Exploring Hydrocarbon Depletion
Page added on February 13, 2017
Five years ago almost to the day (Feb. 9, 2012, actually), the Nuclear Regulatory Commission voted 4-1 to issue a construction and operating license to Southern Company for the 2,234 megawatt Vogtle 3&4 project—the first of the new generation of reactors that was touted as the beginning of the industry’s long climb back from 30 years of dormancy.
At the time, Marvin Fertel, then president and CEO of the Nuclear Energy Institute, the industry’s trade association, sounded almost euphoric: “This is a historic day. [The NRC decision] sounds a clarion call to the world that the United States recognizes the importance of expanding nuclear energy….” Fertel’s optimism was hardly unique: A year earlier, Jim Miller, CEO of Southern Nuclear, the company’s operating subsidiary, told Scientific American: “The nuclear revival is under way in Georgia.”
My, how much has changed in just five years. Today, we are waiting for the other shoe to drop in the Westinghouse-Toshiba fiasco, which is expected later this month. When that happens it will serve as the end point of the revival that never really took place—five years from start to finish, not quite the long-running blockbuster the industry had hoped for.
There is plenty of blame to go around—the federal government’s incentives were poorly structured and created a rush to get in the door, the Nuclear Regulatory Commission probably didn’t have the funding or staff to effectively implement its new, much-touted licensing requirements, and the Fukushima Daiichi disaster in Japan certainly didn’t help—but at its heart this was a case of bad management and wishful thinking, by both Southern and Westinghouse.
Southern, burned by its near-bankruptcy experience with Vogtle 1&2, which were years late and billions of dollars over budget, clearly was driven by a desire for cost certainty, and the company has frequently touted the essentially fixed price nature of its engineering, procurement and construction (EPC) contract with Westinghouse and, at least initially, CB&I. Even when things turned sour, and Southern and the contractors negotiated a deal in 2015 for Westinghouse to take over sole control of the project, the Georgia utility pointed out that the settlement (which added $350 million to Georgia Power’s costs for the project) included “additional contractual protections” to shield the company from even higher costs going forward.
For Westinghouse, as I have written previously (see here), the fixed price contract made sense as a marketing tool. Its AP1000 reactors had never been built in the U.S. and the projects for Southern and SCANA’s South Carolina Electric & Gas unit offered a chance for the company to prove the technology’s worth. Never mind that Westinghouse had no real idea what the project would cost since almost none of the detailed design drawings were complete before the contract with Southern was signed, it was a chance to get a foot in the developing nuclear revival in the United States.
Similar fixed price contracts had been offered up at the beginning of the nuclear era in the 1960s, and that didn’t end well. In a comprehensive 2013 report for the Eastern Interconnection States’ Planning Council and the National Association of Regulatory Utility Commissioners (NARUC), Navigant Consulting found that 13 early plants built by General Electric and Westinghouse had forced the two nuclear developers to subsidize more than a $1 billion in construction costs—back when $1 billion was real money, accounting for inflation that billion would be equal to almost $8 billion today. Interestingly, the contract amount for the first of these turnkey contracts, GE’s offer to build the 640 MW Oyster Creek plant in New Jersey, wasn’t tied to the actual cost of building the plant at all, but according to Navigant was simply set so that it would be cheaper than a fossil plant alternative. GE got the contract, but as the chart below indicates, it had to eat almost half the cost of the project.
Clearly this was not a sustainable proposition, as Charles Huston (a nuclear expert retained by Georgia Power in its prudence review last year before the state’s public service commission) highlighted in his April 2016 written testimony to the PSC. “The fact that GPC [Georgia Power Company] was able to obtain an EPC agreement that contained fixed and firm prices for most of the EPC work scope in 2008 was a major achievement. Although certain NSSS [nuclear steam supply system] suppliers and engineer constructors were willing to provide fixed prices for nuclear plants in the 1960s and early 1970s, virtually every NSSS supplier and engineer constructor refused to provide fixed prices for nuclear plants in the late 1970s and 1980s. The reason for this is that they all lost large sums of money on their fixed price contracts for nuclear plants….”
So the poster child for the U.S. nuclear revival returned to the industry’s fixed price roots, and just like the first do-si-do this dance isn’t going to end well either.
As Huston notes repeatedly in his testimony on the prudence of Georgia Power’s management and spending, the fixed price nature of the EPC contract has largely shielded the utility and to a lesser degree its customers from the project’s cost increases. What he doesn’t say is that those costs haven’t gone away; they simply have been shifted onto the contractor.
This brings us back to the other shoe, which is expected to come tumbling down Feb. 14, when Toshiba, Westinghouse’s parent, is scheduled to release its third quarter 2016 earnings. Public recognition of the troubles began in December, when Toshiba warned that all was not well, saying that it might have to write off several billion dollars in relation to its decision to buy out its construction partner in the Southern and SCANA projects, CB&I Stone Webster. More ominous, certainly for any future nuclear projects, was this statement: “Westinghouse has found that the cost to complete the U.S. projects will far surpass the original estimates, mainly due to increases in key project parameters resulting in far lower asset value than originally determined.”
How this will play out remains to be seen, but I think it is safe to say that there will never be another fixed price contract to build a large nuclear power plant in the U.S.—the risk is simply too great, just ask Toshiba/Westinghouse. And if the fixed price option is off the table, the revival, such as it was, is over. In the current slow-growth, climate change denial environment, no utility is going to take on that risk, which amounts to a bet-the-company approach for all but the very largest firms. And tell me if you think there is a utility regulator anywhere in the United States that would be willing to sign off on such a project. I can hear that conversation now: ‘So, let me get this straight, you want me to approve a project whose total cost is unknown, and whose completion date is uncertain. I don’t think so…’