FINANCING NEW NUCLEAR POWER PLANTS
FINANCING NEW NUCLEAR POWER PLANTS
In the past decade, no new nuclear power plants were ordered bywestern countries and most EU states ruled out new nuclear withlegislation but yet the nuclear industry continued to beat its drumsproclaiming a revival. Has the time come for industry and governmentsalike to accept that nuclear cannot be perceived as an attractiveinvestment on liberalized electricity market?(600.5563) Greenpeace Finland/WISE Amsterdam - Construction costsfor new nuclear power plants continue to escalate dramatically in real termswhile reliability continues to disappoint, resulting in fixed costs being spreadover much fewer units of output (i.e. kilowatt-hours) than expected.Nuclear power plants are expected to be expensive to build but cheap torun: high fixed costs, but low variable costs. If construction costs are lowand reliability high so that fixed costs remain low and can be spread over alarge number of kilowatt hours of output, the plant is consideredeconomically viableAmongst variable costs, fuel costs are low, but non-fuel costs for operationand maintenance are always higher than anticipated. The operating costs ofmany nuclear power plants are often so high that it would be cheaper toclose the plant and build a new fossil-fired station. (1)The impact of competition on power generationThe introduction of competition has had two important impacts on nucleareconomics. The first being that consumers are no longer captive to afranchise supplier therefore it can no longer be assumed that build andoperational costs incurred can be passed on to consumers. These additionalcosts now tend to fall on shareholders as lost profits instead of consumers asin a monopoly markets; making new build of any type a huge investment riskin a liberalized electricity market. To reflect this risk, the required rate ofreturn on capital is much higher and the period over which construction costsare recovered is much shorter in a competitive market. The shorteraccounting life is based on how long it can reasonably be assumed thatoperating the plant will be profitable, not on the engineering life of itscomponents.The second factor is that existing nuclear power plants often cannot makethe rate of return expected when built because the wholesale price ofelectricity is forced down by competition. Assets that cannot achieve theexpected rate of return are characterized as 'stranded'. Owners of 'stranded'plants argue that the plants were built in good faith and were approved byregulators therefore they should be entitled to the income expected when theplant was built. If the market will not provide it, it should be raised with asurcharge on consumers. The taxpayers forced to pay for these poorinvestments are then surcharged as customers so that plant owners canretain expected profits. (2)Prospects for new nuclear plants in western countriesThe nuclear industry continuously claims that the prospects for new nuclearorders have improved and that new reactor designs will solve problems ofinadequate safety and poor economics. That there is now one westerncountry, Finland, about to order a new reactor, has fuelled the bluster.In reality the only orders, apart form Finland, have been placed by PacificRim countries, mainly China, Korea and Taiwan, where utilities remainprotected from the consequences of poor investment decisions by monopolyprivileges. Even in these markets, ordering rates are much slower thanprojected.The United StatesIn 2000, the U.S. Department of Energy (DOE) published a studycommissioned by Westinghouse, which illustrates the lack ofcompetitiveness of reactors in the U.S. The report states unambiguously thatthe so-called third generation nuclear power plants are not able to competein the deregulated market. "Therefore if nuclear power is to be commerciallyattractive in the U.S. in the next 5-7 years, a dramatic decrease in the capitalcost of a Generation III plant is necessary." (3)There have been no new completed orders for nuclear power plants since1973 yet comprehensive energy legislation currently debated in the U.S.Senate attempts to promote building of new nuclear reactors with heavysubsidies. (See also WISE/NIRS Nuclear Monitor {HYPERLINK "../599/5557.php"}599.5557: "Energy Billstalls in U.S. Senate") In practice this equates to a 10-year infusion ofbillions of dollars in research and development and tax breaks.Despite the will at government level, Wall Street analysts and investmentbankers are reportedly unconvinced. Edward Tirello, managing director andsenior power analyst at Berenson & Co., told participants at the AmericanNuclear Society's winter meeting that Wall Street no longer considerednuclear a good investment. He said that Wall Street was wary of investingbecause of real and/or perceived risks associated with nuclear. Tirello thenwent on to say that the task of re-educating financial communities would be"the biggest job of your life" and that if unsuccessful, the industry "is finished"(not all bad news then…). Financing is made more difficult by hedge fundsthat have been investing in utilities since the 1970s. Hedge funds makemoney by betting that stock prices drop - bad news for the industry is greatnews for the funds.Entergy Corp. president, Donald Hunt commented that some nuclearcompanies were already involved in 're-educating' the financial communitybut admitted that the key to new build is whether the Energy Bill passes. Hesaid that financial incentives would be required and suggested that this couldrange from emission or tax credits to those already proposed in the EnergyBill. (4)United KingdomBritish government reviews on the economics and policies related to nuclearpower in 1990 (privatization of electricity industry), 1995 (privatization ofnuclear industry) and 2002 have yielded similar conclusions; the strategiccase for new nuclear is weak and the economics of the business poor.British Energy's severe economic crisis led to the company applying forgovernment assistance. The European Commission is currently consideringwhether to accept the U.K. governments rescue packet (Euro 4.7 billion,US$ 7.9 billion). This and the experience of Sizewell B are believed to havehelped the government to reach the decision to rule out new nuclear powerplants from the White Paper. (See also WISE/NIRS Nuclear Monitor {HYPERLINK "../584/brief.html"}584:In Brief) At Sizewell B, completed in 1995, the actual price for theelectricity produced was eventually three times the price originally planned.(5)Advanced reactorsThe nuclear industry is hoping that new reactor designs will solve theproblem of poor economics. However, with the exception of GeneralElectric's (GE) ABWR model, these so-called advanced reactors exist onlyon paper, their supposed advantages yet to be proven.Experience gained from two ABWRs built in Japan offers the industry noencouragement. In March 1995, GE estimated that a 1,300 MW ABWRcould be constructed for US$ 1,528 (in 1997) per kilowatt of electricalcapacity. The actual construction costs of the reactors built in Japan,completed in 1996 and 1997, was reportedly double GE's estimation in1995. (6) (7)Finnish belief in cheap nuclearNuclear is an extremely political issue and the Finnish nuclear lobby's wish tohave the 'first new reactor' is so strong that cost has not been a crucialfactor. There is strong belief that nuclear is a cheap and reliable energysource, partly due to the operating history of existing plants and lack ofserious accidents or scandals (see below).Teollisuuden Voima (TVO) has signed a contract with AREVA (sharesownership of Framatome ANP with Siemens) and Siemens to build theEPR, an advanced model that exists only on paper, at Olkiluoto. FramatomeANP will supply the nuclear island while Siemens supplies the conventionalisland (turbine). (8)Official cost estimates for the EPR have already risen by roughly 30 %above the highest original projections of Euro 1.75-2.5 billion (US$ 2-2.9billion).TVO shareholders vary from electricity-intensive industry to smallmunicipalities. Investors will get electricity generated by the EPR at costprice, either to use or sell on. TVO is a co-operative that produces powerfor its shareholders thereby enjoying the luxury of its own ready-mademarket. (9)Many TVO shareholders appear unable, or unwilling, to make criticalanalysis of the economics and risks connected to the project. One examplewas the decision-making procedure of one of the biggest shareholders, thecity of Helsinki. City council members were not provided with theeconomical calculations on which the estimated profitability was based andalthough it was possible for to seek this information from the city controller'soffice, only one council member took the opportunity.Helsinki City Council is thought to be investing Euro 310.4 million (US$ 360million), which equates to a 9.7% share. Fortum, a TVO shareholder, is totake a 25.1% share, subject to Board approval, and is said to have issuednew bonds to help refinance its debts. Fortum has put its oil business up forsale and is listing on the Finnish stock exchange to raise funds to develop itsaspirations in the power trade. Stora Enso, which owns 14% of PohjolanVoima Oy, TVOs largest shareholder is also expected to invest in theproject. (10)Special price for the Finns?Framatome ANP is eager to get a prototype of EPR up and running in orderto gain experience of the reactor and credibility for marketing to potentialcustomers. To that end, it is supposed that TVO is getting the reactor for a'special price', which suggests that EPR is not as competitive in the marketplace as perceived.Public subsidiesPrior to the political decision on the reactor in Finland, one of the main pronuclear arguments was that no public subsidies would be required. In reality,Siemens had applied for Hermes export credits for their turbine from theGerman government, improving TVO's chances of achieving a cheaper loan.Export credit guarantees are usually awarded to projects implemented indeveloping countries to decrease the investment risk of the supplier. Thefinal decision about the Hermes credits was to be made after TVO signedthe construction contract however, Siemens has subsequently withdrawn theapplication (see below).It had been rumored that France was also likely to subsidize the projectgiven its governments eagerness for the development EPR. French IndustryMinister, Nicole Fontaine, has recommended EPR as replacement forexisting reactors to be retired by 2020. (11)Future costsFinnish legislation states that nuclear companies are responsible for thedecommissioning of the power plants and the management of the nuclearwaste. Finnish operators have reserved approximately Euro 1 billion (US$1.2 billion) into a special fund for these purposes. Compared with estimatesin other countries based on previous experience of decommissioning, itappears that the Finns have grossly underestimated. (12)The nuclear industry is surviving on a small number of new orders. In mostcountries with liberalized electricity markets experience indicates that nuclearpower plants cannot compete without public subsidies. The fact that aFinnish company is now placing an order has raised hopes among nuclearmanufacturers. The Finnish 'experiment' will definitely be monitored closelyby both the nuclear opponents and proponents.Sources:(1) The economics of new nuclear power plants and electricityliberalization: Lessons for Finland from British experience, Thomas S.,2002(2) See (1)(3) Study of Cost Effective Large Advanced Pressurized Water Reactorthat Employs Passive Safety Features, U.S. Department of Energy, J.W.Winters, 2000(4) Nucleonics Week, 20 November 2003(5) See (1)(6) GE Nuclear Energy, Presentation to the International Conference onNuclear Power Industry Development and Cooperation, 16-17 March1995. Price recalculated from 1992 dollars using GDP deflator.(7) Nucleonics Week, 25 January 1996(8) AREVA press release 18 December 2003(9) Nucleonics Week Special, 16 October 2003(10) See (4)(11) See (9)(12) VTT, Rasilainen K, Vuori S. Käytetyn ydinpolttoaineen huolto,suomalaisen suunnitelman pääpiirteet. VTT Energia, 1999(13) Friends of the Earth Europe press release, 16 December 2003(14) Williams, W.A., and Lee, P.S. Advanced LWR Technology forCommercial Application.(15) WISE News Communique {HYPERLINK "../485/4813.html"}485.4813: "Problems of decommissioningnuclear reactors" (16) The Canadian Nuclear Lesson, Sierra Club of Canada andGreenpeace International Joint Briefing Paper, 2001{HYPERLINK "mailto:http://us.f306.mail.yahoo.com/ym/Compose?To=kaisa.kosonen@nordic.greenpeace.org&YY=95455&order=down&sort=date&pos=5&view=a&head=b"} {HYPERLINK "http://www.greenpeace.fi/"}
In the past decade, no new nuclear power plants were ordered bywestern countries and most EU states ruled out new nuclear withlegislation but yet the nuclear industry continued to beat its drumsproclaiming a revival. Has the time come for industry and governmentsalike to accept that nuclear cannot be perceived as an attractiveinvestment on liberalized electricity market?(600.5563) Greenpeace Finland/WISE Amsterdam - Construction costsfor new nuclear power plants continue to escalate dramatically in real termswhile reliability continues to disappoint, resulting in fixed costs being spreadover much fewer units of output (i.e. kilowatt-hours) than expected.Nuclear power plants are expected to be expensive to build but cheap torun: high fixed costs, but low variable costs. If construction costs are lowand reliability high so that fixed costs remain low and can be spread over alarge number of kilowatt hours of output, the plant is consideredeconomically viableAmongst variable costs, fuel costs are low, but non-fuel costs for operationand maintenance are always higher than anticipated. The operating costs ofmany nuclear power plants are often so high that it would be cheaper toclose the plant and build a new fossil-fired station. (1)The impact of competition on power generationThe introduction of competition has had two important impacts on nucleareconomics. The first being that consumers are no longer captive to afranchise supplier therefore it can no longer be assumed that build andoperational costs incurred can be passed on to consumers. These additionalcosts now tend to fall on shareholders as lost profits instead of consumers asin a monopoly markets; making new build of any type a huge investment riskin a liberalized electricity market. To reflect this risk, the required rate ofreturn on capital is much higher and the period over which construction costsare recovered is much shorter in a competitive market. The shorteraccounting life is based on how long it can reasonably be assumed thatoperating the plant will be profitable, not on the engineering life of itscomponents.The second factor is that existing nuclear power plants often cannot makethe rate of return expected when built because the wholesale price ofelectricity is forced down by competition. Assets that cannot achieve theexpected rate of return are characterized as 'stranded'. Owners of 'stranded'plants argue that the plants were built in good faith and were approved byregulators therefore they should be entitled to the income expected when theplant was built. If the market will not provide it, it should be raised with asurcharge on consumers. The taxpayers forced to pay for these poorinvestments are then surcharged as customers so that plant owners canretain expected profits. (2)Prospects for new nuclear plants in western countriesThe nuclear industry continuously claims that the prospects for new nuclearorders have improved and that new reactor designs will solve problems ofinadequate safety and poor economics. That there is now one westerncountry, Finland, about to order a new reactor, has fuelled the bluster.In reality the only orders, apart form Finland, have been placed by PacificRim countries, mainly China, Korea and Taiwan, where utilities remainprotected from the consequences of poor investment decisions by monopolyprivileges. Even in these markets, ordering rates are much slower thanprojected.The United StatesIn 2000, the U.S. Department of Energy (DOE) published a studycommissioned by Westinghouse, which illustrates the lack ofcompetitiveness of reactors in the U.S. The report states unambiguously thatthe so-called third generation nuclear power plants are not able to competein the deregulated market. "Therefore if nuclear power is to be commerciallyattractive in the U.S. in the next 5-7 years, a dramatic decrease in the capitalcost of a Generation III plant is necessary." (3)There have been no new completed orders for nuclear power plants since1973 yet comprehensive energy legislation currently debated in the U.S.Senate attempts to promote building of new nuclear reactors with heavysubsidies. (See also WISE/NIRS Nuclear Monitor {HYPERLINK "../599/5557.php"}599.5557: "Energy Billstalls in U.S. Senate") In practice this equates to a 10-year infusion ofbillions of dollars in research and development and tax breaks.Despite the will at government level, Wall Street analysts and investmentbankers are reportedly unconvinced. Edward Tirello, managing director andsenior power analyst at Berenson & Co., told participants at the AmericanNuclear Society's winter meeting that Wall Street no longer considerednuclear a good investment. He said that Wall Street was wary of investingbecause of real and/or perceived risks associated with nuclear. Tirello thenwent on to say that the task of re-educating financial communities would be"the biggest job of your life" and that if unsuccessful, the industry "is finished"(not all bad news then…). Financing is made more difficult by hedge fundsthat have been investing in utilities since the 1970s. Hedge funds makemoney by betting that stock prices drop - bad news for the industry is greatnews for the funds.Entergy Corp. president, Donald Hunt commented that some nuclearcompanies were already involved in 're-educating' the financial communitybut admitted that the key to new build is whether the Energy Bill passes. Hesaid that financial incentives would be required and suggested that this couldrange from emission or tax credits to those already proposed in the EnergyBill. (4)United KingdomBritish government reviews on the economics and policies related to nuclearpower in 1990 (privatization of electricity industry), 1995 (privatization ofnuclear industry) and 2002 have yielded similar conclusions; the strategiccase for new nuclear is weak and the economics of the business poor.British Energy's severe economic crisis led to the company applying forgovernment assistance. The European Commission is currently consideringwhether to accept the U.K. governments rescue packet (Euro 4.7 billion,US$ 7.9 billion). This and the experience of Sizewell B are believed to havehelped the government to reach the decision to rule out new nuclear powerplants from the White Paper. (See also WISE/NIRS Nuclear Monitor {HYPERLINK "../584/brief.html"}584:In Brief) At Sizewell B, completed in 1995, the actual price for theelectricity produced was eventually three times the price originally planned.(5)Advanced reactorsThe nuclear industry is hoping that new reactor designs will solve theproblem of poor economics. However, with the exception of GeneralElectric's (GE) ABWR model, these so-called advanced reactors exist onlyon paper, their supposed advantages yet to be proven.Experience gained from two ABWRs built in Japan offers the industry noencouragement. In March 1995, GE estimated that a 1,300 MW ABWRcould be constructed for US$ 1,528 (in 1997) per kilowatt of electricalcapacity. The actual construction costs of the reactors built in Japan,completed in 1996 and 1997, was reportedly double GE's estimation in1995. (6) (7)Finnish belief in cheap nuclearNuclear is an extremely political issue and the Finnish nuclear lobby's wish tohave the 'first new reactor' is so strong that cost has not been a crucialfactor. There is strong belief that nuclear is a cheap and reliable energysource, partly due to the operating history of existing plants and lack ofserious accidents or scandals (see below).Teollisuuden Voima (TVO) has signed a contract with AREVA (sharesownership of Framatome ANP with Siemens) and Siemens to build theEPR, an advanced model that exists only on paper, at Olkiluoto. FramatomeANP will supply the nuclear island while Siemens supplies the conventionalisland (turbine). (8)Official cost estimates for the EPR have already risen by roughly 30 %above the highest original projections of Euro 1.75-2.5 billion (US$ 2-2.9billion).TVO shareholders vary from electricity-intensive industry to smallmunicipalities. Investors will get electricity generated by the EPR at costprice, either to use or sell on. TVO is a co-operative that produces powerfor its shareholders thereby enjoying the luxury of its own ready-mademarket. (9)Many TVO shareholders appear unable, or unwilling, to make criticalanalysis of the economics and risks connected to the project. One examplewas the decision-making procedure of one of the biggest shareholders, thecity of Helsinki. City council members were not provided with theeconomical calculations on which the estimated profitability was based andalthough it was possible for to seek this information from the city controller'soffice, only one council member took the opportunity.Helsinki City Council is thought to be investing Euro 310.4 million (US$ 360million), which equates to a 9.7% share. Fortum, a TVO shareholder, is totake a 25.1% share, subject to Board approval, and is said to have issuednew bonds to help refinance its debts. Fortum has put its oil business up forsale and is listing on the Finnish stock exchange to raise funds to develop itsaspirations in the power trade. Stora Enso, which owns 14% of PohjolanVoima Oy, TVOs largest shareholder is also expected to invest in theproject. (10)Special price for the Finns?Framatome ANP is eager to get a prototype of EPR up and running in orderto gain experience of the reactor and credibility for marketing to potentialcustomers. To that end, it is supposed that TVO is getting the reactor for a'special price', which suggests that EPR is not as competitive in the marketplace as perceived.Public subsidiesPrior to the political decision on the reactor in Finland, one of the main pronuclear arguments was that no public subsidies would be required. In reality,Siemens had applied for Hermes export credits for their turbine from theGerman government, improving TVO's chances of achieving a cheaper loan.Export credit guarantees are usually awarded to projects implemented indeveloping countries to decrease the investment risk of the supplier. Thefinal decision about the Hermes credits was to be made after TVO signedthe construction contract however, Siemens has subsequently withdrawn theapplication (see below).It had been rumored that France was also likely to subsidize the projectgiven its governments eagerness for the development EPR. French IndustryMinister, Nicole Fontaine, has recommended EPR as replacement forexisting reactors to be retired by 2020. (11)Future costsFinnish legislation states that nuclear companies are responsible for thedecommissioning of the power plants and the management of the nuclearwaste. Finnish operators have reserved approximately Euro 1 billion (US$1.2 billion) into a special fund for these purposes. Compared with estimatesin other countries based on previous experience of decommissioning, itappears that the Finns have grossly underestimated. (12)The nuclear industry is surviving on a small number of new orders. In mostcountries with liberalized electricity markets experience indicates that nuclearpower plants cannot compete without public subsidies. The fact that aFinnish company is now placing an order has raised hopes among nuclearmanufacturers. The Finnish 'experiment' will definitely be monitored closelyby both the nuclear opponents and proponents.Sources:(1) The economics of new nuclear power plants and electricityliberalization: Lessons for Finland from British experience, Thomas S.,2002(2) See (1)(3) Study of Cost Effective Large Advanced Pressurized Water Reactorthat Employs Passive Safety Features, U.S. Department of Energy, J.W.Winters, 2000(4) Nucleonics Week, 20 November 2003(5) See (1)(6) GE Nuclear Energy, Presentation to the International Conference onNuclear Power Industry Development and Cooperation, 16-17 March1995. Price recalculated from 1992 dollars using GDP deflator.(7) Nucleonics Week, 25 January 1996(8) AREVA press release 18 December 2003(9) Nucleonics Week Special, 16 October 2003(10) See (4)(11) See (9)(12) VTT, Rasilainen K, Vuori S. Käytetyn ydinpolttoaineen huolto,suomalaisen suunnitelman pääpiirteet. VTT Energia, 1999(13) Friends of the Earth Europe press release, 16 December 2003(14) Williams, W.A., and Lee, P.S. Advanced LWR Technology forCommercial Application.(15) WISE News Communique {HYPERLINK "../485/4813.html"}485.4813: "Problems of decommissioningnuclear reactors" (16) The Canadian Nuclear Lesson, Sierra Club of Canada andGreenpeace International Joint Briefing Paper, 2001{HYPERLINK "mailto:http://us.f306.mail.yahoo.com/ym/Compose?To=kaisa.kosonen@nordic.greenpeace.org&YY=95455&order=down&sort=date&pos=5&view=a&head=b"} {HYPERLINK "http://www.greenpeace.fi/"}
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