New Reactor Costs Daunt U.S. Utilities as TVA Restarts Old Unit

   We want to start building plants,'' said Bush, whose administration is promoting loan guarantees and tax breaks to get the first new U.S. reactors constructed since 1996.

U.S. electricity producers aren't leaping to embrace that vision. Bankers and their utility clients are demanding more generous loan guarantees than the Bush administration is offering. And consumers probably will have to pay more for power to make the $4 billion needed to build each new reactor a worthwhile investment.

   It's a whopping amount of money,'' says Rob Graber, vice president of EnergyPath Corp., an energy consulting firm.

Far more than safety and environmental concerns, the biggest hurdle to fulfilling Bush's ambition to build the equivalent of three new nuclear plants a year by 2015 is money.

U.S. utilities will have to invest about $350 billion by 2025 to satisfy the country's growing appetite for electricity, according to Cambridge Energy Research Associates, a Cambridge, Massachusetts, consultant.

At a time when the Nuclear Energy Institute, a Washington trade group, is heralding a   nuclear renaissance,'' TVA is alone in executing the objective. Of the 16 U.S. electricity producers that have told the government they are interested in building new nuclear plants, none has committed to the projects.

Challenges

The challenges TVA faced at Browns Ferry, a former stagecoach crossing 11 miles (18 kilometers) southwest of Athens, Alabama, demonstrate how difficult it will be to relaunch the U.S. nuclear power industry.

The tasks range from lining up billions of dollars in financing to securing scarce components in a manufacturing sector decimated decades ago, and hiring and training a new generation of skilled workers at a time when about one-third of the industry's existing workforce is close to retirement.

Yet, now that TVA has finished the overhaul of its Browns Ferry Unit One reactor, which is generating enough electricity to light 650,000 homes, the company is already looking to build or complete three other reactors it abandoned in the 1980s.

U.S. nuclear power utilities have scared away investors ever since the 1979 accident at the Three Mile Island plant near Middletown, Pennsylvania. These days, the overwhelming stumbling block is that it costs about 28 percent more to build a new nuclear plant than the value Wall Street assigns to existing reactors.

New Versus Old

Investment banking consultant Gary L. Hunt, president of Global Energy Advisors in Sacramento, California, estimates the cost of building a plant at $2,214 per kilowatt of generating capacity. The market places a value of $1,730 per kilowatt of generating capacity on currently operating reactors, he says.

TVA's renovation of Browns Ferry Unit One was attractive because it retooled an old reactor for just $1,558 per kilowatt.

By comparison, traditional coal-fired plants cost $2,022 per kilowatt to build, Hunt says. And Congress is considering clean-air legislation that would add about $500 per kilowatt to the cost of those conventional coal plants.

Because nuclear power runs on uranium, it doesn't emit the greenhouse gases associated with carbon-emitting coal. Its disadvantage is producing permanent stores of radioactive waste.

To satisfy an estimated 40 percent increase in U.S. electricity demand by 2025, the Bush administration is promoting nuclear power's development with tax credits, loan guarantees and a streamlined regulatory review process.

Higher Rates

Several state governments in the south — Florida, Georgia, Louisiana and South Carolina — have assured utilities they will be able to recapture the costs of new nuclear plants through higher electricity rates, says Mary Quillian, director of business and environmental policy at the Nuclear Energy Institute.

James Curtiss, an energy lawyer at the Washington law firm Winston & Strawn LLP, predicts that applications to build and license the new reactors will start coming in to the government overseer, the Nuclear Regulatory Commission, or NRC, at the pace of about one a month beginning in the fourth quarter. That would surpass the peak of applications in the 1970s.

Still, bankers and utility executives say more incentives are necessary to make the projects viable. That is because $3 of nuclear power-generating assets — reactors hooked up to steam generators — are needed to produce $1 of revenue, making it the most capital intensive of all major industries, according to Cambridge Energy Research Associates.

Loan Guarantees

In March, five bankers told U.S. Energy Secretary Samuel Bodman — who accompanied Bush to Browns Ferry — that the administration's offer to support new plant development with loan guarantees covering 72 percent of a reactor's construction costs should be increased to 80 percent.

In a letter, energy partners at Goldman, Sachs & Co., Citigroup Global Markets Inc., Credit Suisse Securities LLC, Lehman Brothers Inc. and Morgan Stanley told Bodman that without the added concession it wouldn't be possible to raise financing for new nuclear plants “on commercially reasonable terms.''

Democrats' hold on Congress, meantime, has taken some steam out of the nuclear lobby. “It is not unqualified or unambiguous support we are enjoying,'' says the Nuclear Energy Institute's chief executive officer, Frank L. “Skip'' Bowman.

Morgan Stanley Executive Director Caren Byrd says political consensus may not emerge until after the 2008 presidential election: “Both parties — certainly the Democrats — are concerned about the environment. But I don't see a lot of Democrats pounding the table of new nuclear yet.''

Shift to Customer

Government backing is necessary, says Goldman Managing Director John Gilbertson, a signatory on the bankers' letter to Bodman.

   Nobody can have confidence now that when the bell rings and the time comes to go raise the money that they'll find it,'' he says.

Government incentives are too generous already, says Peter Bradford, an NRC commissioner from 1977 to 1982. Now a critic of nuclear power, he says the state and federal programs to promote a nuclear revival shift investment risks from the utilities to consumers and taxpayers.

   The reforms of the '80s said, `Let's put the risk on the utilities and the builders because they're in charge of managing these projects and are in a position to assess and manage the risk,''' Bradford says. “What's offensive about what's happening now is Congress and the state legislatures are doing it in much the opposite direction.''

$300 Million New

TVA, with its headquarters in Knoxville, Tennessee, was created by Congress in 1933 as a self-regulated utility and development corporation to produce jobs and electricity in the rural South. Today, TVA is the largest U.S. power producer, serving 8.7 million people in seven states.

  It really broke a mold of what we call total poverty,'' says sketch artist James Croley Smith, 83, of Athens, Alabama, who remembers life without electricity before TVA changed the landscape in the seven states the Tennessee River traverses.

TVA began building the Browns Ferry plant in 1967. It completed Unit One in 1974 for $300 million.

At the time, TVA was promoting plans to build 17 reactors to contend with forecasts for rising energy costs and fast- growing demand — a scenario much like today's.

It completed only six, including three reactors at Browns Ferry, while spending $10.9 billion on 11 unfinished projects.

$3.3 Billion Debt

The debacle almost led to TVA's insolvency and saddled it with $3.3 billion in debt still on its balance sheet.

The last U.S. nuclear plant completed was TVA's Watts Bar I reactor in Spring City, Tennessee. It was finished in 1996 for $6.9 billion, after a quarter-century of management missteps, shifting regulations and spiraling costs.

During those years, TVA spent $1.8 billion on a second, uncompleted reactor at Spring City and about $4 billion on another uncompleted reactor in Hollywood, Alabama.

Meanwhile, danger signs dogged its existing fleet.

A fire at Browns Ferry Unit One in March 1975 — caused by an electrician working with a candle — burned out of control for almost seven hours. The reactor, then only eight months old, was closed for 1 1/2 years.

From 1980 to 1985, the NRC assessed TVA's nuclear fleet with more than 1,000 regulatory violations.

  A Certain Arrogance'

In March 1985, TVA closed the Browns Ferry plant due to safety concerns that temporarily sidelined its entire fleet of reactors and prompted it to abandon the costliest nuclear energy building program in U.S. history. The NRC says 28 U.S. nuclear plants have shut since the 1960s, 16 are being decommissioned and 97 were canceled before completion.

Craven Crowell, TVA's chairman from 1993 to 2001, says hubris brought on the government enterprise's ills.

   There was a certain arrogance at TVA that `We can do anything, we can build anything': `We've harnessed a river, we've built carbon plants, and there's nothing different about how a nuclear plant boils water,''' Crowell says. “It took until the mid-80s until people realized there had to be a different approach to how people managed the nuclear program.''

Today, Ashok Bhatnagar, 51, TVA's senior vice president of nuclear development, defends the decision to rehabilitate the 1960s-era Browns Ferry reactor.

  These are very robust designs,'' he says. “And there is so much experience built in over the years, you can't discount what the experience is worth to you.''

Latest Technology

Andrew C. White, who runs nuclear operations for General Electric Co., says the refurbished unit is fully modern. General Electric designed the original Browns Ferry reactor and performed $170 million in renovation work on it.

  This has probably brought in all the latest and greatest technology, fuel, instrumentation and technology that we have today for an existing plant,'' White says.

Yet building nuclear reactors will remain challenging, as revealed by TVA's efforts to secure the scarce components — which took it from Brazil to Japan — and the skilled personnel it needed to bring back the Browns Ferry reactor.

The Nuclear Energy Institute estimates that only about 10 percent of the U.S. manufacturing capacity that existed to build the current generation of nuclear reactors remains.

Most companies that produced the heavy steel forgings, cables, pumps and valves that went into U.S. reactors in the 1960s and 1970s have since been acquired by non-U.S. companies or folded, making parts hard to find and expensive.

Lost Infrastructure

Former TVA Chief Nuclear Officer Oliver Kingsley says, “I don't believe the United States is really ready to start the new construction of nuclear reactors. We've lost our previous infrastructure, and it wasn't too good.''

Thomas Retson, president of EnergyPath in Wilmington, North Carolina, takes a more hopeful view.   The entire supply chain has been weakened over the years,'' he says.   This project has brought back into the game the functionalities, some of which had gone dormant.''

The Browns Ferry restoration also cost federal regulators more than 60,000 hours of review time over five years. The restoration was replete with surprises, from welding defects to an unexpected shutdown of the reactor during testing in June.

  It's absurd,'' says Faith Young, a Hartsville, Tennessee, environmental activist who has opposed TVA's nuclear program since the 1970s. “I think they learned no lessons.''

 Massive Undertaking'

NRC Chairman Dale E. Klein responds that the time and care taken shows how much has been learned.  What I hope Browns Ferry does is give the public and industry confidence in the NRC,'' Klein says. “This was a massive undertaking.''

TVA will have to continue to expand. Peak demand for its electricity is increasing by 1.9 percent a year, resulting in the need for new generating capacity comparable to Browns Ferry Unit One every 20 months.

TVA CEO Tom Kilgore told his board May 31 that the enterprise will have to buy $1.06 billion of power on the open market this year to cover its generating shortfall.

The situation is heightened by a drought in the Tennessee Valley that has reduced by 50 percent TVA's river-based hydro- electric generation, its cheapest energy source.

  We need to be self sufficient,'' Kilgore said.

The CEO told his board he would like to finish the uncompleted Spring City reactor by 2013, if cost studies support the project. Some TVA managers, contractors and government inspectors already have moved from Browns Ferry to Spring City. Kilgore said TVA also is considering whether to build two reactors by 2019 at its Hollywood, Alabama, site.

Financial Stretch

Even the Browns Ferry renovation was a financial stretch. TVA funded the project in part by borrowing $1.3 billion against its gas-fired turbine generators and other equipment. It also raised cash through the pre-sale of $1.5 billion in electricity, at about a 1 percent discount, to its largest customer, the city-owned Memphis Light, Gas and Water utility.

TVA's Bhatnagar says the Browns Ferry restart will pay for itself in five years.   We've shown the value of nuclear once again as a good source of energy for the country,'' he says.

Within the nuclear power industry, TVA's example is seen as a symbol of progress that others may follow.

   They did go procure nuclear-grade materials on a global scale,'' says Randy Hutchinson, senior vice president of nuclear development at New Orleans-based Entergy Corp., which is considering building two nuclear plants, in Louisiana and Mississippi.   They were able to go out, and — even though it was difficult — to marshal a workforce to do this.

  They brought a nuclear plant that had been shut down for a number of years — that everybody in the industry thought would never restart — and they started it,'' he says.