Footing nuclear energy’s bill: is there an ideal financial model?

Despite economic uncertainty and poor growth rates, the US is still forging ahead with its plan to prolong and re-build its nuclear fleet. In these times of uncertainty which financial models should be explored? We look to the state of Florida as a barometer of financial options and hurdles, both past and present.

By Peter Taberner

While no industry is bullet proof from recession construction, companies can take advantage of historically low interest rates ensuring that borrowing capital is cheap, and there is also the low hanging fruit of commodity prices that are favourable.

Leslie Kass, NEI senior director, business policy and fuel supply, says: “ Energy infrastructure will need to be replaced in countries where generating plants are aging and no longer efficient to operate and/or new generating facilities need to be constructed where demand growth requires additional resources.

“All energy infrastructure is expensive and utilities and governments are struggling with how to pay for these efforts in a manner that will least impact households and businesses where the economy is struggling.”

She adds: “Access to low cost financing is the key to keeping costs down during this capital intensive build cycle. This can be achieved through loan guarantee programs, bond issues, purchase power agreements, or construction work in progress payments to allow financing costs to be paid as they are incurred.”

Who is footing the bill?

However despite their unequivocal support for the nuclear industry the Obama administration is highly unlikely to put its hands in its pocket, and globally only in countries where the industry is state-owned will government help be available.

New nuclear plants are set to be the growth area in the industry, and there has been a surge in applications for a construction and operating licences. Although the NRC are more concerned with the safety of the plants as opposed to the costs.

In Florida controversy has been caused by the proposal from utilities Florida Power and Light and Progress Energy that part of the costs of reparations to nuclear buildings are to be incurred by the consumer to the tune of $335m.

Florida Power and Light have two reactors St. Lucie 1 and St. Lucie 2 and Progress Energy have their Crystal River plant that are on a Federal list of 27 reactors that have been earmarked for upgrades, particularly for withstanding earthquakes. In addition, FPL has plans to develop two more nuclear units at Turkey Point, units six and seven.

Progress Energy did engage in discussions with outside sourced engineers to analyse all possibilities for repairs, and 22 options were originally put on the table that was narrowed down to four. These comprised of technical issues, constructability, licensing feasibility as well as cost.

They finally decided to remove and replace concrete in the containment structure walls that reached an estimated cost of between $900m and $1.3bn.

Part of the outlay will be covered by their insurance arrangements for property damage and costs of replacement power, they have received $265m from Nuclear Electric Insurance Limited, leaving the consumer to bear the brunt of defraying the rest.

Consumer concerns

The methods from both of the utilities has been criticised by the Florida Office of Public Counsel that participates in discourse over consumer issues within the Florida Legislature.

In 2006 the Florida Legislature made an amendment to a statute that governs the Florida Public Service Commission (FSPC) ratemaking authority that created an incentive for utilities to invest in nuclear facilities.

The legislation directed the FSPC to provide alternatives to traditional means of recovering costs of nuclear investment; this allowed the utilities to file petitions requesting that they can recover costs of the site selection, pre- construction costs and the carrying costs of the construction. An estimate of the total capital costs and long term economic feasibility then have to be given.

Following the petitions exercise, the FSPC now has a ‘prudence review’ of the plans and on this occasion the Office of Public Counsel did take issue with the utilities’ plans.

“Our expert witness, Dr. William Jacobs of GDS Associates, testified that, because of the extreme complexity and uncertainties associated with these particular expansions of existing, operating nuclear units, FPL was imprudent when it decided to “fast track” the development of the up rates” said Joseph McGlothlin, Associate Public Counsel.

It’s all about timing

This will not make good reading for consumers in the sunshine state, but nuclear energy is hardly the only utility that places investment costs onto their customers.

As Leslie Kass points out: “The one open question is timing. The construction work in progress allowances for nuclear plants in Florida, Georgia and South Carolina mean that consumers pay for the costs of financing as they occur, which is before the plant is operational.

“It will ultimately save consumers billions of dollars over the life of the plant, but in austere times it can be difficult to justify payments now for an asset they will enjoy later. The public utilities’ commissions in these states have decided that the benefits of clean, reliable, low cost electricity for sixty plus years is a reasonable trade for some early payments.”