Economic Consulting

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Capacity Factor

CT

CCGT

COAL

NUCLEAR

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Capacity Factor

CT

CCGT

COAL

NUCLEAR Economics of Nuclear Power

Nuclear Power InternationalLas Vegas – 8 Dec 2009

Edward KeeVice President

The nature of this panel means that I will present a few slides in a few minutes

11NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 1

The slides that follow do not provide a complete record of this presentation and discussion.

The views expressed in this presentation are mine; these views may not be the same as those held byour clients or by my colleagues.

Disclaimer

22NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 2

Nuclear energy is valuable

Zero carbon energy

Low cost energy

High availability and reliability

Profitable for unregulated owners

Low rates for regulated utility and public power ratepayers

Existing nuclear power plants are valuable resourcesNuclear energy from these existing units is zero-carbon and low-costExisting US nuclear power plants are operating well, with very high availabilityExisting nuclear power plants produce:

significant profits for unregulated utility or merchant generation company ownerslow rates for customers of regulated and public power utility owners

33NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 3

0

1

2

3

4

5

6

7

8

919

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

cent

s / k

Wh

Coal Gas NuclearSource: NEI

Nuclear has low production costs

Nuclear’s low and stable production costs are a key advantage

Marginal costs of nuclear energy are even lower, perhaps equal to zeroShort-run marginal costs are the costs that change due to a small change in output for a short time period – for nuclear power plants, this is at or close to zero

If carbon costs were included in fossil power plant costs, nuclear energy would be even more competitive

Of course, production costs for gas generation are down this year. If there is a real shale-based gas bubble, there is a possibility of a return to the low and stable gas prices prior to 2000, but this seems unlikely.

44NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 4

0 20 40 60 80

Nuclear

CCGT

CT

Wind

Typical operating life

Nuclear plants have long operating life

The long operating life of nuclear power plants is also a positive attribute. Nuclear units will have a long period of operation, much of it after capital recovery is completedCash flows more than about 25 years into the future add little to NPV using any reasonable discount ratesHowever, a 25-year old nuclear plant is a valuable and profitable asset (whether for shareholders of a non-regulated company or ratepayers of a regulated utility)A key challenge for the nuclear industry is how to make today’s shareholders/ratepayers happy about investing today’s dollars in new nuclear projects, when the upside is 25 years or more into the futureThis combination of high capital costs and a very long stream of benefits is one reason for a government role; Public utility regulators may make long-term planning decisions and governments often do so

55NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 5

Increase output of existing plants–Improve performance–License renewal / life extension–Uprate

Build new nuclear power plants

How do we get more nuclear energy?

The first way to get more nuclear energy is to work existing nuclear plants harder and longer

Companies that developed a superior organizational approach to running nuclear power plants (e.g., Constellation, Dominion, Entergy, Exelon) were able to make money by transferring this institutional knowledge to other plants they acquiredThis nuclear “fixer-upper” strategy has gone well, but there are few fixer-uppers left in the US. Is it time for industry leaders to consider an international fixer-upper strategy?Most US nuclear units have already gotten NRC approval for a 20-year license renewal, most other units have applications in the review process. 80 year (or longer) life is not out of the question for existing nuclear plantsMany US units have already received approval for uprates and have implemented them, with some units including extensive secondary plant re-works to accommodate higher electrical output. Other units have or will apply for uprates

The second way to get more nuclear energy is to build new units - not so easy!

66NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 6

Nuclear plants have high value–Low energy cost–Long operating life

Other factors work against new nuclear–Long lead time–High overnight capital cost–High degree of regulatory oversight

Economics of new nuclear plants

We have already discussed the reasons that nuclear energy is valuableHowever, other factors of a nuclear power project may not fit well into commercial project development/project finance frameworkThe long lead time and high overnight capital cost mean that new nuclear projects are:(a) very capital intensive; and (b) invested capital is at risk for a long time before revenue is received and before payback

Also, the degree of regulatory oversight of nuclear projects and facilities (i.e., NRC) is much higher than other commercial power plant technologies. This raises cost and risk for developers, especially during the long development and construction phase when significant capital has been spent but before there is any revenue or profits

77NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 7

0 4 8 12

Nuclear

CCGT

Wind

CT

PV

Years prior to Operation

Development Construction

Source: EIA 2009 Annual Energy Outlook input assumptions for construction (lead time); development period is estimate

Long lead time

Long lead time brings additional costs and risksIDC: Interest during construction (IDC) is much higher for nuclear, a combination of high capital cost and longer development/construction period. For a nuclear plant, the IDC may be almost as much as the overnight cost. A solution for investor-owned utilities is to get approval to put IDC into rates as it is incurred, rather than capitalizing the IDC and putting it into rate base at commercial operationExternal changes: The need for new capacity, the market price outlook or other factors may change during the 11 years (or more) between project inception and commercial operation. The shorter lead time for other technologies reduces this lead time and lowers this risk; an investor/utility relying on a CT or CCGT may be able to wait longer to commit, so that decisions can be made with additional (and better) information.Disruptions: Once a commitment to construction is made, the longer construction period for a nuclear plant may mean longer exposure to risk from disruptions

88NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 8

0

1,000

2,000

3,000

4,000

5,000

6,000

$ / k

We

CT

CC

GT

Geo

ther

mal

CC

GT

w/ C

CS

Win

d

Con

v. C

oal

Hyd

ro

IGC

C

IGC

C w

/CC

S

Bio

mas

s

Win

d O

ffsho

re

NU

CLE

AR

Sola

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rmal

Fuel

Cel

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Source: EIA 2009 Annual Energy Outlook; 2008 overnight cost including contingency in 2007 $/kW; nuclear increased from $3,318 to $4,000

High overnight capital cost

Nuclear is among the most capital intensive technologies, per unit of capacity outputHowever, nuclear life-cycle costs in $/kWh are relatively low, a result of nuclear base load operation (high capacity factor due to very low marginal cost) and long operating lifeWhile nuclear overnight capital cost is not as high as some options (e.g., PV and fuel cells), it is significantly higher than CT, CCGT and conventional coal options$4,000/kWe used in this chart is only an estimate of overnight costsUntil there is more experience with completed and operational nuclear plants, nuclear capital costs will be less certain than the capital costs of other generation technologies with significant completed project experience

99NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 9

First Wave projects–Face higher risks and higher costs–Blaze the path for Second Wave projects

New nuclear unit hurdles and issues–NRC regulatory process–State regulation / electricity markets–Infrastructure and supply chain–Schedule & capital cost risk

First Wave projects face more hurdles

First Wave units will face higher costs and risksLater projects will benefit from First Wave experience and have lower risks and costsWe now expect that the First Wave of new nuclear in the US will be only the 4 projects that get DOE loan guaranteesThe timing and number of nuclear projects in the Second Wave is highly uncertainThe reasons that a First Wave nuclear plant project is difficult include:

NRC regulatory processState regulation / electricity marketsInfrastructure and supply chainSchedule & capital cost risk

1010NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 10

EPAct of 2005

Focused on First Wave–DOE Loan Guarantees are key benefit

First Wave will test and refine–COL & ITAAC process–Gen III detailed design & EPC contracts–Financing, infrastructure and supply chain

Build industry experience and confidence

EPAct of 2005 provides incentives for a limited number of First Wave projectsDOE Loan Guarantees are a key incentive, even though some see the program as moving slowly and the important subsidy cost issue remains openWhen First Wave projects are completed and placed in commercial operation, industry confidence and experience will be higher and industry infrastructure/ supply chain will have been establishedSecond Wave projects (benefiting from First Wave efforts) may not need these incentivesEPAct of 2005 benefits were defined before recent nuclear capital cost estimatesWith higher nuclear capital costs and no carbon benefits, there are two large issues:1. Will the EPAct incentives be enough for the First Wave?2. Will the Second Wave need incentives to be developed?

1111NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 11

Different approaches to new nuclear

Commercial power projects

Public participation–State cost-of-service regulation–DOE Loan guarantees

Government projects–Fast and clear commitment–Government finance–Fewer parties - lower transaction costs

Commercial projects (e.g., US)Merchant nuclear plants will have a hard time, especially those in the first wavePublic participationState regulators may take the long view, making decisions today that benefit future ratepayers The low-cost, long-term, high-leverage debt from the DOE Loan Guarantee program will help, but is now only available to a few First Wave projectsGovernment Projects (e.g., China, UAE)Fast and clear commitment – governments can decide quickly and make strong commitments, unlike commercial nuclear projects that need agreement from multiple stakeholders (investors, lenders, shareholders, regulators, etc.)Government cost of capital - lower IDC, lower cost of capitalLower transaction costs – A government that is builder, owner, regulator and operator caninternalize the multiple transactions (each with risk sharing, contingencies, and profits) that are in a commercial project, to get lower transaction costs and faster schedules

1212NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 12

Summary

Nuclear energy is valuable

Commercial projects difficult

Limited public involvement in US

Government role may be key to fast/large new build

All existing nuclear plants were built with some degree of government (or public) support. In the US, this was mostly through regulated utility investments; in other countries, nuclear plants were typically built by government utilities

Electricity sector reform and restructuring transformed some existing nuclear assets into unregulated market assets Unregulated nuclear companies are doing well in the US, but there is an open question about whether a new nuclear power plant can be developed as an unregulated power project in a restructured electricity market environment.If there is a role for new nuclear in a clean electricity sector, governments may be required to act if the market fails to deliver nuclear investment.I think that markets are a good thing, but I also see a role for government in some things, one of which might be nuclear power.

1313NERA Economic Consulting – Edward Kee – Nuclear Power International – 8 Dec 2009NERA Economic Consulting – Edward Kee – Nuclear Power International 8 Dec 2009 13

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Nuclear Power – the next generation

© Copyright 2009 National Economic Research Associates, Inc. All rights reserved.

Contact us

Edward KeeVice PresidentNERA Economic ConsultingWashington, DC+1 (202) 370-7713edward.kee@nera.comwww.nera.com

My work combines economics with expertise in nuclear power, electricity markets, restructuring, regulation, private power, and related issues.

I provide strategic advice to companies and governments on issues related to the nuclear and electricity industries. I also provide testimony as an expert witness on nuclear and electricity industry issues.

I invite all of you to join the Linked-In group that I started:

“Nuclear Power – the next generation”

If you are already a member of Linked-In, go to the groups directory and search for “nuclear”