Coal, Nuclear

Existential Threats

Issue 3 and Volume 117.

Brian Schimmoller   by Brian Schimmoller, Contributing editor

“To be or not to be, that is the question.” OK, maybe Shakespeare is a bit dramatic for a nuclear energy column, but bear with me.

All power plants face challenges. Most are relatively modest – trimming operating and maintenance budgets, allocating capital to a persistent equipment issue or responding to new regulations. Occasionally, however, some can reach “existential” levels; that is, challenges that imperil a plant’s continued viability.

The U.S. nuclear industry faces at least three such threats this year. While the final outcome is uncertain, I wouldn’t necessarily be surprised if multiple nuclear plant owners announced decisions this year to shut plants down in the next few years.

The three main threats confronting U.S. nuclear plant owners are the low price of natural gas, potential plant and equipment upgrades to address vulnerabilities exposed by Fukushima and possible nuclear plant requirements associated with seismic hazards. Each of these threats could impose economic pressures that put the asset’s continued viability at risk.

Natural Gas Prices

The low price of natural gas in the U.S. puts particular pressure on merchant generating assets. The impact has been felt most severely by merchant coal plants, many of which are now slated for closure in coming years because they cannot compete on the margin with gas-fired plants , especially when factoring in additional capital outlays required to comply with pending environmental regulations.

Somewhat surprisingly, merchant nuclear plants are now in the proverbial crosshairs. In October 2012, Dominion announced plans to close the Kewaunee nuclear plant in Wisconsin in 2013, placing part of the blame on competition with gas-fired electricity. Dominion made a point to emphasize that the decision was not related to poor station performance but on economics. The plant’s power purchase agreements were ending at a time of projected low wholesale electricity prices in the region – due primarily to low natural gas prices – rendering continued operation uneconomic.

One UBS Securities analyst called the current low-price environment a key factor in putting a projected 2,000 to 3,000 MW of nuclear capacity at risk. The analyst said that while the variable costs of nuclear plant dispatch remain low, tight margins in a gas-driven market cannot support the high fixed cost of certain nuclear assets. With fixed costs for nuclear plants four to five times those for a comparable coal plant, maintenance costs of about $50/kW-year and rising fuel costs, the economic viability of merchant nuclear generators may decline.

Fukushima Vulnerabilities

Despite all we’ve learned over the past two years about the Fukushima Daiichi accident, the full financial impact of the incident on U.S. nuclear plants is not yet clear. Plants have taken a number of steps on their own, particularly with respect to the availability of portable emergency equipment to enhance their ability to respond to a loss-of-cooling-capability situation. Whether these steps are enough to satisfy potential regulatory requirements, however, has not been answered.

Another open issue emerging from Fukushima is whether filtered vents will be mandated for certain boiling water reactor designs. This hardware can enhance a plant’s ability to reduce radiological releases in the event of a nuclear plant accident, but they are costly. Estimates range from $15 million per plant on the low end to as much as $30-$40 million on the high end. Facing such an investment, some plant owners may decide retirement is the prudent business choice.

Seismic Hazards

Seismic hazard models are periodically updated to reflect new data and improved analytical methods; the models are then used to assess the risks posed to individual plants by seismic activity and to evaluate potential operational and physical modifications necessary to maintain safe shutdown capabilities. In the aftermath of Fukushima, the U.S. Nuclear Regulatory Commission ordered nuclear plant licensees to “…reevaluate the seismic and flooding hazards … against current NRC requirements and guidance, and if necessary, update the design basis … to protect against the updated hazards.”

U.S. nuclear plants are in the process of performing screening calculations that will analyze site-specific ground motion responses based on recently updated seismic hazards. If these calculations find that the risk to the plant is substantially higher than previously determined, a more detailed seismic risk assessment may be required. This assessment may point to needed modifications to ensure safe plant operation and shutdown during a seismic event. As with the Fukushima-induced requirements, such changes could result in economic impacts exceeding the owner’s appetite for asset investment.

For some nuclear plant owners, then, “to be or not to be” may indeed be a valid question in 2013.

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