Twilight of the Nukes?
Nuclear power in California and the nation has survived multibillion-dollar cost overruns, inefficiency, Three Mile Island and widespread public enmity--but can it survive the shock of having to compete on its own dubious economics?
That rude awakening will soon confront the nuclear caretakers as a free market in energy takes over. And although many observers see a future for nuclear energy, still clean and reliable, others brand many of the nation’s plants as failed experiments and boondoggles that some utilities will walk away from as competition comes to the power industry over the next decade.
One facility facing an uncertain future is San Onofre near San Clemente, where one of three units has already been padlocked and the remaining facilities are ranked by a leading trade magazine as among the nation’s least efficient. California’s only other operating nuclear plant is at Diablo Canyon in Avila Beach in San Luis Obispo County.
In a recent study of power deregulation, Moody’s Investors Service predicted that as many as 15 of the nation’s 110 licensed nuclear plants--neither San Onofre nor Diablo Canyon is on the list--are likely to close once the free market takes hold because they cost too much to run. The toll could go higher if the price of competing energy sources goes lower, Moody’s said.
More pessimistic is JBS Inc., a Sacramento-based energy consulting firm for consumer groups and government agencies, which predicts that a third of all nuclear plants may close as energy competition replaces the monopolies that utilities now enjoy and, in the words of JBS principal Bill Marcus, the “sheep are divided from the goats.”
“Nuclear isn’t going away, but there will be a significant number of plants closing over the next 10 years. The nuclear power industry will be very Darwinian as we move into the new world. Practices good enough five years ago aren’t good enough today,” Marcus said.
On the other hand, the price of nuclear fuel itself is much lower than that of fossil fuels, noted Joe Wambold, manager of business planning at Southern California Edison. If fossil fuels jump sharply, as they did in the 1970s, nuclear could suddenly become very competitive. Barring that, the manpower and maintenance costs of operating a nuclear plant will more than offset nuclear’s savings.
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All concerned seem to agree on one issue: There will probably never be another major nuclear plant built in the United States. In a free market, utilities or independent power providers could never justify the plants’ exorbitant costs--at least not as long as natural gas and other fossil fuels stay cheap.
Said Cambridge Energy Research Associates senior director Gary Simon, a power industry expert: “It’s doubtful that a new nuclear plant will ever be built in this country. A competitive market punishes a high capital cost, and they are a pretty capital-intensive piece of equipment.”
The issues are different overseas, where nuclear power is booming in some areas, particularly Asia. Japan, Taiwan and South Korea have projects underway and China is expected to launch an aggressive nuclear power development program.
“It’s really the growing, industrializing nations of Asia that are looking ahead to nuclear power,” said Steve Unglesbee, spokesman for the Nuclear Energy Institute, a Washington-based policy and lobby group that represents the nuclear power industry.
Nuclear power is still looked upon favorably in many countries that have to import the bulk of their petroleum. Lithuania, for example, relies the most on nuclear energy: Its two plants supply 85% of all power. France’s nuclear plants supply about 76% of the nation’s power capacity. In this country, the figure is 20%.
Why so gloomy a U.S. prognosis for an industry that once promised an abundance of clean, cheap energy? Nuclear accidents at Three Mile Island in Pennsylvania in 1979 and Chernobyl in the Ukraine in 1986 opened the world’s eyes to the health risks, of course. And gigantic cost overruns and losses in the plants’ construction and operations have rocked Wall Street with the financial risks.
Victor Gilinsky, a former member of the Nuclear Regulatory Commission and now a consultant with Cambridge Energy Research Associates, said the industry was injured, perhaps fatally, by a number of factors, chiefly the accidents and overruns but also higher-than-expected operating costs.
“Manufacturers’ estimates of the number of people it would take to run the plants was low by a factor of 10,” Gilinsky said.
At first, utilities liked nuclear plants as investments because they persuaded state regulators to make ratepayers liable for the huge capital investments plus a fixed return, a more reliable source of revenue than fossil fuel plants, where the major expense is the variable cost of the energy itself.
But when those capital investments overran initial estimates by huge amounts--San Onofre was budgeted at $1.3 billion but cost $4.3 billion--the public and government quickly lost their zeal for the projects.
Safety-related regulatory delays caused in part by the Three Mile Island accident, along with double-digit interest rates at the end of the 1970s, saddled the utilities with far higher costs than had been projected.
Also problematic were the lack of standardized designs for the plants, which made each project unique. “So instead of one to five learning curves, we had 50 to 75 learning curves,” Gilinsky said, referring to the varying blueprints.
In retrospect, some say the government should have licensed the manufacturers, such as Westinghouse Electric Corp. and General Electric Co., to run the plants, not the utilities that owned them but knew little about their operation.
But going forward, nuclear energy’s biggest problem is that the nation, especially the West, is awash in low-cost energy from hydroelectric, natural gas and coal, against which nuclear doesn’t come close to competing. On a purely operating basis--not counting the estimated $16-billion debt on the state’s nuclear plants themselves--nuclear power costs California consumers nearly twice what they pay for the lowest-cost fossil fuel energy.
In the next four years, California consumers will pay an average 4 cents per kilowatt-hour for nuclear power, compared with 2 to 2.5 cents for natural-gas-generated electricity, the lowest-cost source. Both figures exclude the cost of the plants.
The high cost of building, maintaining and operating nuclear plants is the biggest reason California consumers’ electricity bills are 50% higher, on average, than the rest of the nation. And in California, where nuclear represents 25% of the state’s power capacity, those higher costs filter down to most residents and businesses.
Until now, Californians have had no choice but to shoulder the cost of those so-called stranded assets because the state Public Utilities Commission in effect guaranteed that ratepayers would repay the utilities’ investments--plus a healthy profit--when the agency approved construction of the plants in the 1960s and ‘70s.
But after deregulation in California is complete in 2002, the onus for paying off those remaining debts shifts to utility shareholders, who will have to decide whether nuclear investments afford a worthwhile return.
Neither of California’s two remaining nuclear stations, San Onofre--co-owned by Southern California Edison and San Diego Gas & Electric--nor Diablo Canyon--owned by Pacific Gas & Electric--is on Moody’s short list of plants likely to close. But some observers describe San Onofre’s status as marginal. Nucleonics Week, a nuclear trade magazine, puts San Onofre in the bottom third of the nation’s nuclear plants in terms of operating efficiency.
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One big repair bill in the hundreds of millions of dollars--not beyond reason for the aging facility--could prompt the utility owners to shutter San Onofre, said Barbara Barkovich, a San Rafael-based consultant to the 12-member California Large Energy Consumers Assn. Her client is an “extremely price-sensitive” group of large industrial customers, including cement and steel companies, that will wield enormous clout in the newly emerging energy market.
“San Onofre’s more than 10 years old, and if something major goes wrong, that costs a lot of money to fix. There is some question whether they could recover those costs in a free market. If not, they would have to make a business decision to take a loss or shut the plant down,” Barkovich said.
John Bryson, chairman and chief executive of Edison parent Edison International, said San Onofre is improving in efficiency and has one of the industry’s strongest safety records. But he said in an interview that the plant will have to become much more efficient or fossil fuel prices will have to rise significantly in the next five years for San Onofre’s future to be assured.
“The folks at San Onofre know they are going to have to meet market prices or not have an operating plant,” Bryson said.
In 1992, Bryson ordered the closure of San Onofre Unit 1, bowing to the PUC, which said the older plant, built in 1968, was inefficient, did not warrant $100 million in upgrade costs sought by Edison and ought to be closed. San Onofre Units 2 and 3, which generate 1,100 megawatts of power each, remain open.
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Despite the uncertainties, PG&E; likewise vows to keep its nuclear units at Diablo Canyon--which produces 20% of the utility’s total power--running after 2002.
High maintenance costs led Sacramento County residents to vote to close the Sacramento Municipal Utility District’s Rancho Seco nuclear power station in 1989. It kept breaking down, and “ratepayers got tired of paying for capital additions” through rate increases, said Jan Smutny-Jones, executive director of Independent Power Producers, a Sacramento-based alternative-energy trade group.
But closing a nuclear plant raises an additional set of issues and costs related to the disposal of nuclear wastes. Although part of California ratepayers’ monthly bills go to a trust fund to cover such “decommissioning” costs, no one really knows if they are adequate. Some utilities may decide to keep a money-losing plant open rather than shoulder the costs of closure.
The current plan for Rancho Seco, for example, is to keep it in a “safe storage mode” at least until 2008--partly because SMUD doesn’t have the $400 million it would cost to decommission it, partly because there is no adequate disposal site in California for low-level nuclear waste, and partly because the utility wants the radioactive material to further decay and become less hazardous before workers try to remove it.
California and most other states are now in the process of transforming their power industries from utility-controlled monopolies to free-market propositions where energy will be bought and sold on spot markets and through highly competitive, long-term purchase contracts. With the federal government opening up access to power transmission lines, power can now be bought in one part of the country and delivered and sold in another.
Energy sellers and buyers--including large power brokers and consortiums on one side and industrial, government and residential users on the other--are already positioning for the change, which will start taking effect in California in January 1998.
But before the free market can take over, there are those high-priced nuclear plants to pay for.
California’s electricity deregulation law, signed last month by Gov. Pete Wilson--a measure that critics say was unduly generous to the utilities--guarantees that for the next six years, utilities will continue to be reimbursed by consumers for the bulk of the nuclear plants’ bloated construction and debt costs, plus a healthy return to shareholders on the above-market cost of nuclear energy.
That cost could total as much as $16 billion and will be paid to Edison, PG&E; and SDG&E; by their customers in the form of “competitive transition charges,” amounting to a third or more of a typical monthly residential bill through 2002.
Consumers are already carrying those nuclear costs--the new deregulation law simply accelerates the payment as a way of cleaning the slate for utilities once the free-market era kicks in. Consumers’ post-1998 bills will itemize just how much they are paying for above-market nuclear costs--in short, costs that have nothing to do with the actual production of energy.
After 2002, when the plant debt is paid off, nuclear will have to compete on costs with such traditional fuels as natural gas and coal. The new competitive framework means investors in the utilities will have to shoulder the costs and weigh them against future profits.
Despite the brickbats, the nuclear power industry has improved its output steadily in recent years, according to the Nuclear Energy Institute. The cost of nuclear power is coming down, and plants ran at 78.8% of peak efficiency in 1995, compared with 67.5% in 1990.
Still, by comparison with natural-gas-powered plants, nuclear facilities are down an average 20% of the time for maintenance or refueling, compared with 5% for the fossil fuel counterpart, according to Robert Kinosian, senior analyst and nuclear expert at the PUC.
But Bryson said nuclear will be more competitive in the post-deregulation market than is now apparent because industrial and other big electricity customers will be willing to pay a premium for the dependable, uninterrupted energy that is generated at nuclear stations, which, unlike most fossil fuel plants, run 24 hours a day.
California is not alone in grappling with the nuclear issue. The nationwide deregulation trend in power has utilities and consumers everywhere debating what to do with their plants and how to pay off the debt, which Moody’s estimates at upward of $135 billion. Consumers will wind up paying for most of that.
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Meanwhile, as utilities everywhere try to make their nuclear plants more efficient, Northeast Utilities of Connecticut has provided the industry with an object lesson on how not to do it. The utility cut manpower levels so deeply that safety and maintenance suffered.
Northeast’s ill-conceived cost-cutting measures prompted federal regulators to step in and close down four of its nuclear plants--Millstone Units 1, 2 and 3 and Connecticut Yankee--over the last year for safety violations.
“We went too far,” a Northeast Utilities spokesman said. “While the rest of the industry was raising its standards, ours were going down.”
Now, in a state where 57% of the power was once generated by nuclear plants, Connecticut residents are looking at the prospect of mandatory voltage reductions and a “rolling blackout situation” this winter because of Northeast Utilities’ nuclear problems, the spokesman said.
Bryson, professing Edison’s “religious devotion to safety” and declaring he will not compromise San Onofre’s high safety rating, said Northeast Utilities showed the industry how short-term cost-saving measures lead to safety violations and Nuclear Regulatory Commission scrutiny, which adds huge expense even if the nuclear plant keeps operating.
“Once you lose the confidence of the regulators, your costs skyrocket,” Bryson said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
DIABLO CANYON
Location: Avila Beach
Owner: Pacific Gas & Electric
Unit 1: Completes in 1985
Unit 2: Completed in 1986
Megawatts: 1,100 each unit
Original cost estimate: $300 million
Final construction cost: $5.5 billion
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
SAN ONOFRE
Location: San Clemente
Owner: Southern California Edison (75%), San Diego Gas & Electric (20%), Anaheim Electrical Division (3.2%0 and Riverside Public Utilities (1.8%)
Unit 2: Completed in 1983
Unit 4: Completes in 1984
Megawatts: 1,000 each unit
Original cost estimate: $437 million
Final construction cost: $4.3 billion
* Notes: San Onofre Unit 1 completed in 1986, was closed in 1992. Southern California Edison also owns a 15.8% interest in the Palo Verde 1,2 and 3 nuclear power plants Wintersburg, Ariz. A third California nuclear station, Rancho Seco was closed by the Sacramento Municipal Utility District in 1989.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Nuclear Plant Closures
Accidents, safety violations and poor economics of nuclear energy have forced the closure of 18 U.S. nuclear power units--11 permanently and seven indefinitely. More closures are expected as a result of competitive pressures brought on by power deregulation.
PERMANENT CLOSURES:
Indian Point Unit:
Location: Buchanan, N.Y
Majority owner: Consolidated Edison of N.Y.
When ceased operation: 1974
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Humboldt Bay:
Location: Eureka, Calif.
Majority owner: Pacific Gas & Electric
When ceased operation: 1976
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Dresden 1:
Location: Morris, Ill.
Majority owner: Commonwealth Edison
When ceased operation: 1978
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Three Mile Island 2:
Location: Londonderry, Pa.
Majority owner: GPU Nuclear
When ceased operation: 1979
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LaCrosse:
Location: Genoa, Wis.
Majority owner: Dairyland Power co-Op
When ceased operation: 1987
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Fort St. Vrain:
Location: Platteville, Colo.
Majority owner: Public Service Co. of Colorado
When ceased operation: 1989
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Rancho Seco:
Location: Sacramento
Majority owner: Sacramento Municipal Utility Dist.
When ceased operation: 1989
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Shoreham:
Location: Long Island, N.Y.
Majority owner: Long Island Lighting
When ceased operation: 1989
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Yankee Rowe:
Location: Rowe, Mass.
Majority owner: Yankee Atomic Electric
When ceased operation: 1992
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San Onofre 1:
Location: San Clemente
Majority owner: Southern California Edison
When ceased operation: 1992
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Trojan:
Location: Portland, Ore.
Majority owner: Portland General Electric
When ceased operation: 1993
Indefinite or Extended Shutdowns
Browns Ferry:
Location: Athens, Tenn.
Majority owner: Tennessee Valley Authority
When ceased operation: 1985
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Millstone 1,2, &3:
Location: Waterford, Conn.
Majority owner: Northeast Utilities
When ceased operation: 1995-96
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Connecticut Yankee:
Location: Haddam Neck, Conn.
Majority owner: Northeast Utilities
When ceased operation: 1996
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Salem 1 &2:
Location: Lower Alloways Crk Twnshp, N.J.
Majority owner: Public Service & Gas
When ceased operation: 1996
* Source: Nuclear Institute.
