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Fukushima fallout in US to hit existing plants hardest; new plants have their own challenges


By Peter Maloney


August 4, 2011 - Unlike in Europe, the aftershocks in the United States from Japan's nuclear disaster caused by the March 11 earthquake are more likely to be borne by existing nuclear plants than by proposed new reactors, analysts say.


That does not mean that new nuclear plants will proceed unaffected. They are likely to feel some aftershocks, but they are just as likely to be affected by the challenges they faced before the Japanese crisis, namely high capital costs, the scarcity of funding support such as federal loan guarantees and the high cost of building a nuclear plant compared with the low overall costs of gas-fired generation.


In Europe, on the other hand, the repercussions were rapid. Italy in a June 12-13 referendum rejected government plans to build new nuclear plants. Also in mid-June Switzerland voted to phase out its 3,049 MW of nuclear reactors by 2034.


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In Germany the reaction to Japan's nuclear disaster came to a head on June 30 when the country's parliament voted to phase out Germany's nuclear fleet, which supplies about 23% of the country's electricity, by 2022.


In the US, the Nuclear Regulatory Commission earlier this month released the results of its 90-day review of the lessons learned from the catastrophic failure of the Fukushima Daiichi nuclear plant, which suffered a partial meltdown and is still out of service.


The task force concluded that there is no "imminent threat" to the safety of the 104 operating US nuclear reactors. The NRC did say, however, that some issues would require immediate action, such as prolonged loss of AC power at plant sites, ability to respond to potential threats from earthquakes and flooding, and the ability to monitor the condition of spent fuel pools. The agency called for further review.


No impact expected for pending projects


Fukushima will not have a huge impact on pending nuclear projects -- the 18 projects that have applied for combined operating and construction licenses, or COLs -- but will have an effect on existing operators, Hugh Wynne, senior research analyst at Sanford C. Bernstein & Co., said. High on the list of possible effects would be costly changes to how spent nuclear fuel is stored.


Meanwhile there has been a lot of speculation on what Fukushima will mean for the US nuclear renaissance.


Nuclear renaissance refers to the proliferation of applications for new nuclear power projects since 2005. Prior to that, the last nuclear plant entered service in the US in 1996, and the last nuclear project was permitted in 1978.


In that 15- or 33-year hiatus, depending on the starting point used, the Three Mile Island nuclear accident in Pennsylvania and the Chernobyl disaster in what is now Ukraine put a damper on nuclear power development. Now, Fukushima could be the defining nuclear disaster of the new millennium.


UBS analysts Per Lekander and Stephen Oldfield, in a report written in the wake of the March disaster, said Fukushima is likely to hurt the nuclear power industry's credibility more than the Chernobyl disaster in 1986 did. Chernobyl affected only "one reactor in a totalitarian state with no safety culture," they wrote. Fukushima affected four reactors, "casting doubt on whether even an advanced economy can master nuclear safety."


Projects already facing uphill


But even before Fukushima, cracks had already begun to appear in the nuclear renaissance. Exelon in July 2009 withdrew its COL application at the NRC for a nuclear project at its Victoria County, Texas, facility, turning it into an early site permit. At the time, Exelon cited uncertainty about load forecasts brought about by the recession and the limited availability of federal loan guarantees.


In October 2010, Constellation Energy bailed out of its plans to add 1,600 MW of nuclear capacity to its Calvert Cliffs facility, leaving its partner in the project, EDF, holding the bag.


The project was already facing an uphill battle -- Constellation cited the "shockingly high" cost estimate for a federal loan guarantee in dropping the project -- but for EDF the hill is now even steeper. EDF is a foreign company, so by law it cannot own 50% or more of a US nuclear power project. So now EDF owns a nuclear project that it cannot legally complete, unless it finds an American partner.


NRG Energy was also having trouble lining up partners and financing for its plan to add to reactors to its South Texas nuclear plant. Then Fukushima forced the company's hand. On April 19 NRG said it would take a $481 million writedown on its investment in South Texas.


The project had already suffered a series of blows, mainly the loss of funding from one partner and a tough quest to replace that funding, which was resolved only when NRG reached an agreement for Tokyo Electric Power to take a stake in the expansion project. The catastrophe at TEPCO's Fukushima plant disaster closed out that option.


Federal loan guarantees not a certainty


NRG also cited the timing and availability of federal loan guarantees.


The loan guarantee program is an essential component of the nuclear renaissance. The passage of the Energy Policy Act of 2005 is usually cited as the start date of the nuclear renaissance because it created the Department of Energy's loan guarantee program.


Analysts say that no company is going to move forward with plans for a new nuclear reactor unless it has a loan guarantee, but companies also have to consider the rift in the loan guarantee program that was exposed by the fate of Constellation's Calvert Cliff-3 project.


Loan guarantees are not free. The cost to the recipient, known as a credit subsidy cost, is worked out by DOE and the Office of Management and Budget.


For Constellation, OMB, citing market risks, came up with a cost of $880 million for the $7.6 billion loan guarantee the company had sought for Calvert Cliffs-3. The cost of the loan guarantee was the final straw for Constellation, especially given the fact that a couple of months earlier, in March 2010, DOE had offered an $8.3 billion conditional loan guarantee for the $14 billion Vogtle nuclear expansion project planned by Georgia Power and its partners, Oglethorpe Power and the Municipal Electric Authority of Georgia. The credit subsidy cost for the Vogtle loan guarantee has not been made public, but it is believed to be in the 0.5% to 1.5% range, far below the 11.6% cost asked for Constellation-EDF's Calvert Cliffs-3 project.


The lower cost for Vogtle may be justified, from a risk analysis point of view, by the fact that the utilities would sell the output from the new reactors to their customers and enjoy a regulated rate of return, while Calvert Cliffs-3 would be a merchant plant.


The difference put into sharp contrast a stark divide between regulated utilities and merchant generators hoping to build new nuclear plants. It may also be a harbinger of the success of the 18 nuclear projects that have applied for COLs. Ten were proposed by vertically integrated utilities; the others were proposed by the wholesale generation units of utility companies and by merchant developers.


Another limiting factor for the projects on the COL list is the amount of funding left for loan guarantees. Subtracting the $8 billion pledged to the Vogtle project leaves only about $10 billion. That may be enough to support only two or three more projects at most.


President Barack Obama had said his budget proposal would include funding to raise nuclear loan guarantee support by $36 billion, but the fate of any such increase is unknown, given the current federal budget impasse.


Some analysts say that if federal loan guarantees are not available, other forms of subsidy could suffice, such as the construction work in progress provisions that are available in South Carolina to SCANA's proposed V.C. Summer nuclear expansion project.


But outside the Southeast, similar measures have been facing strong opposition. Minnesota, Wisconsin and Kentucky have all failed to lift moratoriums on new nuclear plants. In Missouri a CWIP bill died, as did similar bills in North Carolina and Iowa.


Adding to this is the fact that the US is now awash in inexpensive natural gas being found and produced from shale formations across the US. "You don't need Fukushima to understand that when gas is at $5 and power prices are low it doesn't make sense to build a nuclear plant," said Angie Storozynski, an equity analyst at Macquarie Equities Research. "You can't even build a new gas plant at that price."


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