Duke Energy COL for Levy County Nuclear Plant Still Alive Outside Cost Recovery

We've been watching the wires pretty closely every since we caught wind of a potential announcement by Duke Energy about the proposed nuclear project in Levy County, Florida. So far, several outlets have incorrectly reported that the project has been permanently shelved.

It's too bad those reporters didn't bother reading the fine print of the Duke Energy press release concerning a wide-ranging settlement with the Florida Public Service Commission (PSC) that went out about an hour ago (Bold emphasis mine):

In 2008, Duke Energy Florida announced plans to construct two 1,100-megawatt nuclear units in Levy County, Fla.

Duke Energy’s EPC agreement was based on the ability to obtain the Nuclear Regulatory Commission’s (NRC) combined construction and operating license (COL) by Jan. 1, 2014. As a result of delays by the NRC in issuing COLs for new nuclear plants, as well as increased uncertainty in cost recovery caused by recent legislative changes in Florida, Duke Energy will be terminating the EPC agreement for the proposed Levy nuclear project.

Although the proposed Levy nuclear project is no longer an option for meeting energy needs within the originally scheduled timeframe, Duke Energy Florida continues to regard the Levy site as a viable option for future nuclear generation and understands the importance of fuel diversity in creating a sustainable energy future. Because of this, the company will continue to pursue the COL outside of the nuclear cost recovery clause.

“We continue to believe that a balanced energy portfolio, including renewable energy, energy efficiency, and state-of-the-art cleaner power plants are critical to securing Florida’s energy future, and nuclear energy should remain an option to meet Florida’s future energy needs,” Glenn said.

So, what we're looking at is a delay, not a cancellation, and regulatory preparation for a potential new plant will continue. Here's hoping that detail gets back into the coverage this evening.

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Why Building Too Much Natural Gas Capacity to Generate Electricity Could Come Back to Haunt Florida

NEI VP Richard Myers

About a week ago, the Tampa Bay Times published an analysis by Ivan Penn claiming that ratepayers in Florida would be better served if Duke Energy built a natural gas plant in place of a proposed nuclear energy facility in Levy County. Over the weekend, that same paper published a letter to the editor by NEI's Richard Myers taking issue with that conclusion:

Nuclear plants offer benefits

The May 12 article "Levy nuclear plant more costly than a natural gas facility" fails to account for the economic and environmental benefits the two nuclear plants would bring to Florida. Progress Energy Florida, now Duke Energy Florida, determined in 2008 that the Levy nuclear plants would benefit the state by providing fuel diversity and price stability for consumers while avoiding air emissions.

In 2012, Florida generated 68 percent of its electricity from natural gas, a significant increase from 47 percent in 2008. Floridians may recall that in 2008 and 2009, the state endured its highest-ever electricity costs when natural gas prices were hitting all-time highs. Five years later, Florida relies even more on natural gas.

Just like a diversified financial portfolio is important for investors, so is a diversified energy portfolio for consumers. By relying ever more heavily on natural gas, Florida is putting itself in an increasingly vulnerable position if and when natural gas prices change.

Further, if natural gas plants are built instead of the two Levy nuclear plants, the gas plants will consume nearly 8 trillion cubic feet of natural gas and emit more than 500 million metric tons of carbon dioxide over 60 years.

The Levy nuclear plants will help Florida manage and balance any future that includes changes in carbon regulations and natural gas fuel costs, and an overreliance on any one form of electricity generation.

Richard Myers
Vice President
Nuclear Energy Institute

This isn't the first time Richard has addressed this issue. Back in January, he took issue with a piece in the Wall Street Journal that concluded that the natural gas boomlet we're currently experiencing might undo nuclear energy. The key takeaway here: nothing is forever, and that goes double for natural gas prices.

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The Clear Case for CWIP – A Rebuttal to Mark Cooper’s Analysis on “Advanced Cost Recovery”

Uprate at St. Lucie impossible without CWIP.

Two nuclear critics, Peter Bradford and Mark Cooper, recently published a report (pdf) explaining how “advanced cost recovery” for nuclear plants in Florida and South Carolina “creates another nuclear fiasco.” Cooper’s main argument seems to be that Construction Work in Progress (CWIP) shifts to ratepayers all of the risks of building nuclear plants. This is either a deliberate distortion or a misunderstanding of how the cost recovery mechanism works.

How “advanced cost recovery” (aka CWIP) works

When a utility builds any type of project, it uses a mix of debt and equity to pay for the construction. The debt comes from banks and other investors and, of course, the utility must pay interest to use the debt. The equity comes from the utility’s shareholders and also requires a return for its use. The CWIP financing mechanism, which is also allowed by the federal government for interstate transmission projects, allows a company building a project to include the interest on debt and a return on investor’s equity (known as carrying costs) in its electric rates while the project is under construction.

SCANA’s latest filing to the South Carolina’s public utility commission (pdf), Appendix 3 (page 27) explains how CWIP works for the two-reactor expansion at its Summer station. These carrying costs are classified in accounting and electric-utility parlance as “allowance for funds used during construction” (AFUDC). When CWIP is allowed, AFUDC is basically what the power company adds to its rates, and collects from the ratepayers during construction. The AFUDC in SCANA’s case is $238 million.

What’s also shown on page 27 is the yearly and cumulative amount of cash flow SCANA needs to build the two reactors. This is currently $5.5 billion and is funded by debt and equity. Cooper neglects to explain that SCANA’s customers are paying only about five percent of the construction costs of the projects (the AFUDC rate) during construction, while the owners and investors are contributing 95 percent.

Cooper also neglects to explain another significant feature of CWIP. Because the interest on debt and return on equity are being paid each year, these carrying costs are not accumulating as they would in the absence of CWIP, to be recovered when the plant begins operation. Because these costs, like all debt, compound over time, the quicker they are paid, the less they build up. When ratepayers pay these carrying costs while the plants are under construction, customers will save substantial sums over the life of the units. From Georgia Power:

“Approximately $0.5 billion of these customer benefits are associated with the inclusion of CWIP in rate base.” – p. 36 from Vogtle’s 8th Construction Monitoring Report (pdf)

From SCANA:

“Paying financing costs while construction is ongoing, as opposed to waiting until the project has been completed, will lower the cost of the new units by about $1 billion. We estimate this reduction will save our customers approximately $4 billion in electric rates over the life of the new units.” – SCANA Press Release

Peter Bradford asserted that these cost savings are false and the plants will cost customers more money in the end, but (typically) failed to provide any explanation of or factual support for these statements. A total of ten states – and the federal government – allow CWIP today because the legislators and public service commissions in these states know that such a cost recovery mechanism saves money for its customers.

“Ratepayers are on the hook”

Cooper’s paper claims that “ratepayers are on the hook” and taking all the risk of building a nuclear plant because of CWIP. Apparently, Cooper does not understand how utilities build and recover the costs of power plants in regulated states.

In regulated states, when a power plant is completed, the utility requests approval from the Public Service Commission to place the cost of construction in its rate base, which means that the utility begins charging its electric customers for the construction costs. State public service commissions analyze the costs to determine if they were spent “prudently.” If the PSC deems the costs to have been prudent, then they can be passed on to ratepayers. This occurs with or without CWIP.

When CWIP is allowed, public service commissions exercise even greater oversight and cost control. Costs are audited, reviewed and subject to a prudence determination by the PSC, typically on a quarterly or semi-annual basis. The utility must also demonstrate the economic viability of the project before it even begins construction. 

Cooper and his fellow anti-nuclear critics contend that CWIP allows utilities to collect costs without having to build the plant. Cooper’s paper claims that they can get halfway through the project, cancel it, and then collect the incurred costs of construction from ratepayers without having to pay anything. This is of course an erroneous view of how states govern projects.

Cooper’s paper cites an Iowa Utility Board analysis to make its case against CWIP. Last year, the Iowa legislature debated a bill that would allow CWIP which may have provided MidAmerican Energy the opportunity to build a nuclear plant in the state. The Iowa House passed the bill but the Senate didn’t act on it. There was much discussion about the issue and MidAmerican provided a short explanation of the bill (pdf). The explanation clearly states that the utility does not have the unilateral ability to cancel a project. State public service commissions must approve both the decision to build a plant, the decision to cancel one, and how much utilities can collect in rates based on the prudency of spending.

Cooper’s paper claims that CWIP puts all the risk on ratepayers. CWIP actually lowers the risks to ratepayers because it makes the projects more affordable to build, increasing the chance of successfully completing the project.

Most Economical

The five reactors under construction in the Southeast U.S. (Summer 2&3, Vogtle 3&4, and Watts Bar 2) are being built because they’re the most economical projects for those utilities. Cooper’s paper claims that there are many more economical alternatives than those plants. The utilities and state regulators in that region disagree.

Renewable resources in the Southeast are thin and natural gas plants (despite today’s low costs) are still not cheaper than the nuclear plants in the long-run. Utilities are also looking to diversify away from coal, and improved efficiency only gets a utility so far before new capacity is needed. Here’s what Georgia Power says on page 45 (pdf):

“The weighted average expected value of the relative savings for completion of the [Vogtle] Facility as compared to the gas-fired [combined cycle] alternative is $4.0 billion ….”

Paying it Forward

CWIP provides clear cost benefits for customers when building capital-intensive projects like nuclear plants. The two nuclear critics in this case simply do not like nuclear power and continue to misinform and skew the debate about the benefits of CWIP. Here’s their paper’s foregone conclusion on page viii:

“Nuclear power is inherently uneconomic because it relies on a catastrophically dangerous resource that is vulnerable to human frailties and the vicissitudes of Mother Nature.”

When one begins with such a conclusion, it’s easy to guess the rest of the paper.

Many generating plants and transmission lines operating today – not to mention the interstate highways, hundreds of bridges, and dams – have largely been paid for by customers who are no longer on the system. All customers benefit today from cost-effective capital that was deployed years ago. CWIP is not new and, as shown above, allows customers the benefit of lower electricity costs from a reliable, affordable, emission-free source of power that can last 60 to 80 to 100 years. Very few, if any, other technologies can provide such benefits.

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Guest Post: Nuclear Energy and the Value of CWIP

Bottom of containment vessel for new reactor at Plant Vogtle

The following guest post was written by NEI's Mitch Singer.

Jeff McMahon bases his argument against nuclear cost recovery “Editors Rebel Against Ratepayer Financing For Nuclear Plants,” on the sole premise that because natural gas is inexpensive at this point in time it will remain so for decades. Therefore, energy companies should rely solely on one source of electricity generation. Ignoring the old adage of not putting your eggs in one basket is as relevant in generation choices as it is in financial investments.

Energy companies evaluate a variety of factors to determine their generating mix and plan not in years, but rather decades ahead. Public utility commissioners do the same. They conduct an extensive analysis of the state’s demand growth commonly known as a “determination of needs” that looks at all methods of generation to see which ones are most suitable. Commissioners are also obligated to make sure there is diversification in the state’s generating portfolio, balance economic and environmental concerns and try to keep costs down.

Florida, for example, receives 62 percent of its electricity from natural gas and an overall 86 percent from fossil fuels. Natural gas may be low now, but history has proven on many occasions that low natural gas prices in the U.S. are not sustainable. Within the last month we’ve seen the price of natural gas spike to more than $30 per million BTU on the spot market in New England due to frigid weather and a shortage of natural gas pipeline capacity. So what did New England do to mitigate the impact? It imported significant amounts of electricity from the Indian Point nuclear plant in New York.

Here in lies the value of nuclear energy as it provides a stable, low-operating cost baseload source of electricity that offers a myriad of economic and environmental benefits. Nuclear cost recovery, commonly known as construction work in progress (CWIP), allows a utility to recover financing costs and return on equity. By doing so, a utility avoids paying “interest on interest” that would occur if all costs are held until the plant goes into service. 

In Georgia, where Southern Co. and Georgia Power are building two new reactors at Plant Vogtle, just this past week the Georgia Public Service Commission (PSC) approved the latest cost and schedule reports. One PSC staff member put the reasoning succinctly, saying the project “remains more economically viable than any other (fuel) resource, including a natural gas-fired alternative.”

In Georgia, CWIP is expected to save Southern Company’s ratepayers $300 million in financing costs during construction. CWIP also will reduce the in-service cost of the plant by $2 billion, saving customers additional financing costs over its expected 60-year life. The utility also has improved cash flows through CWIP that support stronger financial ratings, which result in lower interest costs for the project and all other utility investments over the long term. CWIP is allowed by public utilities and the Federal Energy Regulatory Commission to support the construction of baseload electricity plants and transmission lines for a simple reason: because it saves money for consumers and gets necessary infrastructure constructed.

New nuclear power plants also act as a macro-economic catalyst. The reliable, low-cost electricity provided by nuclear plants operates at close to 90 percent capacity. Thus, nuclear’s forward price and supply stability provide a high level of confidence in attracting capital formation to start new businesses and expand existing businesses, which results in job formation and expanded tax revenues. The Plant Vogtle project is about one-third completed and has already generated almost 5,000 jobs during the construction period and there will be about 700 permanent, high-paying jobs associated with the two new reactors when they’re completed by the end of this decade. In addition the average nuclear plant generates approximately $470 million a year in total output for the local community and about $40 million per year in total labor income. Nuclear also bring the environmental benefit of being the largest source of emission-free electricity.

Natural gas may be the preferred generation choice of today. But as Roman conquerors were warned during the celebrations of their triumphs; all glory is fleeting.

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