The 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.