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Nuclear Power Coming Back – But Not Where Expected
Electricity Currents A survey of trends and insights in electricity restructuring
Accidents Bring Energy, Environment into Focus Recent months have witnessed a confluence of events that have brought the interdependence of energy, economic, and environmental issues into focus – not just for the experts, who’ve always been aware of these interdependencies, but for average citizens, who are mostly oblivious to them: A giant oil slick following a spectacular accident on BP’s Deep Horizon offshore oil platform showed the vulnerabilities of offshore oil drilling in deep waters; A deadly accident a month earlier in West Virginia killed 29 miners in a Massey Energy Co. mine allegedly plagued with chronic safety problems; Following protracted debates and interminable delays, the first U.S. offshore wind farm off the coast of Massachusetts got a step closer to reality; President Obama, who had earlier sought to ease restrictions on offshore oil drilling has had second thoughts; and
Continued on page 5
In Electricity Currents This Month: Accidents Bring Energy, Environment into Focus . . . . . . . . . . . . . . . . . . . . Nuclear Power Coming Back – But Not Where Expected . . . . . . . . . . . . . Emissions Curbs Now off Table, Aussies Squeeze Mining Sector . . . . . Once out Front on Issue, Fiscally Challenged Calif. Losing Ardor for GHG Cuts . . . . . . . . . . . . . . . . . How Much Is Too Much For Renewable Resources? . . . . . . . . . . . .
. . . . . .1 . . . . . .1 . . . . . .3
. . . . . .3 . . . . . .4
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Nuclear Power Coming Back – But Not Where Expected Like a dormant patient, the nuclear power industry has been waiting for a revival for some years. Despite many hopeful signs – concerns about climate change and energy security among them – there has been little movement in the two key markets of the U.S. and Europe even with strong political support, notably in the U.S. Lately, however, there are signs that the long nuclear slumber may be coming to an end. While significant obstacles persist, better days may be around the corner. July 2010, Vol. 23, Issue 6
1040-6190/$–see front matter
1
The most stunning news came from Finland, which approved the applications for building two new reactors despite the problems they have had with a unit currently under construction. There was other encouraging news. Tokyo Electric Power Company (TEPCO), among the largest privately owned global utilities and a member of the nuclear big leagues, bought a stake in the NRG Energy Inc. nuclear project in Texas, expected to be among the first new nuclear reactors to be built in the U.S. in over three decades. The $125 million investment in the $14 billion project is TEPCO’s first in a nuclear project outside Japan. The deal, which is conditional on a loan guarantee from the U.S. Department of Energy and licensing by the Nuclear Regulatory Commission (NRC), will give TEPCO a 10 percent ownership in the project, which is 92.4-percent-owned by NRG and Toshiba Corp. Moreover, TEPCO has placed a $30 million option to buy another 10 percent of the project for an additional $125 million, potentially giving it an 18 percent ownership in the flagship project. A combined construction and operating license is expected from the NRC in 2012. If all goes according to plan, the first unit may come online as early as 2016, followed by the second unit in 2017, though that’s considered overly optimistic by most estimates. TEPCO may have been encouraged by Toshiba Corp.’s experience. The company acquired a 67 percent stake in the U.S.-based Westinghouse Electric Co. in 2006 for $4 billion. Its CEO, Mr. Norio Sasaki now believes that the pricey gamble is about to pay off. Referring to a study by the Vienna-based International Atomic Energy Agency, Mr. Sasaki was quoted in The Wall Street Journal predicting a ‘‘potentially huge market for new nuclear reactors’’ worldwide, perhaps ‘‘as many as 1,280 reactors over the next 40 years.’’ That comes out to an average of 32 new reactors per year – a fanciful number given the recent trends. For its part, Toshiba is targeting 39 new orders by 2015. Perhaps it knows something we don’t. Two additional announcements indicate that nontraditional and emerging markets may be where the bulk of new nuclear projects can be expected. China’s National Nuclear Corporation has agreed to build two civilian reactors in Pakistan, while Russia’s 2
1040-6190/$–see front matter
state-owned Atomstroyexport signed a contract to build and operate a massive $20 billion 4,800 MW nuclear plant at Akkuyu in southern Turkey. In the critical U.S. market, the projects of Southern Company, Scana Corp., and NRG appear farther ahead of the pack to receive final loan guarantees and NRC licenses, with several other contenders in hot pursuit. In addition to the federal nuclear loan guarantees, state regulators in Georgia, which is where Southern Company plans to build its two new reactors, appear willing to bend the rules by allowing the company to collect money from customers during the long construction period. Traditionally, state level regulators do not permit investor-owned utilities (IOUs) to pass on the cost of plants under construction until the unit is successfully completed and is placed into operation. This rule, known as used-and useful test, means that the utility must finance the project’s capital costs plus its significant interest charges accumulated during construction period, known as funds used during construction or FUDC in utility parlance, on its books until the unit goes into operation, hence becomes used and useful. If Southern Company, based in Atlanta, is successful in reaching such an arrangement with Georgia regulators, it may prompt other states to look into similar arrangements. Southern Company is also looking into arrangements with engineering firms and service vendors to secure fixed-price contracts – another major stumbling block to getting nuclear projects completed on budget. Areva’s recent experience with the TVO’s nuclear project in Finland shows the perils of such commitments to vendors, and the obvious advantages to utility clients who will be virtually protected from major cost overruns, all too common in nuclear construction projects. Aside from these obstacles, the U.S. nuclear renaissance is hampered by lack of progress on the thorny nuclear waste issue. After spending more than $9 billion over 20 years and having nothing to show for it, the Department of Energy canceled the Yucca Mountain nuclear repository in Nevada last year. Exelon’s CEO, John Rowe, the biggest U.S. nuclear operator with 12 existing units, has repeatedly stated that he views the lack of a permanent nuclear waste The Electricity Journal
repository as a major impediment to new investment in nuclear plants. Nuclear waste, of course, poses the biggest example of the not in my back yard (NIMBY) syndrome, and politicians don’t have any interest in opening this can of worms, in case their state ends up designated as the nuclear dump. In the meantime, 16 utilities have sued the DOE over cancellation of the Yucca Mountain site, pointing out – among other things – that the DOE should not continue collecting $750 million in annual nuclear waste disposal fees from hapless electricity consumers when it is not delivering the promised service. Energy Secretary Steven Chu has appointed a blue ribbon panel to look into the matter. Observers are skeptical about a successful resolution of the matter any time soon. & doi:/10.1016/j.tej.2010.06.012
Emissions Curbs Now off Table, Aussies Squeeze Mining Sector With little prospect for progress in the Senate on climate change legislation, Australia’s Prime Minister Kevin Rudd has proposed a 40 percent resources super profits tax (RSPT) on the country’s export-driven, non-renewable mining sector. Coming only a few months ahead of expected elections, possibly as early as August 2010, the controversial tax proposal sets Rudd against opposition leader Tony Abbott, who says, ‘‘The last thingI want todois tosee any damagedonetowhat isin effect the goose that laid the golden egg for Australia,’’ referring to the all-important mining sector. Prime Minister Rudd, for his part, points out that the proposed tax applies to highly profitable companies who are partly or mostly foreign-owned. BHP Billiton Ltd., one the mining giants, is 40 percent foreign-owned while Rio Tinto Ltd. is 70 percent foreign-owned. The tax, however, would apply to all resource-based companies beginning in 2012, foreign or domestic, including a number of international players such as U.S.-based ConocoPhillips, China’s PetroChina, Royal Dutch Shell, and Malaysia’s Petronas, all active or interested in Australia’s burgeoning mining sector. July 2010, Vol. 23, Issue 6
‘‘The Australian people deserve a fair return on the resources which they themselves own,’’ Rudd said, with some justification. There is no doubt that the mining sector has been hugely profitable, and the booming demand from China and other countries for Australia’s mineral wealth is not going away. Fitch, the credit rating agency, estimates that the additional annual tax on Rio and BHP, the top two affected companies, would amount to A$3 billion, a fraction of the companies’ A$125 billion in operating earnings before interest and taxes (EBIT) in the past three years. But it will nevertheless cut into their expected future profits. Australia has the world’s biggest reserves of brown coal, nickel, silver, uranium, and zinc, among other minerals, and the second-largest reserves of iron ore, sought after by Chinese steel mills. The issue of taxing a country’s mineral resources to support social and economic programs is not new. Norway, Canada, and some U.S. states already have profit-based taxation – but the rate of taxation varies. In the U.S. the effective tax rate is 40 percent, while Brazil’s is at 38 percent. The proposed tax would make Australia’s among the highest taxes in the world. & doi:/10.1016/j.tej.2010.06.013
Once out Front on Issue, Fiscally Challenged Calif. Losing Ardor for GHG Cuts In 2006, during the Bush Administration, when climate change was denied, neglected, or obfuscated, the state of California passed a landmark law to unilaterally and unconditionally reduce its greenhouse gas emissions to 1990 levels by 2020. Republican Gov. Arnold Schwarzenegger not only signed the controversial bill but has been a surprisingly ardent supporter of green policies, including an executive order to meet 33 percent of the state’s electricity needs from new renewable resources – not counting existing large hydro resources – also by 2020. The California law, known as Assembly Bill 32, or AB32, is the only one of its kind in the U.S., and among 1040-6190/$–see front matter
3
Accidents Bring Energy, Environment into Focus Recent months have witnessed a confluence of events that have brought the interdependence of energy, economic, and environmental issues into focus – not just for the experts, who’ve always been aware of these interdependencies, but for average citizens, who are mostly oblivious to them: A giant oil slick following a spectacular accident on BP’s Deep Horizon offshore oil platform showed the vulnerabilities of offshore oil drilling in deep waters; A deadly accident a month earlier in West Virginia killed 29 miners in a Massey Energy Co. mine allegedly plagued with chronic safety problems; Following protracted debates and interminable delays, the first U.S. offshore wind farm off the coast of Massachusetts got a step closer to reality; President Obama, who had earlier sought to ease restrictions on offshore oil drilling has had second thoughts; and
Continued on page 5
In Electricity Currents This Month: Accidents Bring Energy, Environment into Focus . . . . . . . . . . . . . . . . . . . . Nuclear Power Coming Back – But Not Where Expected . . . . . . . . . . . . . Emissions Curbs Now off Table, Aussies Squeeze Mining Sector . . . . . Once out Front on Issue, Fiscally Challenged Calif. Losing Ardor for GHG Cuts . . . . . . . . . . . . . . . . . How Much Is Too Much For Renewable Resources? . . . . . . . . . . . .
. . . . . .1 . . . . . .1 . . . . . .3
. . . . . .3 . . . . . .4
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Nuclear Power Coming Back – But Not Where Expected Like a dormant patient, the nuclear power industry has been waiting for a revival for some years. Despite many hopeful signs – concerns about climate change and energy security among them – there has been little movement in the two key markets of the U.S. and Europe even with strong political support, notably in the U.S. Lately, however, there are signs that the long nuclear slumber may be coming to an end. While significant obstacles persist, better days may be around the corner. July 2010, Vol. 23, Issue 6
1040-6190/$–see front matter
1
The most stunning news came from Finland, which approved the applications for building two new reactors despite the problems they have had with a unit currently under construction. There was other encouraging news. Tokyo Electric Power Company (TEPCO), among the largest privately owned global utilities and a member of the nuclear big leagues, bought a stake in the NRG Energy Inc. nuclear project in Texas, expected to be among the first new nuclear reactors to be built in the U.S. in over three decades. The $125 million investment in the $14 billion project is TEPCO’s first in a nuclear project outside Japan. The deal, which is conditional on a loan guarantee from the U.S. Department of Energy and licensing by the Nuclear Regulatory Commission (NRC), will give TEPCO a 10 percent ownership in the project, which is 92.4-percent-owned by NRG and Toshiba Corp. Moreover, TEPCO has placed a $30 million option to buy another 10 percent of the project for an additional $125 million, potentially giving it an 18 percent ownership in the flagship project. A combined construction and operating license is expected from the NRC in 2012. If all goes according to plan, the first unit may come online as early as 2016, followed by the second unit in 2017, though that’s considered overly optimistic by most estimates. TEPCO may have been encouraged by Toshiba Corp.’s experience. The company acquired a 67 percent stake in the U.S.-based Westinghouse Electric Co. in 2006 for $4 billion. Its CEO, Mr. Norio Sasaki now believes that the pricey gamble is about to pay off. Referring to a study by the Vienna-based International Atomic Energy Agency, Mr. Sasaki was quoted in The Wall Street Journal predicting a ‘‘potentially huge market for new nuclear reactors’’ worldwide, perhaps ‘‘as many as 1,280 reactors over the next 40 years.’’ That comes out to an average of 32 new reactors per year – a fanciful number given the recent trends. For its part, Toshiba is targeting 39 new orders by 2015. Perhaps it knows something we don’t. Two additional announcements indicate that nontraditional and emerging markets may be where the bulk of new nuclear projects can be expected. China’s National Nuclear Corporation has agreed to build two civilian reactors in Pakistan, while Russia’s 2
1040-6190/$–see front matter
state-owned Atomstroyexport signed a contract to build and operate a massive $20 billion 4,800 MW nuclear plant at Akkuyu in southern Turkey. In the critical U.S. market, the projects of Southern Company, Scana Corp., and NRG appear farther ahead of the pack to receive final loan guarantees and NRC licenses, with several other contenders in hot pursuit. In addition to the federal nuclear loan guarantees, state regulators in Georgia, which is where Southern Company plans to build its two new reactors, appear willing to bend the rules by allowing the company to collect money from customers during the long construction period. Traditionally, state level regulators do not permit investor-owned utilities (IOUs) to pass on the cost of plants under construction until the unit is successfully completed and is placed into operation. This rule, known as used-and useful test, means that the utility must finance the project’s capital costs plus its significant interest charges accumulated during construction period, known as funds used during construction or FUDC in utility parlance, on its books until the unit goes into operation, hence becomes used and useful. If Southern Company, based in Atlanta, is successful in reaching such an arrangement with Georgia regulators, it may prompt other states to look into similar arrangements. Southern Company is also looking into arrangements with engineering firms and service vendors to secure fixed-price contracts – another major stumbling block to getting nuclear projects completed on budget. Areva’s recent experience with the TVO’s nuclear project in Finland shows the perils of such commitments to vendors, and the obvious advantages to utility clients who will be virtually protected from major cost overruns, all too common in nuclear construction projects. Aside from these obstacles, the U.S. nuclear renaissance is hampered by lack of progress on the thorny nuclear waste issue. After spending more than $9 billion over 20 years and having nothing to show for it, the Department of Energy canceled the Yucca Mountain nuclear repository in Nevada last year. Exelon’s CEO, John Rowe, the biggest U.S. nuclear operator with 12 existing units, has repeatedly stated that he views the lack of a permanent nuclear waste The Electricity Journal
repository as a major impediment to new investment in nuclear plants. Nuclear waste, of course, poses the biggest example of the not in my back yard (NIMBY) syndrome, and politicians don’t have any interest in opening this can of worms, in case their state ends up designated as the nuclear dump. In the meantime, 16 utilities have sued the DOE over cancellation of the Yucca Mountain site, pointing out – among other things – that the DOE should not continue collecting $750 million in annual nuclear waste disposal fees from hapless electricity consumers when it is not delivering the promised service. Energy Secretary Steven Chu has appointed a blue ribbon panel to look into the matter. Observers are skeptical about a successful resolution of the matter any time soon. & doi:/10.1016/j.tej.2010.06.012
Emissions Curbs Now off Table, Aussies Squeeze Mining Sector With little prospect for progress in the Senate on climate change legislation, Australia’s Prime Minister Kevin Rudd has proposed a 40 percent resources super profits tax (RSPT) on the country’s export-driven, non-renewable mining sector. Coming only a few months ahead of expected elections, possibly as early as August 2010, the controversial tax proposal sets Rudd against opposition leader Tony Abbott, who says, ‘‘The last thingI want todois tosee any damagedonetowhat isin effect the goose that laid the golden egg for Australia,’’ referring to the all-important mining sector. Prime Minister Rudd, for his part, points out that the proposed tax applies to highly profitable companies who are partly or mostly foreign-owned. BHP Billiton Ltd., one the mining giants, is 40 percent foreign-owned while Rio Tinto Ltd. is 70 percent foreign-owned. The tax, however, would apply to all resource-based companies beginning in 2012, foreign or domestic, including a number of international players such as U.S.-based ConocoPhillips, China’s PetroChina, Royal Dutch Shell, and Malaysia’s Petronas, all active or interested in Australia’s burgeoning mining sector. July 2010, Vol. 23, Issue 6
‘‘The Australian people deserve a fair return on the resources which they themselves own,’’ Rudd said, with some justification. There is no doubt that the mining sector has been hugely profitable, and the booming demand from China and other countries for Australia’s mineral wealth is not going away. Fitch, the credit rating agency, estimates that the additional annual tax on Rio and BHP, the top two affected companies, would amount to A$3 billion, a fraction of the companies’ A$125 billion in operating earnings before interest and taxes (EBIT) in the past three years. But it will nevertheless cut into their expected future profits. Australia has the world’s biggest reserves of brown coal, nickel, silver, uranium, and zinc, among other minerals, and the second-largest reserves of iron ore, sought after by Chinese steel mills. The issue of taxing a country’s mineral resources to support social and economic programs is not new. Norway, Canada, and some U.S. states already have profit-based taxation – but the rate of taxation varies. In the U.S. the effective tax rate is 40 percent, while Brazil’s is at 38 percent. The proposed tax would make Australia’s among the highest taxes in the world. & doi:/10.1016/j.tej.2010.06.013
Once out Front on Issue, Fiscally Challenged Calif. Losing Ardor for GHG Cuts In 2006, during the Bush Administration, when climate change was denied, neglected, or obfuscated, the state of California passed a landmark law to unilaterally and unconditionally reduce its greenhouse gas emissions to 1990 levels by 2020. Republican Gov. Arnold Schwarzenegger not only signed the controversial bill but has been a surprisingly ardent supporter of green policies, including an executive order to meet 33 percent of the state’s electricity needs from new renewable resources – not counting existing large hydro resources – also by 2020. The California law, known as Assembly Bill 32, or AB32, is the only one of its kind in the U.S., and among 1040-6190/$–see front matter
3