Public Policy

Summary
The Administration has requested appropriations of $75.5 million in FY 2002 for the Energy Information Administration (EIA), an independent agency within the U.S. Department of Energy. This request includes $8.5 million for EIA’s Office of Integrated Analysis and Forecasting. The Nuclear Energy Institute (NEI) believes that EIA’s forecasting, at least as it pertains to nuclear energy, is based on flawed modeling and methodology and erroneous assumptions, and urges Congress to require, as a condition of providing the appropriations requested, independent peer review of EIA’s forecasting.
 
Need for Accurate Analysis and Forecasting
There is increasing evidence that the United States faces serious energy supply and delivery problems. Even assuming successful conservation and efficiency programs, U.S. dependence on imported oil is at a historic high. Natural gas prices across the country have increased dramatically. Several regions of the country face significant shortages of electric generating capacity. The transportation infrastructure for delivery of oil and natural gas requires significant expansion. The transmission infrastructure necessary to move electricity within and between states and regions is seriously overloaded, placing reliability at risk. 

The imminent threat to reliable supplies of energy at stable, predictable prices is leading to new interest in national energy policy.  The appropriate authorizing committees in both Senate and House are holding hearings on U.S. energy policy, and the Bush Administration intends to offer its proposals shortly. At times like these, policy-makers in the Administration and the Congress must have access to the most accurate analysis and forecasting possible. In the case of nuclear energy, the EIA’s forecasts are inaccurate, appear to be based on hypothetical speculation, and at least to date do not proceed from well-informed analysis of the current status of nuclear energy in the United States.
 
EIA’s Forecast for Nuclear Energy
EIA’s Office of Integrated Analysis and Forecasting publishes an annual forecast of U.S. energy supply and demand called the Annual Energy Outlook (AEO). AEO 2001 provides projections of energy supply and demand in all consuming sectors and for all fuels through 2020. AEO 2001 forecasts that U.S. nuclear generating capability in 2020 will be 71,600 megawatts (MW), a 25 percent reduction from today’s 97,400 MW.

This EIA projection is achieved in three ways: EIA assumes that (1) some nuclear power plants will be closed before the end of their initial 40-year operating licenses because they are no longer economical to operate; (2) others will not renew their licenses for an additional 20 years because they are no longer economical to operate; and (3) no new nuclear power plants are built in the United States because they are too costly to compete with other forms of generation.

The Nuclear Energy Industry Assessment
NEI believes that this outlook is incorrect and does not proceed from a factual understanding of the current status of nuclear energy in the United States.

U.S. nuclear power plants are well positioned for a competitive electricity market. The cost of operations, maintenance and fuel has been declining for more than a decade, and additional efficiencies can still be gained. U.S. nuclear power plants are not subject to the volatility in fuel prices that has caused the dramatic increase in electricity prices in many parts of the nation. And nuclear power plants are not affected by the escalating clean air compliance requirements that will increase the cost of electricity from coal-fired and gas-fired generating plants in the years ahead. In fact, non-emitting technology like nuclear energy will become even more essential for providing electricity in areas that aren’t in compliance with Clean Air Act standards.

The steady reduction in the cost of nuclear electricity during the 1990s is partly explained by the significant increase in plant reliability, and in the amount of electricity plants produce. In 2000, U.S. nuclear plants produced approximately 755 billion kilowatt-hours (the second record year in a row), and operated at an average capacity factor of 89.6 percent, also a record.

On average, a U.S. nuclear power plant produces electricity for 2.0-2.5 cents per kilowatt-hour, with the cost decreasing over the past few years. This includes all costs such as fuel, operations, maintenance, ongoing capital requirements, property tax, federal and state taxes, funds for decommissioning the plant at the end of its useful life, and the one-mill-per-kilowatt-hour fee for used fuel management paid to the federal government. This is the so-called “going forward” cost; it does not include recovery of the original capital investment, but is the sole determinant of whether or not the unit will be dispatched.

The 2.0-2.5 cent electricity from the average nuclear unit is significantly lower than the cost of electricity from new gas-fired combined cycle power plants. At expected future gas prices to generating plants ($4-5 per million Btu), NEI’s analysis indicates that a new gas-fired plant will produce electricity for between 4.5 cents and 5.2 cents per kilowatt-hour. Given that new gas-fired electricity is twice as costly as existing nuclear electricity, no rational economic model would shut down a nuclear unit and replace it with gas-fired capacity, as the EIA’s forecasts suggest, unless that model were being supplied with incorrect economic data and assumptions. (Note: existing nuclear units are also more economical than gas-fired plants supplied with fuel at the low natural gas prices prevailing several years ago. A gas-fired plant using $2.50-per-million-Btu gas would produce electricity for 3.0-3.5 cents per kilowatt-hour, still above the 2.0-2.5 cents range for electricity from an existing nuclear unit.)

As for license renewal, five nuclear units have already renewed their operating licenses to run for 20 years beyond their initial 40-year license. Five other units have filed their renewal applications, which are now being reviewed by the Nuclear Regulatory Commission (NRC). Thirty-three other units have formally notified the NRC that they intend to renew their licenses, and NRC officials have indicated publicly that the agency has received informal notification that 85 of the 103 nuclear units in the United States intend to renew their licenses. The industry expects that nearly all 103 U.S. nuclear units will extend their licenses because operating these plants for an additional 20 years represents the lowest-cost, most reliable source of electricity available from any source.

T he Differences Between the EIA and Industry Assessments
Given the significant differences between the EIA’s forecast for nuclear energy and the future suggested by today’s business realities, NEI has analyzed the basis for the agency’s forecasts in order to understand the assumptions and methodology behind them. NEI completed a detailed assessment of the 1999 edition of the Annual Energy Outlook, for example, and discovered a number of mistakes, suspect assumptions, and the use of cost and performance data that were several years out of date. NEI staff briefed EIA staff fully on the results of our assessment.

In general terms, for the 103 existing nuclear units, the EIA obtains its forecasting results by assuming an “aging effect”—i.e., that the plants will cost more to operate as they age, and operate less reliably. The EIA forecast burdens the nuclear units with increasingly, and unrealistically, high operating and capital costs.

There is no factual basis for these assumptions. NEI has evaluated the historical data for the 103 nuclear units now operating, which include a number of units well into the second half of their original 40-year licenses. NEI sees: (1) no statistically significant evidence that operating costs increase as plants age (in fact, for the fleet as a whole, they are declining); (2) no evidence that capital costs will or can increase to levels so high that the plant becomes uneconomic; and (3) no evidence that capacity factors deteriorate as plants age (in fact, for the fleet as a whole, capacity factors are increasing).

Consider one specific example:  the three unit Oconee station (2,538 MW) owned by Duke Power Co., which received approval from NRC last year to operate for an additional 20 years beyond the original 40-year license. From 1999 through 2006, Duke Power will invest close to $1 billion in the Oconee station—approximately $450 million in new steam generators for all three units, and another $400 million in one-time improvements and replacements designed (1) to assure another 20 years of operating life,(2) to maintain plant reliability during that period, and (3) reduce operating and maintenance costs in the future. Even with this significant investment, the Oconee station remains easily competitive with other sources of electricity, and significantly less costly than building new generating capacity of any kind. The Oconee case study is broadly representative of nuclear units across the nation.

The Outlook for New Nuclear Units
The 2001 Annual Energy Outlook assumes no new nuclear power plants will be built before 2020 in the United States. As with the EIA outlook for the existing nuclear units, the nuclear energy industry does not believe this forecast reflects what is really happening in the marketplace.

The NEMS (National Energy Modeling System) model reaches this conclusion because EIA analysts have assigned an unrealistically high, and unreasonably inflated, capital cost to new nuclear generating capacity. The EIA assumes new nuclear plants would have an overnight capital cost of $2,188 per kilowatt of capacity. The nuclear energy industry estimates an overnight capital cost of $1,450-1,500 per kilowatt for the AP-600 advanced light water reactor. Unlike the EIA estimate, which is purely theoretical and lacks any substantive factual basis, the industry estimate is a robust, well-founded cost estimate based on over $400 million invested in detailed design and testing for the AP-600 and other ALWR’s. Although the industry is taking actions that will reduce the capital cost of new nuclear generating capacity further, the current cost estimates for the AP-600, other advanced light water reactors, and new high temperature gas reactors, coupled with the low cost for operating nuclear plants, will make new nuclear capacity competitive over the period from now through 2020 and beyond.

Conclusion
Given the potential importance attached to the Energy Information Administration’s forecasts, NEI believes it is important that these forecasts have a sound factual and analytical basis. At a minimum, NEI urges that any additional appropriations for EIA’s forecasting function should require (1) rigorous peer review of all EIA’s nuclear-related assumptions and methodologies, and (2) peer-reviewed development of new economic models better able to simulate the dynamics of competitive electricity markets, the performance of existing nuclear power plants, and the timing for construction of new nuclear units.