Nuclear Energy Loses Cost Advantage
Aug 25, 2010 - By DIANA S. POWERS - New York Times
PARIS — Solar photovoltaic systems have long been painted as a clean
way to generate electricity, but expensive compared with other alternatives
to oil, like nuclear power. No longer. In a “historic crossover,” the
costs of solar photovoltaic systems have declined to the point where they
are lower than the rising projected costs of new nuclear plants, according
to a paper published this month.
“Solar photovoltaics have joined the ranks of lower-cost alternatives
to new nuclear plants,” John O. Blackburn, a professor of economics
at Duke University, in North Carolina, and Sam Cunningham, a graduate student,
wrote in the paper, “Solar and Nuclear Costs — The Historic
This crossover occurred at 16 cents per kilowatt hour, they said.
While solar power costs have been declining, the costs of nuclear power
have been rising inexorably over the past eight years, said Mark Cooper,
senior fellow for economic analysis at Vermont Law School’s Institute
for Energy and Environment.
Estimates of construction costs — about $3 billion per reactor in
2002 — have been regularly revised upward to an average of about
$10 billion per reactor, and the estimates are likely to keep rising, said
Mr. Cooper, an analyst specializing in tracking nuclear power costs.
Identifying the real costs of competing energy technologies is complicated
by the wide range of subsidies and tax breaks involved. As a result, U.S.
taxpayers and utility users could end up spending hundreds of billions,
even trillions of dollars more than necessary to achieve an ample low-carbon
energy supply, if legislative proposals before the U.S. Congress lead to
adoption of an ambitious nuclear development program, Mr. Cooper said in
a report last November.
The report, “All Risk, No Reward for Taxpayers and Ratepayers,” was
a response to a legislative wish list developed by the Nuclear Energy Institute,
an industry group. The institute has called for a mix of U.S. subsidies,
tax credits, loan guarantees, procedural simplifications and institutional
support on a large scale.
At the state level, the industry has also pressed the case for “construction
work in progress,” a financing system that requires electricity users
to pay for the cost of new reactors during their construction and sometimes
before construction starts. With long construction periods and frequent
delays, this can mean that electricity users start to pay higher prices
as much as 12 years before the plants produce electricity.
The institute’s Web site says the financing system “reduces
the cost ratepayers will pay for power from the plant when it goes into
commercial operation,” by lowering interest payments on capital costs
and spreading the costs over time.
“The utilities insist that the construction work in progress charged
to ratepayers also include the return on equity that the utilities normally
earn by taking the risk of building the plant — even though they
have shifted the risk to the ratepayers,” Mr. Cooper said. “If
the plant is not built or suffers cost overruns, the ratepayers will bear
History suggests that the risk of this is not negligible. In 1985, Forbes
magazine dubbed the construction of the first generation of U.S. nuclear
plants “the largest managerial disaster in business history.”
The first round of plants resulted in write-offs through bankruptcies
and “stranded costs” — investments in existing power
plants made uncompetitive by deregulation — which essentially transferred
nearly $100 billion in liabilities to electricity users, said Doug Koplow,
an economist and founder of Earth Track, based in Cambridge, Massachusetts,
which campaigns against subsidies it considers environmentally harmful. “Although
the industry frequently points to its low operating costs as evidence of
its market competitiveness, this economic structure is an artifact of large
subsidies to capital, historical write-offs of capital, and ongoing subsidies
to operating costs,” Mr. Koplow said.
From 1943 to 1999 the U.S. government paid nearly $151 billion, in 1999
dollars, in subsidies for wind, solar and nuclear power, Marshall Goldberg
of the Renewable Energy Policy Project, a research organization in Washington,
wrote in a July 2000 report. Of this total, 96.3 percent went to nuclear
power, the report said.
Still, these costs pale in comparison with the financial risks and subsidies
that are likely to accompany the next wave of nuclear plant construction,
Mr. Cooper said.
A November 2009 research report by Citigroup Global Markets termed the
construction risks, power price risks, and operational risks “so
large and variable that individually they could each bring even the largest
utility to its knees.”
Those risks were mentioned in a 2009 report by the credit rating agency
Moody’s. “Moody’s is considering taking a more negative
view for those issuers seeking to build new nuclear power plants,” the
report said. “Historically, most nuclear-building utilities suffered
ratings downgrades — and sometimes several — while building
these facilities. Political and policy conditions are spurring applications
for new nuclear power generation for the first time in years. Nevertheless,
most utilities now seeking to build nuclear generation do not appear to
be adjusting their financial policies, a credit negative.”
Adding to the risks facing any reactor construction program, only one
of five proposed designs under consideration by U.S. utilities has ever
been built, the Nuclear Regulatory Commission said.
“No one has ever built a contemporary reactor to contemporary standards,
so no one has the experience to state with confidence what it will cost,” said
Stephen Maloney, a utilities management consultant. “We see cost
escalations as companies come up the learning curve.”
Market risk has been heightened by the recent recession. “The current
crisis has decreased energy demand even more than the 1970s oil price shocks,” Mr.
Cooper said. The recession “appears to have caused a fundamental
shift in consumption patterns that will lower the long-term growth rate
of electricity demand.”
Meanwhile, most of the projects that have created the increase of license
applications to the regulatory commission have already experienced difficulties. “About
half of the projects that have been put forward at the start of the next
generation of reactors have been delayed or canceled,” Mr. Cooper
said. “Those that have moved forward have suffered substantial cost
escalation and several have received negative financial reviews.
“Of the 19 applications at the N.R.C., 90 percent have had some
type of delay or cancellation, run into a design problem, suffered cost
increases and/or had the utility bond rating downgraded by Wall Street.”
Despite the economic challenges, the nuclear power industry remains unfazed.
“This is not a hospitable environment in which to commission any
large base-load power plant,” said Marvin Fertel, president and chief
executive of the Nuclear Energy Institute, in a briefing to the financial
community. Still, he said: “Fortunately new nuclear plants won’t
be in service until 2016 or later, so today’s market conditions are
not entirely relevant.”
Mr. Cooper said the industry’s equanimity was based, at least partially,
on the supportive cushion provided by loan guarantees and work-in-progress
financing. “With such financing the utility is making a one-way bet,
allowing it to make a profit even when the project fails,” he said. “The
people bear the risks and costs; the nuclear utilities take the profits.
Without loan guarantees and guaranteed construction work in progress, these
reactors will simply not be built, because the capital markets will not
Without public guarantees, nuclear projects often cannot get financing.
AmerenUE, the Missouri utility, suspended in April 2009 plans to build
a $6 billion, 1,600-megawatt reactor at its Callaway County nuclear site,
after trying unsuccessfully to get the State Legislature to repeal a longstanding
ban on work-in-progress financing. The continued existence of the ban “makes
financing a new plant in the current economic environment impossible,” the
Similarly, Florida Power and Light said in January that it would not proceed
beyond licensing with plans to build two new reactors at its Turkey Point
site, after the Florida Public Service Commission rejected its request
to pass on a $1.27 billion cost increase to its users.
Yet, despite episodic resistance at the local level, financial support
for the industry at the U.S. government level has been increasingly evident
in successive versions of climate and energy bills before the U.S. Congress,
including the most recent, the American Power Act, which is delayed in
the Senate until after the summer recess.
Nuclear subsidies in the Senate proposal include five-year accelerated
depreciation; tax credits for investments and production and eligibility
for the advanced energy tax credit; an increase in government insurance
against regulatory delays; access to private activity bonds; and a $36
billion increase in loan guarantees, bringing the total to $56 billion.
That remains less than the Nuclear Energy Institute’s goal of $100
billion, an amount it describes as “a minimal acceptable loan volume.” Still,
Mr. Fertel said in his financial briefing that “‘strong political
support’ understates our position.”
Federal loan guarantees cut nuclear construction financing costs by allowing
the utilities to sell bonds at a lower interest rate. But at the same time
the guarantee means that “the U.S. Treasury, and therefore the taxpayers,
are on the hook for the value of the loans should they go bad,” Mr.
According to the U.S. Government Accountability Office, the average risk
of default for such Department of Energy loan guarantees is about 50 percent,
which is the historic rate for the nuclear industry.
Mr. Koplow of Earth Track said two of the other subsidies in the Senate
bill, the investment tax credit and five-year accelerated depreciation,
would together “be worth between $1.3 billion and nearly $3 billion
on a net present value basis per new reactor.
“This is equivalent to between 15 and 20 percent of the total all-in
cost of the reactors, as projected by industry.”
Over all, Mr. Koplow said, the proposed subsidy package would undermine
the equity requirements of the nuclear loan guarantee program, designed
to ensure that investors have a strong interest in the long-term success
of the venture. “Although investors will get all the profit if the
reactor project is successful, they will bear virtually none of the financial
risk if the project fails,” he said. “This is a disastrous
By distorting energy markets, these subsidies would “effectively
make the government the chooser of which energy technologies will be winners
and which will lose,” he said. The American Power Act “does
not build a neutral policy platform on which all energy technologies must
The tax breaks for nuclear would “greatly impede market access for
competing energy sources,” Mr. Koplow said.
He said handing out huge subsidies would also cloud the transparency of
decision-making. “This approach,” he said, “which replaces
price signals with decisions by a handful of often unnamed individuals
within the U.S. Department of Energy, plays to none of the inherent strengths
of the U.S. market system to spur innovation and effectively allocate risks
and rewards. Further, the basis, and sometimes scale, of these subsidy
decisions is largely hidden from the public view.”
For Mr. Cooper, the core issue at stake is one of opportunity cost. “While
the cost estimates of nuclear power continue to rise, the potential for
energy efficiency measures to reduce the need for energy are far cheaper,” he
Lower-cost, low-carbon technologies are already available, and cost trends
for several others indicate that a combination of efficiency and renewable
technologies could meet projected power needs while also achieving aggressive
carbon-reduction targets, Mr. Cooper said.
In a June 2009 report drawing on several earlier studies, Mr. Cooper said
that energy efficiency, cogeneration and renewable sources could meet power
needs at an average cost of 6 cents per kilowatt hour, compared with a
cost of 12 cents to 20 cents per kilowatt hour for nuclear power.
Choosing the nuclear route, and constructing 100 new reactors, would translate
into an extra cost to taxpayers and electricity users of $1.9 trillion
to $4.4 trillion over the 40-year life of the reactors, compared with the
costs of developing energy efficiency and renewable sources, the report
Mr. Cooper said it would make sense for policy makers, standing in the
place of the market, to choose the least costly alternatives first.
“In an attempt to circumvent the sound judgment of the capital markets,
nuclear advocates erroneously claim that subsidies lower the financing
costs for nuclear reactors and so are good for consumers,” he said. “But
shifting risk does not eliminate it. Furthermore, subsidies induce utilities
and regulators to take greater risks that will cost the taxpayers and the
“The risks that have dismayed Wall Street should be taken seriously
by policy makers because they would cost not just hundreds of billions
of dollars in losses on reactors that are canceled, but also trillions
in excess costs for ratepayers when reactors are brought to completion
by utilities that fail to pursue the lower-cost, less risky options that
“The frantic effort of the nuclear industry to increase federal
loan guarantees and secure ratepayer funding of construction work in progress
from state legislatures is an admission that the technology is so totally
uneconomic that the industry will forever be a ward of state, resulting
in a uniquely American form of nuclear socialism.”