By Brian Schimmoller, Contributing Editor
Amid the media talk about high capital costs for new generation sources, production costs often get lost in the zeroes. While power plants routinely claw for every fraction of a penny reduction in operations and maintenance costs, the billions of dollars required for new large power plants typically capture the headlines.
Nowhere is the discrepancy more apparent than in the nuclear power industry, where the gap between capital costs ($5 billion-plus for a new unit) and production costs (2 to 3 cents/kWh) is the greatest.
According to data compiled by Platts in Nucleonics Week in September, spending at nuclear power plants in the United States to generate electricity rose by 1 mill/kWh (0.1 cents/kWh) between 2005 and 2006. The top quartile of reporting nuclear power plants generated electricity for less than 15.72 mills/kWh in 2006, compared to less than 14.75 mills/kWh in 2005 and less than 14 mills/kWh in 2004.
Driving the cost escalation is sustained high demand for nuclear electricity and tight supply for the commodities and human resources that keep nuclear power plants humming. And while differences in nuclear plant ownership and operation—single unit versus fleet, dual unit sites versus single unit site—are reflected in production costs, the entire industry is battling the same elements.
Fleet operators enjoy unquestioned advantages in applying downward pressure on production costs. The economies of scale associated with spreading costs over, and sharing resources among, multiple sites are a leading reason why fleet operators occupy most of the positions at the top of the Platts’ list. “Production costs within Entergy’s nuclear fleet have been relatively flat over the past decade,” said P.L. Swigart, director of financial operations and control for Entergy Nuclear Operations. However, there has been a 30 percent increase in fuel costs since 2000 and a 75 percent increase in capital costs. The company has managed rising costs by leveraging contracts in the fleet using bargaining power, allowing it to keep non-fuel labor costs in check. “We’ve also been able to leverage contract incentives with our alliance partners, Westinghouse and General Electric, to operate more efficiently and profitably,” he said.
While single-unit nuclear plants don’t enjoy the economies of scale associated with fleet operators, there are unique advantages. “We can be much more fleet on our feet,” said Tim Hermann, vice president of engineering at AmerenUE, which owns and operates a single nuclear unit at its Callaway plant in Fulton, Mo. For example, the company can implement industry best practices faster than fleet operators because it doesn’t have to change the minds of multiple management teams. Hermann cited implementation of a new work management process to reduce the maintenance backlog, which moved Callaway from the industry fourth quartile to industry top decile in 18 months.
The recent spike in uranium markets has set off alarm bells. Higher uranium costs have established a new floor for fuel prices, said Hermann. While this floor is not yet fully reflected in current production costs, fuel contracts being negotiated for five and 10 years out are starting from this higher floor. AmerenUE formed a company with three other nuclear utilities from the STARS (Strategic Teaming and Resource Sharing) sub-group of the Utilities Service Alliance to exercise some leverage in fuel contract negotiation. The fuel company enables AmerenUE to “mimic a fleet operator,” Hermann said.
Maintaining downward pressure on production costs will be further complicated by labor market constraints, particularly in response to pending personnel retirements. At Callaway, more than 50 percent of the workforce is expected to retire in the next 10 years, Hermann said. AmerenUE is aggressively pursuing a litany of strategies to fill these positions, including apprenticeship programs with local community colleges, internships with regional engineering students and outreach programs with area high school educators. Such activities, of course, cost money. “To keep this pipeline of potential new workers open, and to mentor incoming staff, we will likely be carrying a larger workforce over the next several years than what will ultimately be needed 10 to 15 years from now,” Hermann said.
In the Gulf Coast, Entergy is facing increased competition for craft labor for refueling outages and major projects due to Hurricane Katrina. The skill set for craft labor has become much more low density, and laborers will often choose longer jobs on the Gulf Coast over 21-day refueling outages at nuclear plants, said Entergy’s Swigart. Reversing this trend will depend on coordination and communication among nuclear utilities to ensure relatively stable and reliable craft labor demands, coupled with enticing compensation and fringe benefit packages.
While non-fuel labor cost increases are always a challenge, other cost elements are gaining attention. Rising regulatory fees and security costs post-9/11 have been a key driver in increasing O&M costs over the past seven years. “If these costs continue at the same rate, they will be our greatest O&M non-fuel cost challenge going forward,” Swigart said.
Finally, the aging of existing nuclear plants has significant economic repercussions, encompassing everything from alloy 600 and dissimilar welds to buried piping and equipment reliability. Entergy Nuclear has formed Unit Reliability Teams that prioritize spending on capital equipment and maintenance based on budget limits.
Replicating such innovation is no longer a good business practice in today’s nuclear power industry. It’s become business practice itself—an inherent part of nuclear power plant operation that keeps units from getting lost in the zeroes.