When were the first signs of the nuclear renaissance?
September 28th, 2008 by William Nuttall, University of CambridgeThe electricity industry has shown an interest in already completed nuclear power plants. This predates the first examples of interest in new build nuclear power plants forming part of a “nuclear renaissance”.
Such a situation arises because most of the key economic risks of nuclear energy are associated with the construction and licensing phase. Pre-existing plants have the advantage that these difficult hurdles have already been passed.
Figure 1 Prices paid per unit of rated capacity for already completed US NPPs. Data source: World Nuclear Association
Figure 1 presents data corresponding to the prices paid for pre-existing US Nuclear Power Plants (hereafter, NPPs) in the period July 1999 (Entergy purchase of Pilgrim) to July 2008 (Duke NCEMC expected purchase of Catawba).
The “market” for second hand nuclear power stations in the US was very much a buyers one in the late 1990s. Ownership of NPPs was fragmented and several minority owners were happy to sell their stakes at low prices. Companies such as AmerGen (a joint venture between PECO and British Energy) and Entergy spotted the potential for consolidating ownership and improving performance, at a time when the conventional wisdom was that NPPs were liabilities rather than assets.
Figure 1 shows that four deals were made in the period July 1999 to August 2000 at prices below USD 30.00 per kWe of rated capacity. However, in the autumn of 2000 prices started to rise significantly. In September 2000 Dominion paid USD 1.3 billion for the Millstone NPP in Connecticut, equivalent to USD 660 per kWe. Was this the very first tangible sign of the nuclear renaissance?
Incidentally “nuclear renaissance” is a phrase first coined in 1990 by Charles Venyvesi writing in US News and World Report. However the phrase really started to take hold after it was used by Mark Yost in the Wall Street Journal on 13 September 1999 when he wrote:
‘Not long ago, nuclear energy looked headed for extinction. Those days are over. With production costs dropping and regulations for fossil-fuel-burning plants rising, there’s a renaissance taking place in nuclear power that would have been unthinkable five years ago.’
We suggest that the seeds of renaissance were indeed sown at the turn of the millennium and now as we approach the end of the first decade of that millennium the renaissance is truly taking shape.
Figure 1, however, neglects to include an important consideration concerning the purchase of used NPPs – the number of licensed years of operation remaining. Some plants are simply too elderly to have much residual value. Figure 2 corrects for this consideration.
Figure 2 Prices paid used US nuclear power plants per unit of rated capacity per licensed year remaining. Data source: World Nuclear Association
The notion that prices for nuclear assets rose in the autumn of 2000 is still visible in the data shown in figure 2. It is, however, somewhat overshadowed by the $80/kWe/year paid by Entergy for the Palisades plant in Michigan in July 2006. However shortly after the plant was purchased it secured a twenty year life extension – a fact not represented in the data of figure 1 where only the less than four years of remaining life at the time of the deal are used for the calculation of the data.
It is important to stress that several factors came together to drive prices for existing NPPs lower during the early 1990s.
First and foremost fossil fuel energy prices were low and stable following the 1991 Gulf War. Although climate change was a live scientific issue it had not yet started to impact seriously on either business or public policy.
During this period several US states were liberalising their electricity markets and in several cases utilities were able to argue that legacy NPPs represented “stranded assets”, that is, investments made in good faith during the period of rate of return regulation which would not be profitable in the new liberalised markets. Compensation agreements for these apparently unprofitable NPPs provided a convenient exit for the utilities which owned them.
Finally the market in this period had not yet fully realised the significant improvements in plant operations being achieved by US NPP operators. Engineering reliability of NPPs has improved enormously since the mid 1990s and has acted to boost the value of such plants over this period. The average load factor for the US improved from 68% in 1991 to 90.7% in 2001, mainly owing to much shorter refuelling outages. US aggregate nuclear output increased about 40% over the period, despite minimal additions to capacity. In a high fixed cost industry, extra output implies a sharp increase in operating revenue and profit.
Another story revealing the emerging renaissance well before any plans for actual new build is the decision made in 2002 to restart Browns Ferry unit 1 in Alabama USA. The background to that story is: Browns Ferry Unit 1 is a Boiling Water Reactor operational from 1973. It was shutdown by fire for one year in 1975. The fire prompted much general concern about fire safety across the US nuclear industry and beyond. Brown’s Ferry was forced into extended safety-based shutdown from 1985. But following the 2002 decision, and after major investment, the unit restarted in 2007. A plant came back from the dead – perhaps a true renaissance?
William Nuttall and Simon Taylor, Judge Business School, University of Cambridge
P.S. This post is based on part of a CESSA working paper Financing the Nuclear Renaissance.
April 18th, 2009 at 10:41 pm
According to William Nuttall’s paper, the first signs of the nuclear Renaissance can be spotted about 2000. In the comment below, I will try to focus on the facts that prove that the nuclear Renaissance itself (as opposed to the first signs) was “inevitable”. Besides, I am going to try to define when those elements were clearly visible.
To be able to determine when the Renaissance of nuclear power occurred, we have to study when the causes that led power producers to choose nuclear power were simultaneously present. The different drivers that can lead to choose nuclear energy are the following:
The need in base load electricity. The economic growth of emerging countries such as India and China really started by 2003/2004. This growth was linked with a high need of base load production. Indeed, western countries outsourced many plants that were high-energy consumers (steel producers, chemical plants…) . Those consumers have constant power needs in time that can be assimilated to base load.
Low costs compared with other type of energy. Oil prices surged with the beginning of the war in Iraq in March 2003. The oil demand was increasing then because of the economic growth of emerging countries. Thus the price went from 20$/bbl in 2002 to 50$/bbl in 2005.
One could add that new designs of NPPs were available at the beginning of the 2000s. Those designs also known as 3rd generation are said to be safer and more competitive than the previous. We can argue that this fact backs up the previous point and that it helped to fight fears against nuclear power.
Another way to define when the Renaissance of nuclear power occurred is to focus on the direct consequences of the development of new NPPs.
Uranium ore prices are directly linked to the growth of nuclear energy. Over the past 30 years, uranium prices reached their lowest point in 2002 with a price of 9.5$/pound. The price started to increase in 2003 to reach 36$/pound in 2005. However, we have to qualify this point because the demand in uranium ore was very low for a while and there was no search for new uranium mines. Consequently, we cannot know what part of the surge is directly linked with the increase in demand and which part is correlated to the decrease in offer.
Another consequence of the Renaissance of nuclear power is the fact that the time needed to build the vessel containing nuclear fuel increased by several years. Indeed, only Japanese Steel Works is technically able to build such vessels and the demand for those dramatically increased by 2003. The time needed to obtain such a vessel was only a few months in 2002 and it quickly jumped to 2 or 3 years then.