Coal, Nuclear

No Good Deed Goes Unpunished

Issue 7 and Volume 110.

By John C. Zink, Ph.D., P.E., Contributing Editor

Electricity customers across the country are feeling the pain of the higher price utilities are paying for natural gas. Generating companies which rely more on coal and nuclear plants have largely escaped the dramatic fuel price increase. Now, some state regulators have decided to punish those companies perspicacious enough to diversify their fuel resources. This reminds me of the sad, but often true, observation that no good deed goes unpunished.

Specifically, according to a February 28 article in The Wall Street Journal, Connecticut’s Attorney General asked the state legislature to impose a windfall-profits tax on nuclear power plants. The Attorney General says nuclear plants generate electricity so cheaply that utilities make too much money by selling their output at the prevailing market price.

Some of us nukes who had to seek other lines of work after the industry went bust in the 1980s can say, “I told you so.” Not that it makes any difference; it just makes us feel prescient, maybe even brilliant – but mostly frustrated. It’s time for some of the old anti-nukes, who said nuclear plants would be too expensive, to eat crow. But who will hold them accountable in the public eye? Where are the investigative reporters now?

The Nuclear Regulatory Commission’s environmental proceedings, part of the old process for obtaining a construction permit, required examination of the economics of nuclear vs. other options. At one such hearing in the 1970s I argued that although nuclear plants are expensive to build, the total generating cost is competitive over the plant’s lifetime. In addition, at the time of the first oil price shocks to the U.S. economy, I noted that once a nuclear plant is built, it is less susceptible to fuel price hikes than plants using other fuel. Fuel makes up only about 25 percent of the operating costs of a nuclear plant, vs. more than 75 percent for fossil plants. My company’s analysis showed that, over a 30-year period, nuclear power plants operating at capacity factors of 70 percent to 80 percent would be economical. The anti-nukes, in contrast, maintained that nuclear plants would never be competitive because they would never achieve such high capacity factors.

Because nuclear front-end costs are high and the benefits are long-term, the technology was a misfit with the short reelection time perspective of most politicians. Many state utility commissions in the 1970s and 1980s made it financially difficult, if not impossible, to complete a nuclear project. Because of the inability to recover investment costs from customers, companies cancelled their projects and company finances suffered grievously. For example, the utility commission’s failure to allow recovery of its investment in the Seabrook plant drove Public Service of New Hampshire into bankruptcy in 1988, the first U.S. utility bankruptcy in more than 50 years.

The 1990s brought the beginnings of deregulation. This is when the concept of stranded costs became synonymous with both expensive power purchase contracts and nuclear plants. Companies wishing to compete in the open market with their nuclear-generated electricity petitioned regulators to temper the would-be free market aspects of wholesale electricity pricing to allow recovery of capital costs already incurred in good faith, but which might be unrecoverable in a totally competitive market. Non-nuclear utilities fought against this, recognizing that well-operated nuclear plants could have a clear economic advantage.

So what happened? Not surprisingly, oil and natural gas prices rose sharply, adversely affecting the economics of oil and gas generation. Transportation bottlenecks and environmental restrictions conspired to drive up the cost of using coal. At the same time, nuclear plants matured and operators improved their operations so nuclear capacity factors rose from an average of 71 percent in 1997 to more than 90 percent in 2002. Capacity factors have remained in the 90 percent range ever since.

A 2005 study by the International Energy Agency (IEA) found that nuclear plants are competitive with other plants, even taking into account their high capital costs. IEA estimates that, at a 10 percent discount rate on capital, nuclear plants will cost $30 to $50 per MWh. In comparison, the agency estimates $35 to $60 for coal and $40 to $63 for natural gas. Clearly, nuclear advocates were correct in claiming that the right way to evaluate power plant economics is to consider the lifecycle cost; that is, the total cost of building and operating the plant over its lifetime.

Now, having lived through the hard times with their nuclear plants and having honed their operations to the point of extremely high reliability, the stalwart nuclear utilities finally are getting their just rewards. Finally, the long-term wisdom of their decision to go nuclear is bearing fruit. And who is picking that fruit? Not the long-suffering stockholders; it is those same politically motivated utility commissions who created so much financial suffering in the past. Having been proven wrong at every turn, the politicians – at least in Connecticut – are exacting their revenge. No good deed goes unpunished.