Senate Energy, Utilities, and Communications Hearing

December 10, 2007
San Diego, CA

Good afternoon, Chairwoman Kehoe and members of the Committee. Thank you for inviting me to testify before this Committee. My name again is Jim Harding, and I am an Olympia, Washington based consultant on energy and environmental issues, and was recently director of power planning and forecasting and external affairs for Seattle City Light. I learned most of what I know about the economics of nuclear power 30-35 years ago, in this state, where utilities were considering over 30 new reactors by the year 2000. About fifteen months ago, I was approached by the Keystone Center to join an expert panel examining prospects and challenges of a nuclear “renaissance.” 

At our first session, we were treated to a presentation by the Electric Power Research Institute. EPRI examined thirteen recent studies, through out the 2003 MIT study and another from Czechoslovakia, just because they were outliers, averaged the rest, and assumed the plants could be placed into ratebase with their output sold in deregulated wholesale markets. They’d make a lot of money, but this is a preposterous approach, and was uniformly rejected by all members of the Keystone panel.

We started with 2003 MIT study, which had the good judgment to actual data from recently completed plants in Asia. The data is far from perfect, but it was the best we had. The next thing we had to do was to assess developments since 2002 – the most important of which is called by some the “China effect.” Construction costs and commodity prices from 2002-2006 increased at more than twice the rate of inflation. Keystone estimated final completion costs of $3600-4000/kW for a reactor, and capital costs account for most of the lifecycle costs of a nuclear plant.

We used conservation assumptions. The low number has no real escalation going forward; the high number assumes continuation of 2002-2006 trends. We assumed a 5-6 year construction period; very few reactors in the US were built that quickly. We assumed that the plants could be ratebased, and that Wall Street would require only a slight premium on equity and would not downgrade debt. We assumed that recent commodity and construction cost escalation would be no worse for nuclear power than other big engineering projects. We did not assume that state regulators would only approve projects subject to a construction cost cap.

All the recent evidence points to a much environment for nuclear than other resources. The US and Western European industries have been moribund since TMI 2 and Chernobyl – two to three decades. Skilled contractors and crews are scarce; the number of ASME-certified firms holding N-stamps has fallen from 200 to 80. Almost all large components would need to be imported, and NRC-certified. Only one steel mill in the world – Japan Steel Works - can supply the very large forgings. Lead times for many key components are 4-6 years. In short, the supply-chain is weak, and that poses risks of monopoly pricing and labor and material delays during construction. Ironically, these are the same factors that were primarily responsible for driving nuclear costs in the 1970s and 1980s, when we tried to build many reactors simultaneously. 

At the outset of our Keystone Center dialogue, many people thought that vendors would complete all engineering design before construction and offer fixed “turnkey” contracts to interested utilities. I don’t think anyone believes that anymore. The one international project being built on those terms is Olkiluoto-3, in Finland, and the vendor – the mainly French government owned company Areva – is taking at least a billion dollar bath on the project. Areva admits it underestimated the supply chain challenges; they didn’t have the resources or think they needed to complete all engineering design before starting construction – now they must redesign the plant for a longstanding Finnish standard – the ability to withstand the crash of a commercial airplane.

For me, the other big surprise was the uranium supply and enrichment market. Uranium prices have skyrocketed since 2002 from roughly $30/kg to $300/kg earlier this year. This is not being driven by new demand, but by the exhaustion of US and Russian surplus inventories, mostly from cancelled plants and downblending of highly enriched Russian weapons uranium. We produce – essentially worldwide – about 60 percent as much uranium and today’s reactors use. The surpluses mainly disappear by 2013; we need to roughly double uranium and enrichment capacity in very short order. While fuel cost is only a modest part of cost of nuclear generation, the other side of the coin is the operator of an existing reactor can afford to pay very high prices to avoid shutdown.

Keystone looked at the question of whether the uranium supply issue should interest us in reprocessing, and our conclusion on economic grounds is that reprocessed fuel costs 3 times more than high priced uranium, and does not material affect the need for long term underground management of radioactive waste.

After our Keystone work was complete, Standard & Poor’s and Moody’s both released reports on reactor economics. S&P’s capital cost estimate for nuclear power was $4000/kW – equal to our high case. Moody’s was $5000/kW – higher than anything we considered. S&P asked whether carbon taxes up to $30 per ton would create a clear cost advantage for new reactors, and they concluded that it would not. These values translate into a lifetime levelized cost of 10-14 cents per kilowatt-hour – far cry from the 3.8-6 cent range in many paper studies. I would only observe in hindsight that people doing paper studies have different standards than those spending real money.

I have provided staff with both a recent paper on these topics, and with overheads supporting my talk today. Thank you.