generated, are arguably in a far stronger position to pay such high capital costs in the UK market than Exelon, Entergy, Constellation, Duke and the others in the USA. A twin unit station costing $15 billion or so, will strain their balance sheets, also representing a significant share of company market capitalisation.
Companies that build new nuclear plants will see marked increases in their business and operating risks because of the size and complexity of these projects, the extended time they take to build, and their uncertain final cost and cost recoveries. To the extent that a company develops a financing plan that overly relies on debt financing, which has an effect of reducing the consolidated key financial credit ratios, regardless of the regulatory support associated with current cost recovery mechanisms, there is a reasonably high likelihood that credit ratings will also decline. So ‘thinking caps’ must now certainly go on amongst US boards of management – credit ratings are important and taking a punt on a new nuclear plant may not be the first priority of a CEO in his late 50s with a distinguished career behind him. But, what is clear is that there is a huge need in many markets for incremental and replacement generating capacity – it is very important that for environmental and security of supply reasons, ways are found to make a large part of this nuclear.
Finding ways to share risks and also ways of lowering them is going to be the key to managing this situation. Consortia of owners are one way to share the risks and we’re likely to see this in both the US and UK markets for new build. Allocating the risks amongst those parties best able to bear them is also going to be a key area, so project structuring amongst various possible models is an important area for discussion. Vendors are going to have to take on some of the risks on the cost and scheduling certainties – perhaps not to the extent that Areva has done in the Finnish EPR project, but nevertheless offering more guarantees of performance than was the case in the past. Governments will undoubtedly take on some of the burden in certain markets, such as the US administration is doing for initial units with loan guarantees, delay risk insurance and production tax credits. The financial sector will also take on some risk now it is convinced that nuclear can be a satisfactory investment – it’s respectable to support nuclear investment today and even the World Bank may eventually come around to supporting projects in developing countries.
One way to reduce risks is to make use of current known and understood technology. China Guangdong Nuclear Power Corporation’s preference for the CPR-1000 reactor, derived from a 1980s Framatome design, in its immediate plans is quite notable. It can achieve greater cost certainty and higher local content with this rather than Generation III alternatives such as the EPR and AP1000. Lowering risks was also a main consideration behind NRG Energy’s decision to choose the ABWR design in its combined construction and operating licence (COL) application for the South Texas Project (STP), which it has submitted to the US Nuclear Regulatory Commission (NRC). The ABWR is already certified by the NRC and with it having been built four times in Japan, the people that will build it know exactly how much concrete you need, how much steel and how many man hours it will take for the reactor construction.
Indeed, the industry in the USA seems very focused on the cost and project structuring issue – the general feeling is that it’s now moved beyond licensing as the major challenge (even though the first COL is some years away). Risk is clearly a double-edged sword – whoever takes on some of the risk will charge more money for doing it, so companies will seek to assume risks they feel they can control. In the case of reactor vendors, Areva may have some advantages as it is vertically integrated, with huge in-house manufacturing capability. This may explain why it feels it can still be competitive in the US market with its EPR, despite its position behind alternatives in licensing.
Finally, the proof of the pudding has to be in the eating. The ‘sticker shock’ has not prevented any company from filing its COL application in the USA, and upwards of 30 new reactors may eventually be on the cards. The first engineering, procurement and construction (EPC) contracts have also been signed. This doesn’t necessarily mean that new reactors will definitely be built in the USA, but signs still point in a positive direction.
Author Info:
Steve Kidd is Director of Strategy & Research at the World Nuclear Association, where he has worked since 1995 (when it was the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members
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