Energy finance in free markets: an open conundrum

A question which has occurred to me lately revolves around the oft-heard objection that, "Nuclear has always been a state enterprise." In other words, the high up-front capital cost (and attendant front-loaded risk from construction delays and potential intervenors) makes nuclear a tough pill to swallow for liberalized energy markets, despite the extremely low operating costs (and hence, low back-end risk).

This problem seems to extend well beyond nuclear energy itself; rather, it would seem to indict any capital-intensive energy projects where a given rate of return on investment is not guaranteed. It provokes the question - in a completely free market for electricity (as opposed to the admixture we have now), what would energy investment look like?

Some of the imbalance which currently exists now owes to the imbalance of externalities captured by the current regulatory environment. Sources like coal - especially older, "grandfathered" plants, are allowed to treat the atmosphere effectively as an open cesspool; at the other extreme, nuclear is expected to account (and pay for!) each last curie of waste produced, going as far as to return the site to greenfield status once the plant has closed.  Meanwhile, indictment of nuclear as uniquely a "state industry" by its detractors rings somewhat hollow, given that yet more expensive, diffuse, and less reliable sources such as wind and solar would almost certainly be pushed to the margin under the same standard.

Obviously, a balance to the regulatory playing field is called for (although don't hold your breath waiting for that one…). Yet going a step further, assuming this, what would energy investment look like in a completely liberalized energy market?

U.S. natural gas prices, per EIA

Essentially, what such a market would appear to produce, if the current trend is any example, is likely sources in which costs are easily externalized to others (e.g. coal and to a lesser degree natural gas) or the costs are relatively distributed throughout the lifecycle (e.g., natural gas, where costs are largely on the fuel cost). Yet one predictable consequence of this - beyond the environmental impact - would be the impact on retail electricity price volatility. Again - natural gas is far from being historically "stable" in price.

Where does this leave nuclear? Ultimately, nuclear would seem to have the ability to moderate these types of price shocks, namely by providing stable, low-cost baseload power. This ultimately is where I believe technologies such as small modular reactors (SMRs) are so vital to the future of nuclear; they provide at least some means of blunting the capital risk of nuclear in liberalized energy markets. Further, incentives clearly matter - Pigouvian measures such as a carbon tax would go a long way toward leveling the playing field (again, don't hold your breath on this one.)

Yet even beyond this however, the need for innovative mechanisms for financing large, capital-intensive energy projects remains clear. Ultimately, my expertise is in nuclear technology and not finance, and thus I am at a loss for ideas. Given my own personal predilections toward free markets, it is often disappointing to see many market-oriented advocates simply put down nuclear as "socialist" rather than seeking out new vehicles and mechanisms to finance such projects through private investment.  (Unlike many nuclear advocates such as Rod Adams, I do not share their antagonism to Wall Street, recognizing that ultimately private capital will be essential for future energy projects, especially as America's own government contemplates austerity measures in light of a growing entitlement crisis brought about by massive demographic shifts). One notable example of innovative ideas for finance comes from this excellent guest post at Idaho Samizdat, taking a lesson from the Dutch nutmeg trade. But further such ideas for innovative financing models are badly needed.

An alternative proposal is for legislative mandates such as portfolio standards - e.g., a "clean energy standard" similar to renewable energy portfolio standards which currently exist, mandating that utilities generate a certain fraction of their energy from designated sources. Beyond the obvious potential for peril of political manipulations on defining just what qualifies as "clean" (or attempts to game the standard by powerful, entrenched interests), this does nothing to solve the existing problems of financing which have ultimately precipitated the perceived need for such mandates.

Ultimately, this question goes well beyond nuclear; given the fact that liberalization in energy markets is unlikely to reverse course in the forseeable term, how can we develop new mechanisms to provide financing to capital-intensive (but lower long-term financial risk) projects, sans government intervention? This is the true long-term challenge, incumbent advocates of clean energy of all types as well as market advocates themselves. These kinds of questions are the kind whicn should form the basis of free market environmentalism (a term which need not be an oxymoron).

Unfortunately, these are questions I am ill-equipped to answer, yet they are (in my mind) vital to the future of energy markets.

Not all energy is fungible - and it matters

Via the NYT Green blog comes a new survey by the Pew Center indicating that a smaller majority of Americans now prefer further federal funding of research into alternative energy technologies (specifically, wind, solar, and hydrogen) as a priority over additional exploration of oil and gas supplies. If the comparison seems to be a bit of a misnomer, then you've already caught on to the idea that not all energy, as we have it now, is fungible. Generally speaking, unless you are one of the very fortunate Americans who can afford an electric vehicle (with extremely generous taxpayer support at that), what is being posed is a false dichotomy. All the windmills and solar panels in the world do extremely little to curb demand for oil (and to a lesser extent, natural gas, which may also stand in as a transportation fuel).

Being generous to the poll, one can suppose some confusion arises over the fact that natural gas has been largely responsible for electricity capacity additions within the last decade in the U.S. Still then, one wonders why nuclear energy is excluded from the choice provided.

Public support of expanded nuclear energy production (adapted from Pew)

Digging deeper into the survey, nuclear does show up; what it reveals further highlights the dichotomy illustrated above. Despite rising energy prices overall (both at the pump and in the retail electricity sector), public support clearly shows a disconnect when it comes to fossil fuel exploration versus electricity production. In general, nuclear energy is still recovering in terms of public opinion one year later following the Great Tōhoku Earthquake and tsunami and resulting nuclear crisis at Fukushima.

Public support for off-shore oil drilling, from Pew

What is perhaps revealing is to contrast this to the trend in public opinion on offshore oil drilling following the Deepwater Horizon blowout and massive spill in the Gulf of Mexico - something much closer to home. Unlike nuclear energy, public opinion has generally settled back into its prior setting (enjoying broad majority support) within less than two years, with large majorities favoring expanded offshore oil drilling. While favorable opinion on nuclear expansion appears to recovering, it is still unlikely to achieve the broad support that offshore oil exploration has - again, despite the very visible risks of the latter.

Perhaps also noteworthy is the relative "stickiness" of public opinion - one observes that following a high-profile event (e.g., Deep Water Horizon or Fukushima), public opinion eventually gravitates back to its historical average, implying relatively firmly entrenched opinion with a handful of the public being swayed by major events.

Public support for increased federal funding for alternative
energy research, from Pew

For comparison, Pew also evaluated public opinion of increased financing for alternative energy sources, including solar, wind, and hydrogen. Interestingly, public support for such increased financing has been on a slow decline; thus, in spite of the lede in the New York Times blog that this is somehow a newly emerging phenomenon compared to conventional sources, it is a process which appears to have been dragging on for some time. Indeed, the trend appears to have begun well before high-profile events such as the Solyndra bankruptcy and resulting scandal; while public support slowly continues to drop afterwards, the decline began well before this and continues steadily afterwards. It is difficult to speculate what one may take away from this other than the fact that if the Republican nomination fight is any sign, Americans are notoriously fickle, constantly in search of an appealing hypothetical alternative which simply does not exist.

Weekly average retail gasoline prices (all grades), via EIA

Why the quicker"snap back" in public opinion (or faster-acting amnesia, if you prefer) for oil and gas exploration, in particular? A likely culprit is the higher visibility of rising fuel prices (directly connected with the price of oil); particularly strong is the correlation between public support for oil and gas exploration and the price at the pump. 

Average retail electricity prices, from EIA

Retail prices for electricity have also been on the rise, but such a rise has been much more of a slow creep; with the average rising slowly over a matter of months rather than weeks. Plausibly, electricity consumption is perhaps seen as something consumers can exert some degree of influence over, be it through conservation or efficiency improvements, while demand for gasoline is relatively fixed (at least with respect to workplace commuting).

Meanwhile, yet another interesting artifact comes out of the Pew poll: a breakdown of support for various energy policies by self-identified party, with some of the highlights as follows:

	% in favor
	Rep	Dem	Ind
Allowing more oil & gas drilling in U.S. waters	89	50	64
Giving tax cuts for oil & gas exploration	61	38	42
Promoting the increased use of nuclear power	54	37	45
Requiring better fuel efficiency for vehicles	67	88	77
Spending more on mass transit	52	74	67
More federal funding for alt. energy research	52	81	70

What the above data puts to lie is the myth that members of either major political party are interested in an "all-of-the-above" energy strategy, something frequently invoked as a toll to political correctness (by countless nuclear advocates included) but not reflecting anyone's actual opinions. Indeed, among self-identified Republicans, while a much larger number favor nuclear energy expansion compared to Democrats, it is still a far less popular option than most scenarios involving either the development of additional fossil fuel resources or extension of existing supplies (i.e., fuel efficiency mandates). With respect to Democrats, overwhelming majorities seem to place their faith in measures such as conservation (including vehicle efficiency) and alternative energy research, particularly compared to the use of nuclear energy (again, issues of numeracy be damned). Only self-described independents might be considered to favor an "all of the above" strategy, although their support of such is divided at best.

In other words, despite the popularity of declaring favor for an "all-of-the-above" energy strategy, such a mantra is typically invoked simply as a cover-all in order to push forward an individual's energy priorities without having to engage in inconvenient discussions like practicality, cost, or environmental impacts. And again - this is something which occurs across the board - a token statement given which if the above is any indication, few actually believe (at least with any fervor).

What is perhaps most evident from the above is sharp evidence for the hypothesis that in the political conversation over energy, Americans are talking past one another. Again - given the fact that very little oil is burned directly to produce electricity, most of the conversation on fossil fuels comes down to energy for transportation, with natural gas coming along for the ride in the sense that it may conceivably occupy both sectors. Meanwhile, absent dramatic advances in battery technology, renewables show nearly zero intersection with the transportation sector.

Meanwhile, the lesson in this for advocates of nuclear, both looking at the historic trend in public opinion of oil drilling compared to nuclear energy as well as divisions among party lines is that in order for nuclear to command strong majorities of public support, the issue of ever-rising electricity prices (rising in tandem with global demand for overall energy resources, including coal and natural gas) must be continuously hammered, along with nuclear energy's role in providing affordable, base load electricity. The issue of electricity prices can and does motivate groups - and indeed, sometimes in the wrong way. An example would be the AARP's opposition to Iowa's recent legislative action toward allowing construction-in-progress financing of small modular reactors. The reason? Concerns over electricity prices for those living on fixed incomes. Again, despite the fact that the conclusion is logically perverse in this case, the connection is quite clear.

So what does all of this come down to? Ultimately, it reinforces the issue of fungibility in energy. For nuclear to enjoy the same resilience as fossil fuel sources with public opinion, it must also share the same perception of indispensability. Right now, nuclear is viewed as a fungible energy source - again, one can refer back to the way in which both Republicans and Democrats appear to be making a mental substitution (natural gas or renewables, respectively), thus making nuclear expansion appear to be an "optional" energy strategy for a resource (and carbon)-constrained energy future. Until advocates drive home the essential nature of nuclear energy production with respect to both future energy prices and the environment (i.e., demonstrating that nuclear energy is not so easily substituted without unacceptable economic and environmental trade-offs), it is likely support for nuclear will languish at its historic value near 50%, with sharp and persistent divisions among partisan lines.

Small modular reactors meet "Iowa stubborn"

The land of Iowa - home of hogs, corn, windmills, and... SMRs (i.e., small modular reactors). Or at the least, that last part may be true pending a proposal before the Iowa Legislature (HF 561) is passed, allowing for among other things, recovery of costs while construction is in progress on nuclear projects (known as "CWIP" or "construction work in progress" financing). Iowa's electricity market is a regulated market - which means rates are ultimately set by the Iowa Utilities Board.

As a former long-term resident of Iowa and still self-identified Midwesterner-in-exile, I have a keen interest in seeing where this one goes. Despite the characterization of the bill's opponents (which, by sheer coincidence, also seem to be almost identical to those who oppose nuclear energy writ large), Iowa's "abundant energy alternatives" generally consist of coal (about three-quarters of Iowa's electricity capacity), followed by wind (about 16%) and nuclear (about 8%, from the state's lone nuclear unit, Duane Arnold, north of Cedar Rapids), per 2010 EIA statistics, shown on the right.

Given the highly-touted wind resources of the Iowa (i.e., from the hundreds of windmills which dot the rolling plains of Iowa), wind makes up a significant share of Iowa's energy. However, given the sheer enormity of coal's share of Iowa's energy portfolio, it is difficult imagine wind displacing Iowa's heavy reliance upon coal for electricity, particularly when one looks at penetrations beyond 20%, where wind's intermittency begins impact grid stability (thus requiring changes to grid infrastructure in order to accommodate further wind generation). Instead, wind is appears serving the role of taking required load away from "peaking" sources like natural gas - one notices that contra the national trend, natural gas makes up a tiny share of Iowa's energy mix. Ultimately however, if Iowa is to become in any way serious about doing its part on carbon emissions, weaning itself off its dependence of coal (specifically, anthracite low-sulfur bituminous coal shipped by the trainload directly from Wyoming) is of paramount priority. Given its inherent intermittency, doing this with wind seems highly improbable, while few other sources appear ready to fill the gap here.

Enter the small modular reactor - in an attempt to obviate the issues of high up-front capital cost and large "step-wise" investments (i.e., traditional nuclear units start around 1 GWe), small modular reactors miniaturize nuclear reactors into a relatively small, self-contained unit - one which is manufactured off-site and produces power at a lower scale (typically on the order of 1/10 to 1/3 of a traditional unit). To wit - the concept of the "small modular" part of the SMR is that in many cases, such as in more conventional designs, the same fundamental designs as their larger cousins are employed (e.g., uranium fuel cooled by ordinary water) - simply scaled down into a smaller package which can be manufactured in a factory and shipped by truck or rail to the installation site. As a result, SMRs avoid the uncertainties due to construction delays while scaling down a nuclear investment into a more tractable size, one which allows for a more granular addition of nuclear capacity than the traditional gigawatt-scale traditional reactor.

Indeed, one of the reasons SMRs are appropriate for unique energy markets like Iowa is in their ability to be "right-sized" for the kinds of municipal utilities and electricity cooperatives that make up the Iowa market. Unlike large, multi-state utilities, most electricity retailers in Iowa are unlikely to be willing or able to support the large investment for a traditional unit, nor do they have the need for such large generating capacity. In as much, smaller, scalable units provide an alternative which affords the capacity of carbon-free baseload generation at low operating costs. Outside of the jaundiced view of nuclear which seems to color this discussion, this would seem to be boon to Iowa's energy producers an consumers.

Given these factors, the introduction of SMRs to Iowa as an alternative to coal should seem to be a no-brainer. Of course, as usual with anti-nuclear politics, it doesn't always seem to work this way; in a way of cutting off their nose to spite their face, many nuclear opponents will cast aside the issue of carbon constraints aside to attack nuclear on any and all fronts. Take this example from a left-wing community blog, "Blog for Iowa," where author Paul Deaton criticizes the CWIP proposal on the grounds that it might indeed do just what it's slated to do - attract the development of small modular reactors to serve Iowa's largely rural electricity markets. Deaton brings up many of the usual anti-nuclear arguments, however he turns his attention specifically to several criticisms of SMRs which on the face of it simply don't make much sense.

For example, Deaton argues that the modularity of SMRs are self-defating in nature:

When proponents of SMR technology talk about it in public, what they say doesn’t make sense. On the one hand they talk about the efficiency and flexibility of modular reactor technology. On the other hand, they talk about the need for centrally located “baseload” power where economies of scale are important to keeping the cost per kilowatt hour low. What this means to consumers is that while a single town or large-scale user may be able to have their own nuclear reactor on-site, if this were done, the cost of the ancillary charges would be much higher per kilowatt hour because efficiencies of scale would be lost. Installing SMRs only makes sense, from a cost standpoint, if they are constructed in clusters as the Nu-Scale and Babcock and Wilcox designs are intended.

Unfortunately, much of this betrays a fundamental misunderstanding of the issues at hand. For one, part of the cost advantages of SMRs is that so-called "energy parks" can be developed in staged fashion - in other words, installing one or two units at first in order to allow cost recovery, then installing more units later, "scaling up" the energy production without having to attempt to swallow the entire capital cost in one fell bite, thus avoiding both the high borrowing cost and financial risk of the large, single-unit traditional equivalents. Further, each SMR is still generally on the order of 100-300 MWe - again, about 1/10 to 1/3 the size of a traditional nuclear facility. For comparison - the average wind turbine puts out less than 10 MWe at rated capacity - so how precisely is it that SMRs fail the same test which one can infer our author has no problem with when it comes to other energy sources?

Finally, this argument ignores one of the chief advantages of SMRs, in that they can be manufactured almost entirely along an industrial process line within a single facility - eliminating the need to build on-site with its attendant construction costs and delays while affording efficiencies of scale at the actual manufacturing process (along with the respective enhancements to quality control that can come with it). Thus, where SMRs push on nuclear's chief weaknesses - high up-front capital costs and financial risk due to construction - are factors entirely unconnected to the points Deaton brings up.

Deaton goes further, arguing in several places that SMRs are too "under-developed" to make them viable for energy markets, arguing:

While the paradigm of SMRs fits into the hyperbole of the recent discussion, the reality is that no SMR design has been approved by the Nuclear Regulatory Commission. Nor is approval imminent, with talk of the earliest likely approval of SMR design being ten years from now.

The purpose of a TVA SMR would be to further the NRC design approval process and develop field data about SMR design efficacy. Without government subsidy of this kind, the SMRs seem unlikely to move forward in the United States in the near future.

Of course, this argument ignores the inherent problem - the issue is not that SMRs aren't ready for primetime, but rather that the NRC lacks the will or capacity to make such regulatory analysis. How this is the fault of the industry or specifically SMR manufacturers remains to be seen. Absent the NRC's dithering, it remains to be seen why such a "subsidy" as he terms it would even be necessary. Again, the problem here is not that the so-called "subsidy" is necessary but that some degree of expedience on the part of the NRC (one Deaton is silent on) is warranted. Assigning the blame to the technology for bureaucratic inaction is thus a non-sequitur.

Finally, Deaton assails nuclear as a non-starter in a free market for energy, arguing that it should succeed or fail on its own financial merits. All fine, again - although somewhat odd, given both that Iowa is a regulated electricity market and other sources like wind are given particularly favorable treatment in said energy market. Given the leftist orientation of the blog, one is left to doubt we'll be hearing calls for a deregulated Iowa electricity market or an elimination of similar subsidies for wind and other politically favored sources, so one is left to question the sincerity of this particular rhetorical strategy. Indeed, nuclear seems to be the unique case in which your average nuclear opponent begins to act as if they would fit in at a Tea Party rally - with such situational preference for laissez-faire disappearing once the topic changes to energy mandates and subsidies writ large.

Likewise, when it comes to anti-nuclear politics, some rather specious claims tend to be made. For example, this one - that CWIP financing would mean, "An average ratepayer who paid $67 a month in 2009 would pay an estimated $135 a month" - are repeated entirely uncritically. Going to the data, Iowans pay an average of 10.34 cents/kWh - comfortably below the average of 11.88 cents/kWh. For a monthly bill to jump from $67 to $135 per month would require a rise of the cost of electricity to 20.83 cents/kWh - a rather difficult claim to sustain in the absence of compelling evidence.

None of this of course is to say that Iowa's specific legislation is perfect - a legitimate criticism can be made that processes such as CWIP financing should be carefully balanced to avoid totally offloading risk onto consumers and undercutting incentives to avoid cost and schedule overruns. Ultimately, these kinds of discussions only go on in regulated electricity markets - where producers are generally guaranteed a fixed rate of return on investment, becoming moot in deregulated ("merchant") electricity markets, where in fact electricity prices are set by the market. The key point to take away however is that in regulated markets at least, it's a matter of pay now or pay more later when it comes to energy investments. Carefully structured, allowing for cost recovery mechanisms while construction is in progress can ultimately lower the total amount  retail electricity customers ultimately pay.

*For those who don't get the title, a viewing of "The Music Man" is highly recommended - if only to give you a feel for an Iowa which is not about corn, livestock, or hyped-up fabulism of Iowa as a methamphetamine-fueled wasteland. Really, it's quite nice.


Updated 2/28: An anonymous commenter noticed the statistics I'd had were for total U.S. production, rather than Iowa - a tremendous goof which has now been fixed.

Is deregulation really the problem for new nuclear?

John Rowe, CEO of Exelon Energy (operator of one of the largest nuclear fleets in the U.S.), is not exactly shy with his thoughts on the economics of new nuclear.

In an August meeting of the American Nuclear Society Utility Working Conference, Rowe gave a hard-edged presentation titled, "My Last Nuclear Speech" in which he laid out his position that nuclear "is a business, not a religion," and predicted that lower natural gas prices would persist for the next 10-20 years, making investment in new nuclear energy uneconomic. To be clear, Rowe is not an anti-nuke (at least not by ideology); it would be an awfully hard fence to straddle were he, given that Exelon's portfolio consists of 93% nuclear.

Rowe, like Vizzini, believes new nuclear plants in merchant
utility markets are "inconceivable."

Depending on your point of view (and perhaps, your political leanings), Rowe is either a hard-nosed energy economics realist or simply a rent-seeking opportunist hoping to cash in on the rush to natural gas. (In truth, there's probably merit to both cases, given Rowe's penchant for lobbying both the government and industry for outcomes such as a carbon tax and increased natural gas consumption which would increase the value of his current fleet.)

Recently, Rowe raised new hackles in criticizing the Calvert Cliffs expansion project in Maryland, describing the move to build a third nuclear unit in a deregulated electricity market as "almost inconceivable." The basis of his incredulity? Low natural gas prices coupled with a competitive market for electricity. (Unlike states with regulated utilities, where a public utilities board sets electricity prices, prices deregulated markets are controlled by the lowest-bidding providers on the spot market.) Rowe remarked,

"At today's [natural] gas prices, a new nuclear power plant is out of the money by a factor of two," Rowe said, echoing one of the main points of his speech. "It's not 20%, it's not something where you can go sharpen the pencil and play. It's economically wrong. Gas trumps it," he said

Fellow nuclear blogger Rod Adams took this as an indication of Rowe's hypocrisy, asking why he isn't immediately "selling off its existing nuclear plants and investing the proceeds in additional gas-fired generation." But this is a facile understanding of the situation - Rowe's position is not that the existing fleet is uneconomic - quite the opposite. A nuclear plant whose capital costs are already paid for can outbid natural gas - even "cheap" natural gas - every time, namely because the fuel costs of an established nuclear plant are incredibly low. For example, the EIA predicts the operation costs of a new nuclear plant entering service in 2016 to comprise roughly 10% of total electricity cost, compared to around 70% for natural gas. (All of this is roughly consistent with current estimates for electricity costs).

So where is the problem? Capital costs - especially the cost of money (i.e., the premium paid to investors to borrow money to finance new nuclear builds). These costs, by the above estimate, make up 80% of nuclear electricity costs. In other words, most of the cost for nuclear is up-front. Hence, the paradox of nuclear: expensive to build but incredibly cheap to operate, especially once the unit is paid for. Thus the reason CEOs like Rowe are loathe to part with their existing nuclear fleet to gamble on new gas capacity - established nuclear is a sure economic winner, even in deregulated ("merchant") utility markets.

Given this, why does Rowe seem to think nuclear is so "inconceivable" in a deregulated market compared to gas? Namely because of the same reasons it's hard to build nuclear in the first place - costs are front-loaded, and in a merchant market there's no guarantee of the rate of return. (Regulated markets, on the other hand, can both generally guarantee a price for electricity as well as allow for construction work in progress [CWIP] financing, allowing the utility to collect some of the financing costs up-front, thus saving ratepayers millions of dollars in the future by lowering the total amount financed). Natural gas doesn't face this handicap, although it faces a different gamble, in that future energy prices are heavily tied to the future costs of gas. (Given the low fuel cost of nuclear, on the other hand, even a doubling in the price of uranium would only produce a small uptick in the price of power - about 7%, less than a penny per kWh).

Thus, even though once the cost of the facility is paid-off nuclear can under-bid even historically low natural gas prices, the difficulty lies in recovering the cost of the investment. As a result, some nuclear advocates (such as Adams) point to this as a fundamental flaw in energy market liberalization, pointing out that deregulated markets drive a race for short-term profits over long-term planning. (Rod even goes so far as to characterize Rowe as a ruthless energy market villain counterpart to Mister Potter from It's a Wonderful Life).

[Note: My colleague Alan reminds me that the capital cost itself is irrelevant to the bidding itself; i.e., the bid is controlled by the marginal cost of production (e.g., fuel cost). Hence, even new nuclear can under-bid low-priced natural gas in the spot market. The issue is not the capacity for new nuclear to under-bid then, per se, but rather to do so while garnering a return capable of also paying back the existing capital costs.]

But is it really deregulated energy markets that are the problem for nuclear? Rod points to Électricité de France (who owns a 49% stake in the Calvert Cliffs project) as evidence of Rowe's shortsightedness. Yet there is a fundamental difference overlooked in this analysis between the two companies - the total market equity of Exelon is $13.16 billion, while that of EDF is €36.9 billion ($50.1 billion USD). In other words, EDF is over three times the size of Exelon; while the cost of one new nuclear unit (at around $4 billion) might very well be a case of "betting the farm" for Exelon (despite being one of the larger U.S. utilities), it is a much more easily handled investment for a giant like EDF.

There is often a caveat made to investors wishing to bet against obvious irrationality in the market - "Markets can stay irrational longer than you can stay solvent." Here it would seem the same caveat applies to perhaps resolve our seeming contradiction. The problem is not necessarily that deregulated electricity markets hinder long-term planning, but that lack of sufficient capitalization (i.e., access to capital) makes it much more difficult for smaller utilities to engage in long-term economic planning than much larger firms like EDF.

Further, this again seems like a place where small modular reactors may yet tip the balance. Given that the business case for nuclear is driven by long-term stability in costs but hampered by high up-front investment costs, SMRs may well be able to provide for an opportunity for forward-looking utilities to compete even in deregulated markets. Given that the up-front investment is smaller for SMRs while the overall economics are largely unchanged, SMRs may offer the capacity for such utilities to incrementally enter merchant markets to compete with gas even at record-low prices, namely by allowing a smaller up-front investment to be recovered over the same time period.

Likewise, given the "modular" part of SMRs, utilities can more easily scale up their energy investments with nuclear, avoiding the economic catastrophe that befell many nuclear unit investors in the 1980's when energy demand unexpectedly plateaued. (Such a recent slowdown in growth of energy demand has likewise been a chief element in slower investment in new nuclear units domestically.)

Thus, a Chinese proverb seems appropriate here: "It is better to light a candle than to curse the darkness." Deregulated energy markets and historically low natural gas prices may by their nature provide a challenge to new nuclear - but certainly not an insurmountable one. The key to success for new nuclear will be in its ability to adapt, both through new technologies like SMRs which allow for more scaleable development in competitive energy markets and perhaps through innovative partnerships between utilities which allow for more efficient financing of large builds without the "bet the farm" risk presented to less capitalized firms.

Thus the new rule for new nuclear: adapt or die. The alternative is to simply curse the darkness.

Nuclear and the moral case for energy development

Recently, the Dalai Lama spoke out in favor of the peaceful use of nuclear energy to help bridge the gap between the developed world and the world's poorest, causing quite a stir, particularly among nuclear supporters. In his own words, he said

There is still many developing countries with a huge gap between rich and poor…millions of people’s lives remain under the poverty level and we have to think about these people

I'm arriving somewhat late to the party on this one, coming off the heels of giving five talks at the recent American Nuclear Society conference (incidentally, several of which pertained to nonproliferation education and research). However, there was a point that particularly resonated, similar to what Rod Adams recently touched on and in the theme of the Dalai Lama's comments: specifically, the moral case to be made for energy development. In this respect, I am reminded of the The Obligation of the Engineer, specifically:

Since the stone age, human progress has been spurred by the engineering genius.
Engineers have made usable nature's vast resources of material and energy for humanity's benefit.

As an engineer, I pledge to practice integrity and fair dealing, tolerance, and respect, and to uphold devotion to the standards and the dignity of my profession, conscious always that my skill carries with it the obligation to serve humanity by making the best use of Earth's precious wealth. 

When needed, my skill and knowledge shall be given without reservation for the public good.

Many of us who came into the nuclear profession did so out of awareness of the enormous potential nuclear energy holds, particularly in creating a world of energy abundance. In particular, balancing the dual concern of how to continue our current standard of living against pressing environmental concerns (despite my otherwise lack of granola / hippie cache) is part of what drove me into the field of nuclear engineering. Fundamentally, what motivates many in this regard is thus nuclear's capacity to help bridge the gap in what the late resource economist Julian Simon described as the greatest scourge: energy poverty.

Consider for a moment all of the conveniences that afford those of us in the developed world to call ourselves prosperous: homes which are kept comfortable and lit at night, sophisticated medical technology, the capacity to grow, transport, and maintain fresh food over long distances - each of these critically depends upon abundant access to energy. Take away the energy wealth of the developed world and suddenly much of this capacity is lost.

In this vein, nuclear energy is unique in several respects, but most remarkable in the sheer energy density. Fossil fuels (like coal and natural gas) exploit the breaking of chemical carbon bonds to produce energy, which until the discovery of nuclear fission was the most energy-dense process known around. Indeed, this density along with portability is still what makes fossil sources some of the most economical and attractive forms of energy. Nuclear fission takes this to a new dimension, exploiting the fundamental forces of nature (e.g., the strong force which binds the nucleus itself) to harness orders of magnitude greater amounts of energy, without the harmful byproducts of combustion of organic materials, some from combustion itself (carbon dioxide) and some which are inherent to the source (lead, mercury, and sulfur dioxide - i.e., the precursor to acid rain).

Underlying the Dalai Lama's endorsement of nuclear energy development is something nuclear professionals and advocates are keenly aware of: despite the attractiveness of renewable energy sources such as wind and solar, they are by nature diffuse and subject to the whims of nature. While there are other professionals (as adamantly  feverant about the idea of energy abundance as any nuclear advocate) who strive to soften the issue of the inherent instability of these sources through technologies such as energy storage, none of this gets around the fact that the density of renewable sources is critically constrained by nature, inherently limiting their ability to provide the level of power of sources such as nuclear without taking enormous amounts of land and resources out of other productive uses.

Relative abundance of elements of earth (Source: Wikipedia)

Nuclear, in particular with the development of new technologies such as grid-appropriate small modular reactors (SMRs) as well as alternative fuel cycles like throrium (yet more abundant in nature than uranium, itself more abundant on earth than silver, and both more abundant than the "rare earth" metals essential for components of wind and solar energy systems) thus has the capacity to provide for energy abundance in the developing world without the rather painful environmental trade-offs developing nations such as China have been forced to make, with their heavy reliance on coal.

Does this mean nuclear is a free lunch? Of course not - something which both the Dalai Lama and I freely acknowledge. Spent fuel is still an issue - although as we have seen, a political challenge rather than a technical one. (Looking beyond, the waste problem is one hardly exclusive to nuclear, either.) And indeed, the Dalai Lama is right to emphasize the need to minimize risks to public safety, something which nuclear professionals are acutely aware of (although, as is historically the case with technology, something technical managers are sometimes still catching up to). But what makes the case for nuclear is its capacity to balance these risks against the real and ever-present harms of other sources (especially those from coal, which is responsible for far more deaths per unit energy) against other factors like availability and economics.

Finally, there is of course the issue of the proliferation of nuclear weapons, something the Dalai Lama has long campaigned against (likewise an area I myself specialized in during my graduate studies). Yet as I have pointed out before, nuclear development need not come with the capacity for weapons (and in fact, the broader use of peaceful uses may yet prove to be antagonistic to weapons, both in consuming the feedstock as well as cementing economic benefits not readily yielded for a decision to proliferate).

Ultimately, there is fundamentally a humanist case to be made for expanded energy development in the developed world, in order to enable all of humanity to enjoy the benefits of energy abundance. Nuclear is and will continue to play a fundamental part in this.

Follow-up: Is spent fuel repository space truly "scarce?"

An anonymous commenter* left a response this evening to my most recent post criticizing the BRC's chief reliance on interim storage as a waste management solution. [*While it is generally my policy to be quite liberal with anonymous commenting (and I would never demand anyone disclose their real identity without so choosing), it is perhaps helpful for responding to anonymous comments to provide some kind of pseudonym or handle. As it is, this is simply a personal preference, no more.]

Ordinarily, I would simply respond in the thread, however the commenter raised several intelligent and interesting points which are worth responding to more broadly.

Taking it piece-by-piece:

The BRC report actually does recommend a decision framework for adopting advanced future fuel cycle technologies (including reprocessing). The report says that the federal government should sponsor RD&D to develop and demonstrate these technologies, but that the federal government (and the federal corporation recommended by the BRC) should not build or operate such infrastructure. So any future closing of the fuel cycle would involve decisions made by the private sector, based upon economics of direct disposal versus recycle. There it is.

Yes, it is true the report states just that. However, as I pointed out previously, the BRC report does not address any of the incentive structure built into the current waste fee, which charges based upon electricity demand rather than final impact upon the repository. By the current policy, private operators have no incentive to reprocess until the value of spent fuel exceeds the direct cost of reprocessing in addition to fees already paid for disposal. (There is likewise the issue that the fuel is held in title by the federal government).

In this sense then, it is not per current law the province of the private market to solve. This is at the root of the reason that I point out the flawed incentive structure, however - right now, the current policy of pay-as-you-produce, per unit electricity fundamentally short-circuits decisions by the private market by forcing them to pay a fixed cost for disposal no matter what. A revised policy which rested on A) Payment at time of disposal, and B) Fees adjusted to repository-impacting factors such as volume and heat would allow for this kind of private decision-making process to take place.

In other words, right now any market for private action on spent fuel is essentially a stacked deck, which the BRC recommendations do little to address.

Further, because without further changes to the Nuclear Waste Policy Act, spent fuel is the legal responsibility of the federal government, disclaiming technological alternatives to direct disposal without modifying the legal or fee-structure process is itself a commitment to direct disposal, absent events which entail spent fuel having a commercial value above and beyond that which has already been paid over to the federal government. Again, even a policy which delays these payments until spent fuel is handed over for final disposal would help to correct this issue.

As of now, given the fact that the federal government assumes a monopoly over spent fuel, it's a bit of a mulligan to argue that the private market serves as the decision framework for spent fuel treatment alternatives.

This post states that "The overall capacity of a geologic repository is controlled chiefly by temperature" which is not really correct; the overall capacity of a repository is determined primarily by the repository's area. The post presumes that repository area will remain a scarce resource, making closing the fuel cycle necessary to use limited repository area efficiently. This is a potentially completely incorrect assumption. What is the area of bedded salt in the Permean basin that stretches from Texas to Louisiana to Kansas? What is the area of the 70% of the continental U.S. which has crystalline basement rock within 2 kilometers of the surface suitable for deep boreholes? How many ridges of volcanic tuff are there at the Nevada Test Site that have ground water over 1000 feet below the surface? How much granite, how much clay does the U.S. have?

Let's break this into two issues. Assuming fixed physical design (i.e., footprint), temperature is a limiting factor. This is not really a matter of dispute. The temperature of the drift wall and the rock between drifts is what controls the physical emplacement of waste.

Yes, one can always dig a bigger hole - or for that matter, look into alternatives such as vertical emplacement rather than the current model for horizontal emplacement. And indeed, by this logic, we conceivably aren't restricted in terms of available repository space - which is why I took care to point out that this is a regulatory limit in the context of Yucca Mountain (based upon the design itself) rather than a strictly technical one. However, the political feasibility of this approach of indefinite expansion has always been in doubt (difficulties in opening one limited-scale geologic repository notwithstanding). I am extremely pessimistic that one can simply get away with indefinite expansion of capacity at a single site, despite what is easily sufficient physical capacity to do so.

Moving on to the broader point regarding available alternative disposal sites, this is actually a point I've been wanting to address in a future follow-up about geologic disposal alternatives (i.e., alternatives to the Yucca Mountain geology). Indeed, the Permian basin salt dome formation is quite large, and was the subject of the aforementioned "Project Salt Vault," which originally tested the feasibility of salt-dome formations. (Likewise, WIPP is also on the border of this same formation).

Deaf Smith county, Texas, one of the five original sites nominated for a permanent geologic repository, was also located in the Permian basin geology, which indeed is quite expansive, with many locations isolated from population centers. Other locations considered, such as Hanford feature granite in the saturated zone. The list goes on.

So, are we limited in terms of available site selection for geologic repositories? Physically, no - nor was this the problem to begin with. However, I would argue on the basis of history that we are greatly constrained politically in opening such a repository. While I welcome the BRC report's emphasis upon a consent-based process for repository siting, I am pessimistic that the NIMBY politics which mired down a site selection process originally would not make opening or expanding future sites another difficult and time-consuming process. I would thus argue that repository space thus is at a premium, not for want of accommodating geology but for lack of political will, something which appears to evolve only on the same timescales as geology itself. (Again, somewhere I'd be happy to be proven wrong.)

On the topic of boreholes - this is one area where the BRC report appeared to favor further investigation - however the one remark I can provide here is that deep borehole disposal is relatively expensive - then again, so are geologic repositories. Cost estimates seem to vary wildly based upon the assessment, with some studies indicating an array of 700 boreholes to dispose of 70,000 MTHM of waste would cost about $14 billion. Looking back to a study performed by a former colleague, it would appear that their estimate for 95 boreholes (for 10,000 cubic meters of storage, or about the equivalent of 36,000 MT of SNF) would be about $3.26 billion - still less than a tenth of the estimated cost of Yucca Mountain and about a quarter of the estimated cost of a similar geologic repository in Sweden. (Note that this study is for intermediate-depth boreholes for greater-than-class-C waste; actual requirements for intact spent fuel may vary.)
In this sense then, issues of future retrievability and ultimate technical feasibility aside, deep borehole disposal may indeed be the way to go. This begs the question (to which I have no immediate answer) why the original Nuclear Waste Policy Act and subsequent amendments were thus so committed to the strategy of centralized geologic repositories, as opposed to decentralized disposal in deep boreholes.

Will the private sector ever want to invest in building reprocessing infrastructure that could become uneconomic overnight as soon as a few square miles of new repository space are opened up?

Historically, this factor didn't seem to stop investments at West Valley and Barnwell. While West Valley was ultimately ill-fated due to initial design issues and later rendered retroactively uneconomical by changing regulations, Barnwell was clearly an attempt by the private sector to directly address spent fuel reprocessing. One can dispute whether the economics ever favored the viability of Barnwell, however clearly the private sector has been willing in the past to take on some of this infrastructure.
Further, this assumes a relative ease in developing repository capacity which again, may not be technically constrained, but certainly has yet to be demonstrated in terms of political feasibility.

If the decision to recycle spent fuel is left to the private sector, as the BRC recommends, probably the only reason any significant amount of spent fuel will get recycled in the future is because new reactor technologies will be commercialized where fissile recovered from old spent fuel will be less expensive than fissile from natural uranium. Google "denatured molten salt reactor" for a plausible example.

If the BRC recommendations are followed with no further amendment to the Nuclear Waste Policy Act (specifically with regard to the fee structure), this is likely true. And certainly, there are plenty of examples of reactor concepts which make use of recovered fissile materials, ranging from the integral fast reactor (a perennial favorite of Barry Brook over at Brave New Climate) to the EM2 small modular reactor design being proposed by General Atomics.

However, once again I believe my criticism here is still salient - how will the chain of custody of spent fuel adapt to allow for private alternatives to direct disposal? Will the federal government rebate funds for fuel diverted for recovery? Will an alternative fee be assessed for waste forms which are either more compact or cooler (thus having a lower marginal impact on the repository capacity?) These are questions which are left unanswered, ones which I believe would have significant consequences for private incentives for nuclear waste management (including recovery for reactors).

Given my own personal political preferences, I would prefer to see a system in which the private market handled spent fuel and the federal government only served in the role of steward of geologic disposal sites. However, in my opinion this requires a more fundamental re-working of the incentives built in to the Nuclear Waste Policy Act, which has yet to be proposed by the BRC.

Overall, several good and provocative points raised by the commenter - I appreciate their taking the time to present such a thought-out response, and hope this post serves to further the discussion.

Small Modular Reactors and the Economics of Nuclear

My colleague (and member of my dissertation committee) Dr. David McNelis had an excellent Op-Ed in the Raleigh News and Observer yesterday touting the safety and economics advantages of small modular reactors (SMRs). A snippet:

In contrast to a conventional nuclear plant, SMRs could be added one at a time in a cluster of modules, as the need for electricity rises. The cluster's costs would be paid for over time, softening the financial impact.

The modules could be factory assembled and be delivered by rail to an existing nuclear plant site. In such a configuration, one SMR could be taken out of service for maintenance or repair without affecting operation of the other units.

Most SMRs would be situated beneath the ground to provide better security. Typically they would operate for many years - possibly decades - without refueling and produce far less waste than conventional reactors.

Significantly, almost all of the SMR development is being done with private financing. Companies are using their own resources to develop the small reactors, without government support from mandates or subsidies of the sort that renewable energy sources now require.

As the kids say, do read the whole thing.

SMRs are an interesting, potentially game-changing addition to the nuclear energy market in my opinion, namely due to their ability to overcome one of the chief barriers to the rapid deployment of nuclear energy units right now: high capital costs.

Prohibitively high capital costs (most new reactors are starting with price tags around $4 billion or so) present utilities with a double-whammy of sorts: first in that raising so much capital is in itself a difficult undertaking, particularly compared to the total capitalization of the types of utilities making these investments. (This is where the typical rhetoric about "betting the farm" comes into play, despite the fact that the low fuel and operating costs and very high capacity factors make nuclear units veritable cash cows once electricity begins to flow. Ultimately, such investments require tying up a large portion of an individual utility's assets for several years before any money is generated.) Second, due to the large amounts of money involved and generally long construction times, utilities get hammered on costs by paying interest upon interest; in other words, interest accrues on money they borrow from the moment construction begins, meaning that the "cost of money" is a rather significant factor in nuclear construction. Finally, given both the large amounts of money and extended timelines involved, investors will thus typically demand a "risk premium" - similar to the kind of interest rate premium an ordinary borrower without stellar credit would have to pay on bank loans an credit cards. This too can significantly raise the cost of capital for building new units.

Each of these factors thus conspires to keep many smaller players out of the market. Instead, many have sought to invest in smaller, more scalable alternatives such as natural gas, which has nearly the opposite economics of nuclear: low capital costs (i.e., each unit is of a relatively small capacity and can be built quickly) and relatively high fuel costs as a fraction of the cost of electricity. (While nuclear's fuel cost for electricity is around 10%, natural gas can be around 70-80%). Nor has the price of natural gas ever been historically stable (at least in the last 15 years).

Unless, of course, this is your definition of "historically stable." (Source: EIA)

SMRs have the potential to change the economics of the game by several means. First, many proposed SMR designs are engineered to be mass-produced and pre-fabricated in factories, rather than built on-site. This could tremendously push down prices while also shortening construction times, thus ameliorating what is currently one of nuclear's biggest weaknesses at the moment.

Meanwhile, the "small" in SMRs also may have potentially positive implications for both cost and safety: SMRs can be potentially built into the ground, using the surrounding earth as containment, due to their relatively small size. Given the lower total power and nuclear material within the reactor, it can be said to have a lower overall "radiological footprint," meaning simplified safety planning.

Finally, the "right-size" power of SMR capacity may allow them to be sold in a greater number of markets - places both where a new full-sized reactor is too big for the needs of a community (for example, Fort Calhoun, north of Omaha, is the smallest reactor in the U.S. nuclear fleet, clocking in at only 500 MW; compare this to currently proposed new reactor designs, which begin in the neighborhood of 1000-1100 MW). Likewise, the smaller size means that for utilities only looking to incrementally expand capacity, small reactors may prove to be competitive with alternatives such as natural gas turbines.

One point which I think nuclear advocates tend to allow themselves to be blindsided to at times is in the fact  that above all else, it is economics which will ultimately determine the future of the nation's electricity portfolio. Factors like politics certainly come into play (particularly such issues as energy portfolio mandates, etc.), and likewise factors such as safety can never be understated. Nor should public acceptance ever be ignored, much as it has to the industry's peril in the past. However, those ultimately committing the funds to expand energy sources are the utilities, many of whom answer either directly to shareholders or to ratepayers. In this regard, they have an obligation in either sense to produce power as profitably or affordably as possible.

Thus, the decision for utilities will always ultimately come down to economics, something that nuclear advocates cannot simply ignore. I don't necessarily doubt the assertions of fellow advocates such as Rod Adams, who assert that fossil fuels have a strong interest to defend in continuing to sell their products. (Although I will say that I also don't necessarily buy the idea that those who argue natural gas is currently more economical based on short-term factors are necessarily on the fossil fuel dole, either.) But the fact remains - for nuclear to succeed, it must be able to compete, head to head, dollar for dollar.

Nuclear energy has tremendous advantages to offer, in that is clean, abundant, and easily the most energy-dense source we have available at our disposal. Yet at the end of the day, decisions over energy investments do not necessarily come down to these factors: they come down to economics, and often (regrettably) economic return over the short-term. This may be where SMRs ultimately change the game for nuclear, then - namely, by bringing the advantages of nuclear to bear in a more economically attractive package.