With Toshiba in a deep crisis over a massive writedown on its troubled US nuclear subsidiary, Westinghouse Electric, the US nuclear renaissance, which started five years ago, looks to be over already. Independent energy author Dennis Wamsted explains what went wrong.
Five years ago almost to the day (Feb. 9, 2012, actually), the U.S. Nuclear Regulatory Commission voted 4-1 to issue a construction and operating license to Southern Company for the 2,234 megawatt Vogtle 3&4 projectâthe first of the new generation of reactors from Westinghouse that was touted as the beginning of the industryâs long climb back from 30 years of dormancy.
At the time, Marvin Fertel, then president and CEO of the Nuclear Energy Institute, the industryâs trade association, sounded almost euphoric: âThis is a historic day. [The NRC decision] sounds a clarion call to the world that the United States recognizes the importance of expanding nuclear energyâŚ.â
Fertelâs optimism was hardly unique. A year earlier, Jim Miller, CEO of Southern Nuclear, the companyâs operating subsidiary, told Scientific American: âThe nuclear revival is under way in Georgia.â
Fiasco
My, how much has changed in just five years. Today, we are waiting for the other shoe to drop in the Westinghouse-Toshiba fiasco. When that happens it will serve as the end point of the revival that never really took placeâfive years from start to finish, not quite the long-running blockbuster the industry had hoped for.
There is plenty of blame to go aroundâthe federal governmentâs incentives were poorly structured and created a rush to get in the door, the Nuclear Regulatory Commission probably didnât have the funding or staff to effectively implement its new, much-touted licensing requirements, and the Fukushima Daiichi disaster in Japan certainly didnât helpâbut at its heart this was a case of bad management and wishful thinking, by both Southern and Westinghouse.
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.âthe risk is simply too great
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 Powerâs costs for the project) included âadditional contractual protectionsâ 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 SCANAâs South Carolina Electric & Gas unit offered a chance for the company to prove the technologyâs 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.
Turnkey contracts
Similar fixed price contracts had been offered up at the beginning of the nuclear era in the 1960s, and that didnât end well. In a comprehensive 2013 report for the Eastern Interconnection Statesâ 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 costsâback 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, GEâs offer to build the 640 MW Oyster Creek plant in New Jersey, wasnât 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 stateâs public service commission) highlighted in his April 2016 written testimony to the PSC:
âThe 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 plantsâŚ.â
So the poster child for the U.S. nuclear revival returned to the industryâs fixed price roots, and just like the first do-si-do this dance isnât going to end well either.
Lower asset value
As Huston notes repeatedly in his testimony on the prudence of Georgia Powerâs 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 projectâs cost increases. What he doesnât say is that those costs havenât gone away; they simply have been shifted onto the contractor.
This brings us back to the other shoe, which was expected to come tumbling down Feb. 14, (although it has now been delayed), when Toshiba, Westinghouseâs parent, was 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: âWestinghouse 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.â
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.âthe 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: âSo, let me get this straight, you want me to approve a project whose total cost is unknown, and whose completion date is uncertain. I donât think soâŚâ
Editorâs Note
This article was first published on Dennis Wamstedâs blog Wamsted on Energy. Dennis Wamsted (djwamsted@verizon.net) is a free-lance journalist, consultant, speaker and moderator, and former executive editor of The Energy Daily in Washington, D.C., and a specialist on U.S. energy policy.
[adrotate group=”9″]
onesecond says
Excellent article, putting it all into perspective. It is really hard to ignore the simple truth: Nuclear is not competitive.
Nigel West says
No, it’s just expensive and commercial mistakes have been made by vendors and purchasers.
Frank Jalics says
“just expensive”? do you think the average Joe would be willing to pay a lot extra just so his generation could be nuclear?
Nigel West says
Decisions on whether new nuclear costs are acceptable in the UK are made by Government. It’s reported that the Government wants the cost of the proposed Horizon and Nugen new nuclear projects to be less than Hinkley Point C.
Frank Jalics says
You are completely right.
The National Audit Office estimates the additional cost to consumers under the “strike price” will be ÂŁ29.7 billion.
How many of those plants do you think will happen before those who set it up get voted out of office, and no more plants get built?
Nigel West says
The NAO estimate is based on forecasts – all forecasts are wrong – to a greater of lesser extent. It’s no good debating the pros and cons of HPC anymore, that was done extensively last year and the contracts are now signed.
As I have said before, the UK Government has said it wants follow on new nuclear costs/energy prices to be less than HPC.
William R. Corcoran, Ph.D.,P.E says
Lesson to be Learned (LTBL): Never take on vast commitment with a half vast due diligence.
R. L. Hails Sr. P. E. (ret.) says
The unseen elephant in the room is the migration of US talent. According to a national survey done in 1991, 69 engineering colleges had dropped course work considered vital to power plant design. Their graduates could not find employment. The nuclear energy and the fossil fuel power plants industries, excluding combustion turbine designs, had ceased to exist. There was no work.
Thus, due to demographics, essentially none of the mid and top managements of the new nukes can not have engineered two units which worked. In the prior generations, a veteran engineer had scores of power plants on his resume.
Consider the excellence of the Super Bowl stars, If Tom Brady had gone forty years reading a book about being a quarter back, but had never taken a snap or thrown a pass, would he possess the same skill sets as he exhibited a few weeks ago? There is a reason why engineering is termed a Professional practice; you learn by doing.
Thus, if you can not put food in front of your kids, for decades, you migrate to programming games in Silicon Valley, or statistically analyzing stocks, or selling real estate, or becoming a plumber, or driving a cab. And the self starters go first.
The US nuclear industry is a hollow shell, lacking experienced professionals at many levels. America can stimulate investment, alter regulations, but it can not produce experienced engineers. They now live in China and other nations. We off shored nuclear power a long time ago. This is our choke point and the reason why the new nukes are headed toward bust. No one can know what they do not know.
JosĂŠ DeSouza says
Excellent points!
William R. Corcoran, Ph.D.,P.E says
Perhaps the President should initiate a new domestic nuclear “Peace Corps” to recruit underutilized existing nuclear engineering talent. Call it “Service Corps of Retired Nuclears (SCORN)..”
Mike Parr says
Good points – I undersrtand that the Chinese are experts at building nukes – perhaps the USA should go knocking on their door… or er hang on a mo’…
Harry Degenaar says
The Russians also, they completed in recent days 2 reactors in India and are building 2 more at a fraction of the USA cost.
Andrew says
Do You suggest to invent an other formula to deliver those projects ? If not turnkey formula (lump sum) so what could be an viable alternative?
In other sectors (gas, oil, petrochemical) the EPC formula (and turnkey projects) are wide spread and it works! So why not in nuclear? Should we revise the role of nuclear regulator witch contributes to those troubles?
Harry Degenaar says
Andrew, exactly – Dr.Jackzo (ex-NRC Chairman) was an antinuclear campaigner while he was a student at the University of Wisconsin. He personally threw a huge wrench into the process of renewing licenses for existing reactors and for awarding licenses for new reactors. He was the driving force behind the aircraft impact rule for new reactors; he pushed as hard as he could to add more requirements for design changes as a way to significantly delay the the four new Westinghouse AP1000 reactors that are still under construction. Every day of delay at the NRC in producing the final COLA approvals for Vogtle and VC Summer after the staff had completed its review added at least a million dollars to the cost of each approved unit. As described in Mark Leibovichâs âThis Townâ, Senator Reid played an important role in President Obamaâs early decision to run for office. He pushed a lot of support to Obama from his position as Senate majority leader. After he became president, Obama made a payment on his political debt by firing Dale Klein as the Chairman of the Nuclear Regulatory Commission and promoted Dr. Jaczko 2009 into the position. In October 2011, all the other four NRC commissioners, two Democrats and two Republicans, sent a letter to the White House expressing “grave concern” about Jaczko’s actions at the NRC. He resigned as chairman (2012) after months of conflict with his four colleagues on the NRC commission. I am surprised that he never got prosecuted for industrial grand scale sabotage. But so didn’t the Wall Street criminals.
Keith says
It is more incestous with Jaczko being the science advisor to Harry Reid before the appointment to the NRC. Now to lay blame for global warming at the feet of these corrupt officials that have sunk the carbon free ship for the US. China makes the PV panels and now they will make the nuclear reactors. I trained for work in the nuclear industry and I retired last year and didn’t earn a dime from my nuclear training. Still it feels awful to see global warming add another burden for future generations. I suppose building sea walls to protect cities is more politically correct than finding political solutions to use nuclear energy.
Chip says
Optimism has been overtaken by reality! Throw in some very expensive politics and you have the same issues that the nuclear industry has had since its inception. The plants under construction must be finished as quickly as possible!
Harry Degenaar says
Egypt signed an agreement with Russian Rosatom to establish a nuclear power plant in Dabaa with a capacity of 4,800MW for US$30bn. Russia will provide a governmental loan to Egypt worth US$25bn. The loan is used to finance 85% of the value of each contract to implement works, services, and shipments of the project. The Egyptian side will pay the remaining amountârepresenting 15%âin the form of instalments. The amount will be paid for the benefit of the authorised Russian institutions in a way that suits the contracts, in the form of an advance or any payment that is later made after delivering supplies and implementing works and services. The term of the loan is 13 years over the period from 2016 until 2028, with a 3% annual interest rate.
Jim Little says
Interesting yet incomplete analysis. The article quotes a 2013 study by Navigant yet the original study that provided the data was a 1980 study by DOE. That certainly was a different era which included huge conglomerates which no longer exist and a period of regulatory inflation post TMI and a prime rate approaching 12%. There is no comparison to other data points which include the completion of Korean units or Japanese units (Kashiwazaki) which were completed on schedules of 36-42 months.
My point is that conclusions aren’t that easy to make.