Exelon’s Rowe: Low gas prices and no carbon price push back nuclear renaissance a “decade, maybe two”
And a new Maryland nuke bites the dust
Exelon Corp. Chief Executive Officer John Rowe said he expects natural-gas prices to remain low, pushing back the construction of new U.S. nuclear power plants by a “decade, maybe two.”
“We think natural gas will stay cheap for a very long time,” Rowe said in an interview today at Bloomberg’s headquarters in New York. “As long as natural gas is anywhere near current price forecasts, you can’t economically build a merchant nuclear plant.”
… Absent a price on carbon dioxide emissions, gas would have to rise to $9 or $9.50 to make the reactors economically attractive, Rowe said.
Reports of the death of the long-heralded nuclear renaissance have not been exaggerated. The industry has helped ruin itself by failing to either standardize its product or stop costs from escalating out of control (see “Intro to nuclear power” and “Nuclear Bombshell: $26 Billion cost — $10,800 per kilowatt! — killed Ontario nuclear bid“).
And the pro-nuke conservative movement finished off the renaissance by killing the climate and clean energy jobs bill, which would have priced carbon and boosted all low-carbon forms of energy.
As a result, the nuclear industry — perhaps the most heavily subsidized source of power in U.S. history (see “Nuclear Pork — Enough is Enough“) — has been staking its hopes for building even a few plants on the American public taking virtually all of the risk. CAP’s Richard W. Caperton explains why even that isn’t working:
In a setback for the American nuclear renaissance, Maryland’s Constellation Energy announced on Friday that they would no longer be pursuing a new reactor at their Calvert Cliffs site. The move isn’t entirely unexpected, as the economics of the project have been in question for some time.
The most interesting aspect of the announcement is that Constellation and the Department of Energy (DOE) were unable to come to terms on a critical loan guarantee. Without the guarantee, financing the project would be prohibitively expensive.
DOE has the authority to issue loan guarantees under a program created by the Energy Policy Act of 2005. This program is unique among government loan guarantees, though, in that it requires the borrower (Constellation) to reimburse the government for the risk that the government takes on. This payment, known as the “credit subsidy fee,” is at the center of the disagreement between DOE and Constellation.
The credit subsidy fee is calculated by DOE and the Office of Management and Budget (OMB) using a proprietary model. The fee is intended to cover the expected payouts on the guarantee (in the event that Constellation is unable to pay back a loan) minus any proceeds from a liquidation (such as selling a nuclear reactor to a new buyer).
I have previously estimated that this fee should be about ten percent of the total size of the guarantee for a generic nuclear reactor project. To arrive at this conclusion, I used publicly-available estimates of both the default rate and recovery rate for a new reactor. Both government and non-government sources indicate that a new reactor has about a 50 percent chance of defaulting on a loan. In addition, similar sources indicate that the government will only recover half of the outstanding loan in liquidation proceedings. (This calculation is discussed more fully in my Congressional testimony, “Taxpayer Protection and the Nuclear Loan Guarantee Program.”)
DOE and OMB told Constellation that the credit subsidy fee for the Calvert Cliffs project would be $880 million, or 11.6 percent of the total guarantee. This fee accurately represents the risk of building a new nuclear reactor and fully covers the cost of the guarantee to the government. By law, Constellation must pay the fee that OMB and DOE calculate in order to receive a loan guarantee.
In a letter to DOE, Constellation said that this fee would be “unreasonably burdensome and would create unacceptable risks and costs for our company.” The purpose of the credit subsidy fee is to shift risk from the taxpayer to the borrower. Clearly, if the risk is unacceptable for Constellation, then asking taxpayers to carry that same risk is equally unacceptable. The unfortunate reality of this project is that several factors have combined to make it uneconomical. Cheap natural gas, the dynamics of competitive wholesale electricity markets, the lack of a price on carbon, and cost overruns that have plagued the reactor design they planned to use all make this project a risky investment. Exelon’s John Rowe has concluded cheap natural gas and inaction on pricing carbon will push back the construction of new merchant nuclear plants – like Constellation’s – by a “decade, maybe two.”
OMB has been under fire recently for their perceived slowness in evaluating loan guarantee applications. Under this intense political pressure, the fact that OMB was unwilling to make accommodations to a borrower that would have shifted risk to taxpayers deserves a hearty applause. In fact, OMB appears to have gained a much better appreciation of the financial risk involved in a new nuclear reactor. There are reports that OMB had previously signed off on a credit subsidy fee in the range of 1 to 2 percent, so they have fended off political pressure and lobbying from loan applicants to arrive at the 11.6 percent fee for Constellation’s reactor.
At the same time, no one should cheer the fact that a project that would have created 4,000 jobs is now in extreme doubt. (There is an outside chance that EDF, Constellation’s partner in the project, could move forward, but that seems highly unlikely.) Hopefully Constellation uses this as an opportunity to refocus their efforts to other low-carbon solutions, such as wind, geothermal, or solar. These technologies compare favorably with nuclear in terms of job creation, and may make more financial sense for Maryland.
In addition, OMB and DOE should continue reminding people that the loan guarantee program is bigger than just nuclear. Constellation’s announcement overshadows DOE’s announcement of a loan guarantee for what will be the biggest wind project in the world on Friday. While it was slow to get off the ground, the DOE loan guarantee program is starting to turn out success stories.
– Richard W. Caperton is a Policy Analyst with CAP’s energy opportunity team.
As a mechanical engineer once told me, you can’t make chicken salad out of chicken sh!t. Taxpayer dollars should go where they create the most benefit for the buck — and for the foreseeable future that certainly is not nuclear power.
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