Public Policy

Sen. Merritt, Rep. Moses and members of the committee, thank you for your interest in nuclear energy and in addressing the policies that can facilitate deployment of new nuclear plants to meet national energy needs and reduce carbon emissions.

My name is Leslie Kass.  I am the director of business policy and programs at the Nuclear Energy Institute (NEI).  NEI is responsible for establishing unified nuclear industry policy on regulatory, financial, technical and legislative issues affecting the industry.  NEI members include all companies licensed to operate commercial nuclear power plants in the United States, nuclear plant designers, major architect/engineering firms, fuel fabrication facilities, materials licensees, and other organizations and individuals involved in the nuclear energy industry.

My testimony will cover four major areas:

1.    Current status of the U.S. nuclear energy industry
2.    The need for new nuclear generating capacity
3.    Progress toward new nuclear power plant construction
4.    Financial challenges facing the electric power sector

I.    Current Status of the U.S. Nuclear Energy Industry

The U.S. nuclear energy industry’s top priority is, and always will be, the safe and reliable operation of our existing plants.  Safe, reliable operation drives public and political confidence in the industry, and America’s nuclear plants continue to sustain high levels of performance.

In March of this year, the U.S. Nuclear Regulatory Commission published a fact sheet highlighting the dramatic improvements in every aspect of nuclear plant performance over the last two decades:  “The average number of significant reactor events over the past 20 years has dropped to nearly zero.  Today there are far fewer, much less frequent and lower risk events that could lead to reactor core damage.  The average number of times safety systems have had to be activated is about one-tenth of what it was 22 years ago.  Radiation exposure levels to plant workers has steadily decreased to about one-sixth of the 1985 exposure levels and are well below federal limits.  The average number of unplanned reactor shutdowns has decreased by nearly ten-fold.  In 2007, there were two shutdowns compared to about 530 shutdowns in 1985.”

This high level of performance continued last year.  In 2008, the average capacity factor for our 104 operating nuclear plants was over 90 percent, and output of over 800 billion kilowatt hours represented nearly 75 percent of U.S. carbon-free electricity.  According to the quantitative performance indicators monitored by the Nuclear Regulatory Commission, last year’s performance was the best ever.  This performance represents a solid platform for license renewal of the existing fleet and new nuclear plant construction.

II.    The Need for New Nuclear Generating Capacity

Construction of new nuclear plants will address two of our nation’s top priorities:  additional supplies of clean energy and creation of jobs.

Nuclear energy is one of the few bright spots in the U.S. economy—expanding rather than contracting, creating thousands of jobs over the past few years.  Over the last several years, the nuclear industry has invested more than $4 billion in new nuclear plant development, and plans to invest approximately $8 billion more to be in a position to start construction in 2011-2012.

The investment to date has already created 15,000 jobs over the last two to three years, as reactor designers, equipment manufacturers and fuel suppliers expand engineering centers and build new facilities in New Mexico, North Carolina, Tennessee, Pennsylvania, Virginia and Louisiana.  These jobs represent a range of opportunities—from skilled craft employment in component manufacturing and plant construction, to engineering and operation of new facilities.  The number of new jobs will expand dramatically early in the next decade when the first wave of new nuclear power projects starts construction.  If all 25 reactors currently in licensing by the NRC were built, this would result in approximately 100,000 new jobs to support plant construction and operations, not including additional jobs created downstream in the supply chain.  This would be in addition to the 30,000 new hires in the next 10 years to support operation of the existing fleet of plants through the extended license period of 60 years.

New nuclear plants will also help the United States meet its climate change objectives.  Predominantly independent assessments of how to reduce U.S. electric sector CO2 emissions – by the International Energy Agency, McKinsey and Company, Cambridge Energy Research Associates, Pacific Northwest National Laboratory, the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, the Electric Power Research Institute and others – show that there is no single technology that can slow and reverse increases in CO2 emissions.  A portfolio of technologies and approaches will be required, and that portfolio must include more nuclear power as well as aggressive pursuit of energy efficiency and equally aggressive expansion of renewable energy, advanced coal-based technologies, plug-in hybrid electric vehicles and distributed resources.

NEI is not aware of any credible analysis of the climate challenge that does not include substantial nuclear energy expansion as part of the technology portfolio. In fact, removing any technology from the portfolio places unsustainable pressure on those options that remain.

Analyses this year by the Energy Information Administration and the Environmental Protection Agency of the Waxman-Markey climate change legislation (H.R. 2454) demonstrates the value of nuclear energy in a carbon-constrained world. In EPA’s analysis of the bill, “nuclear power generation is allowed to increase by ~150% from 782 bill. kWh in 2005 to 2,081 bill. kWh in 2050.” This is equivalent to building 187 new nuclear plants by 2050 if all existing U.S. nuclear plants retire after 60 years. In EIA’s analysis, 96 gigawatts of new nuclear are built by 2030, which is projected to supply 33% of total US generation, more than any other source.

It is also clear that the United States will need new baseload electric generating capacity even with major improvements in energy efficiency.  Recent analysis by The Brattle Group, an independent consulting firm, showed that the United States will need between 133,000 megawatts of new generating capacity (absent controls on carbon) and 216,000 megawatts (in a carbon-constrained world) by 2030.  These numbers assume 0.7 percent per year growth in peak load – a significant reduction from historical performance.  Annual growth in peak load between 1996 and 2006 was 2.1 percent, and the Energy Information Administration’s Annual Energy Outlook assumes a 0.8 percent annual increase in peak load.

NEI estimates that if the 25 reactors being licensed today (which will generate approximately 32,000 MW) were built by 2030, this would simply maintain nuclear at 20 percent of U.S. electricity supply.  To increase nuclear energy’s contribution to 2050 climate goals, build rates of 4 to 6 plants per year must be achieved.  This was possible in the 1970s and 1980s even with the old licensing process and a lack of standardization.  With standardized designs and improved construction techniques, this accelerated deployment is feasible after the first wave of plants are constructed.

III.    Progress Toward New Nuclear Power Plant Construction

The Nuclear Regulatory Commission is reviewing 16 construction and operating license applications from 13 companies or groups of companies for 25 new reactors totaling 32,000 MW.  These new plants will be built at a measured pace over the next 10 to 15 years.  Safety-related construction of the first new nuclear plants will start in 2012, and NEI expects four to eight new nuclear plants in commercial operation in 2016.  The exact number and date will, of course, depend on many factors – U.S. economic growth, forward prices in electricity markets, capital costs of all baseload electric technologies, commodity costs, environmental compliance costs for fossil-fueled generating capacity, natural gas prices, growth in electricity demand, availability of federal and state support for financing and investment recovery, and more.  We expect construction of those first plants will proceed on schedule, within budget estimates, and without licensing difficulties, and a second wave will be under construction as the first wave reaches commercial operation.

Supported in part by government-industry cost-shared programs like the U.S. Department of Energy’s Nuclear Power 2010 program, detailed design and engineering work on advanced reactor designs is nearing completion.  This detailed design information will allow companies to develop firm cost estimates.  Based on what is known today, however, there is a solid business case for new nuclear generating capacity.

Nuclear energy is a capital-intensive technology.  NEI estimates a new nuclear power plant could cost $6 billion to $8 billion, including financing costs.  This large capital investment does not mean that new nuclear plants will not be competitive.  Capital cost is certainly an important factor in financing, but it is not the sole determinant of a plant’s competitive position.  The key factor is the cost of electricity from the plant at the time it starts commercial operation relative to the other alternatives available at that time.  Based on NEI’s own modeling, on the financial analysis performed by companies developing new nuclear projects, and on independent analysis by others, new nuclear capacity will be competitive. 

Florida Power & Light and Florida Progress demonstrated this in the financial modeling that supported their requests last year to the Florida Public Service Commission for “determinations of need” for new reactors at Turkey Point and Levy County.  In FP&L’s modeling, the only scenario in which nuclear was not preferred was a world in which natural gas prices were unrealistically low and there was no price on carbon.  The Florida PSC has approved both projects.  Similarly, in 2009 the Georgia and South Carolina PSCs approved determinations of need for construction of new nuclear plants at the Edwin I. Vogtle and Virgil C. Summer sites respectively.  Independent analyses reach the same conclusion.  In an integrated resource plan developed for Connecticut last year, The Brattle Group concluded that new nuclear plants are a lower-cost source of electricity in a carbon-constrained world.

Dr. Cooper, who testified before you earlier today, testified before the Florida PSC earlier this year in the proceeding for nuclear power plant cost recovery (Florida PSC Docket No. 090009-EI).  In rebuttal testimony, Dr. Stephen Sim, an employee of Florida Power & Light, provided a thorough review of Dr. Cooper’s analysis of the proposed nuclear plants in Florida.  The full testimony can be found at http://www.floridapsc.com/library/filings/09/08267-09/08267-09.pdf.  An excerpt from Dr. Sim’s testimony is provided below: 

SACE’s witness Witness Cooper declares there is a high level of uncertainty in the future. Then, when reviewing FPL’s current economic analysis of Turkey Point 6 & 7, Witness Cooper - who does not appear to have any utility system planning or electric generation analytical background or experience - attempts to persuade the state of Florida to discontinue the on-going evaluation of this option which would provide emission-free, fossil fuel-free, capacity and energy at a 90% capacity factor for at least 40 years. He attempts to do so by choosing to suspend his belief in future uncertainty at carefully selected points. At those points he selects a specific futures forecast, or contentious pending legislation, as certain guideposts for how the future will unfold for the next 50 years. Finally, he offers no meaningful economic analysis that contradicts FPL's 2009 economic analyses, nor is he able to support his conclusion that other resources will improve FPL’s system fuel diversity more than new nuclear capacity.

Therefore, Witness Cooper’s recommendation that Florida stop its on-going evaluation of the new Turkey Point 6 & 7 nuclear units does not warrant serious consideration.

I believe Dr. Sim’s testimony puts Dr. Cooper’s remarks in the proper context.  Reputable and thorough analysis shows that nuclear energy will continue to be a competitive and reliable source of electricity.

Understanding the Past.  Many of the nuclear power plants commissioned in the 1960s and early 1970s completed construction in four to five years with construction costs around $500 million.  By the late 1970s and early 1980s, however, construction was averaging 10 to 12 years, and construction costs ranged as high as $5 billion.  The nuclear industry has conducted detailed and extensive analysis of this experience, which demonstrates that the nuclear plants built after the early 1970s were built under extremely unfavorable conditions—caused by several major factors converging at roughly the same time.

Nuclear energy technology in the United States scaled up quickly.  The industry scaled from the first 200 megawatt-scale plants to 1,000 megawatt-plus plants in just a few years.  This rapid increase in reactor size occurred at a time when electricity demand was growing at 7 percent a year on average, which required a doubling of electric generating capacity every 10 years.  In that business environment, bigger was better for new power plants.  Larger plants meant greater economies of scale.  Larger was also more complex, however, and that complexity coupled with other factors discussed subsequently created project management challenges.  Construction times stretched out and economies of scale vanished with schedule delays and rising costs.

Changing regulatory requirements and licensing difficulties added to the challenge of managing these large construction projects on schedule and budget, but licensing and regulatory requirements were not the sole cause of cost increases and schedule delays.  Construction started before design work was complete.  Some projects were managed by companies with no prior nuclear construction experience.  Project planning and management tools equal to the complexity of the task did not exist at the time.

Finally and of significant importance to the increasing cost, the first generation of nuclear power plants were built under difficult business and economic conditions.  Growth in electricity demand slowed from 6 to 7 percent a year to 1 to 2 percent in the mid-1970s.  Many utilities intentionally slowed construction.  The prime rate reached 20 percent in the early 1980s.  As project schedules stretched out, costs increased and companies were forced to borrow more at double-digit interest rates.

Lessons Learned:  Roadmap for a Successful Future.  The root causes of past construction delays are well understood, and both industry and government have taken steps to ensure that past experience is not repeated.

The licensing process has been restructured to increase efficiency and effectiveness and reduce uncertainty and financial risk.  Today’s plants were licensed under a two-step process:  Electric utilities had to secure two permits—a construction permit to build the plant and a second operating license to operate it.  Under the new process, all major safety and regulatory issues—reactor design, site suitability—will be resolved before construction begins, and a company receives a single license to build and operate the plant.  The use of certified standardized designs will also reduce licensing and construction times through repetition.  Once a design has been certified, the NRC reviews will focus only on site suitability and plant operations.  The industry is working together to ensure that the standardization carries over into their license applications, construction practices and operating procedures to fully enjoy the benefits of a standard fleet of plants.

As construction proceeds, inspections and tests are performed to ensure the plant has been built in accordance with the approved design.  These inspections, tests, analyses and acceptance criteria – or ITAAC – are included in the plant’s construction and operating license.  ITAAC are a key risk-management tool.  When the ITAAC are met, the NRC and the public know that the plant has been built according to its design and will operate safely. 

In addition to an improved licensing process, the next generation of nuclear plants built in the United States will benefit from an industrywide inventory of lessons learned.  The roadmap for future success includes:

Detailed design essentially complete before construction.  Companies planning to build new nuclear plants intend to have virtually all detailed design complete before construction is started.

Standardized, design-specific pre-build preparation.  Starting in 2006, the nuclear industry formed design-centered working groups (DCWG) with each reactor vendor.  These groups are charged with maintaining standardization within each reactor design, which will enhance licensing, preparation for construction and construction.

Focus on quality assurance.  While quality assurance is a core competency at existing plants, the U.S. nuclear industry in 2005 formed a New Plant Quality Assurance Task Force.  In conjunction with the Institute of Nuclear Power Operations (INPO), this task force is conducting a systematic lessons-learned review of past and present nuclear construction projects in the United States and around the world.

Corrective action programs.  The industry is adapting the corrective action program (CAP), which is standard at operating plants, for use in new plant construction.  A CAP includes a structured database to capture and categorize potentially safety-significant items, enabling constructors to identify and trend quality deficiencies, record that corrective action was taken, and report to the appropriate levels of management.

Focus on safety culture as part of construction.  Safety culture, corrective action programs and programs that encourage employees to raise safety concerns are now an essential part of the operating philosophy at the 104 operating plants.  The work force building new plants will have the same safety focus.

Preparation for construction inspection.  In 2001, the U.S. nuclear industry formed a New Plant Construction Inspection Program Task Force comprised of utilities, reactor vendors and major construction companies.  The task force is formulating guidance and developing programs and processes to implement the inspections, tests, analyses and acceptance criteria that the NRC will use to determine whether the plant is built according to the approved design and is ready to operate safely.

Improved planning and construction management tools.  Project and construction management at new nuclear plants will benefit from a suite of sophisticated construction planning and management tools equal to the complexity of the task, none of which were developed when the last nuclear plants were built.  Companies did not have computer-aided design (CAD) to enable design changes.  Databases for tracking components and resources were not yet mature.  Computerized tools that linked resources with design and construction schedules were in their infancy.

Improved construction techniques.  Construction of new nuclear plants in the U.S. will also benefit from improved construction techniques (such as modular construction), many of which were developed overseas for the U.S. nuclear navy or for other industries.

Successful Track Record.  Recent construction and operational experience demonstrates that an experienced project management team—with effective quality assurance and corrective action programs, with detailed design completed before the start of major construction, with an integrated engineering and construction schedule—can complete projects on budget and on schedule.  The global nuclear industry, including the U.S. nuclear industry, has performed projects ranging from major upgrades to plant restarts to refueling outages efficiently and without delay.  As recently as 1990, maintenance and refueling outages at U.S. reactors lasted more than 100 days; today’s average is 37 days.

There are other examples that provide confidence that new nuclear plant development in the United States will proceed smoothly:

• The Tennessee Valley Authority returned Unit 1 of its Browns Ferry nuclear plant to commercial operation in May 2007.  The five-year, $1.8-billion project was completed on schedule and only 5 percent over the original budget estimate, a significant achievement during a period of rapidly escalating commodity costs.  The Browns Ferry 1 restart project was comparable in complexity to the construction of a new nuclear power plant.  Most systems, components and structures were replaced, refurbished or upgraded, and all had to be inspected and tested.

• At the Fort Calhoun plant in Nebraska, Omaha Public Power District replaced the major primary system components—steam generators, reactor vessel head and rapid refueling package and pressurizer—as well as the low-pressure turbines, the main transformer and hydrogen coolers, among other equipment.  The outage began in September 2006 and ended in December of that year, lasting 85 days.  The $417-million project was completed approximately $40 million under budget and five days ahead of schedule.

• Nuclear construction experience in South Korea over the last 15 years demonstrates the “learning curve” that can be achieved.  The “first of a kind” nuclear power plants—Yonggwang Units 3 and 4—were built in the mid-1990s in 64 months.  The next two units—Ulchin 3 and 4—were built in 60 months at 94 percent of the “first of a kind” cost.  The next plants—Yonggwang 5 and 6—were built in 58 months for 82 percent of the “first of a kind” cost.  By 2004, Ulchin 5 and 6 were built in 56 months for 80 percent of the “first of a kind” cost.  The next two plants—Shin-Kori 1 and 2—will be in service next year, with a construction duration of 53 months at 63 percent of what it cost to build Yonggwang 3 and 4.  South Korea’s goal is a 39-month construction schedule.

• Nuclear power plants in Japan achieve construction schedules similar to those in South Korea.  The first two Advanced Boiling Water Reactors built were constructed in times that beat the previous world record, and both were built on budget.  Kashiwazaki-Kariwa Unit 6 began commercial operation in 1996, and Unit 7 began commercial operation in 1997.  From first concrete to fuel load, it took 36.5 months to construct Unit 6 and 38.3 months for Unit 7.  Unit 6 was built 10 months quicker than the best time achieved for any of the previous boiling water reactors constructed in Japan.

• The Qinshan nuclear power plant in China consists of two 728-megawatt pressurized heavy water reactors. First concrete was placed on June 8, 1998.  Unit 1 began commercial operation on Dec. 31, 2002, 43 days ahead of schedule. The construction period was 54 months from first concrete to full-power operation.  Unit 2 began commercial operation on July 24, 2003, 112 days ahead of schedule.

U.S. projects will also benefit from this learning curve in other countries, since most of the reactors being licensed in the United States will be built overseas prior to U.S. construction.  South Texas Project Units 3 and 4, for example, are Advanced Boiling Water Reactors of the type already built in Japan.  There are 52 nuclear plants under construction worldwide, and 108 more ordered or planned.

IV.    Financial Challenges Facing the Electric Power Sector

The U.S. electric industry faces a formidable investment challenge.  Consensus estimates show that the electric sector must invest between $1.5 trillion and $2 trillion in new power plants, transmission and distribution systems, and environmental controls to meet expected increases in electricity demand by 2030.  To put these numbers in perspective:  The book value of America’s entire electric power supply and delivery system today is only $750 billion, which reflects investments made over the last 60 years.

Addressing the financing challenge will require innovative approaches.  Meeting these investment needs will require a partnership between the private sector and the public sector, combining all the financing capabilities and tools available to the private sector, the federal government and state governments—particularly at a time when the electric sector is already showing some signs of stress.

For new nuclear power plants and other capital-intensive projects, the financing challenge is structural.  Unlike the many consolidated government-owned foreign utilities and the large oil and gas companies, U.S. electric power sector consists of many relatively small companies, which do not have the size, financing capability or financial strength to finance power projects of this scale on their own, in the numbers required. 

The financing challenge can be addressed with supportive state and federal policies.  Supportive state policies include recovery of nuclear plant development costs as they are incurred and Construction Work in Progress or CWIP, which allows recovery of financing costs during construction.  Many of the states where new nuclear plants are planned—including Florida, Virginia, Texas, Louisiana, Mississippi, North Carolina and South Carolina—have passed legislation or implemented new regulations to encourage construction of new nuclear power plants by providing financing support and assurance of investment recovery.  The cost savings from CWIP, which will be passed on to consumers, amount to billions of dollars over the life of a project.
 
By paying carrying costs as they are incurred, the utilities and their customers benefit through:

• Reducing financing costs since carrying costs are not accumulated and capitalized over the life of the asset.  This avoids having to pay “interest on interest” when the carrying costs are rolled into the long-term project.

• Reducing rate shock for consumers by minimizing financing costs and gradually introducing small rate increases during construction.

• Improving utility cash flows through inclusion of carrying costs in the rate base as they are incurred.  Improved cash flows support stronger financial ratings, which result in lower interest costs for the project and all other utility investments long term.

 
Federal policies can also support the financing of large projects.  Loan guarantees offset the disparity in scale between project size and company size.  Loan guarantees allow the companies to use project finance-type structures and to employ higher leverage in the project’s capital structure.   These benefits flow to the economy by allowing the rapid deployment of clean generating technologies at a lower cost to consumers.  The recent stimulus bill recognized the need to provide access to low-cost capital to encourage rapid deployment of renewable energy projects.  Similar support is required for nuclear energy since, in many cases, new nuclear plants and renewable energy projects are built by the same utilities.

Loan guarantees are a powerful tool and an efficient way to mobilize private capital.  The federal government manages a loan guarantee portfolio of approximately $1.1 trillion to ensure necessary investment in critical national needs, including shipbuilding, transportation infrastructure, exports of U.S. goods and services, affordable housing, and many other purposes.  Supporting investment in new nuclear power plants and other critical energy infrastructure is a national imperative.

The Title XVII program currently includes 10 technologies eligible for loan guarantees.  They include renewable energy systems, advanced fossil energy technology (including coal gasification), hydrogen fuel cell technology for residential, industrial or transportation applications, advanced nuclear energy facilities, efficient electrical generation, transmission and distribution technologies, efficient end-use energy technologies, production facilities for fuel-efficient vehicles, including hybrid and advanced diesel vehicles, and pollution control equipment.  Each of these technologies presents different financing challenges.

The Title XVII program also represents an innovative departure from other federal loan guarantee programs.  It is structured to be self-financing, so that companies receiving loan guarantees pay the cost to the government of providing the guarantee and all administrative costs.  For this reason, a Title XVII loan guarantee program is not a subsidy.  In a well-managed program, in which projects are selected based on creditworthiness, extensive due diligence and strong credit metrics, there is minimal risk of default and minimal risk to the taxpayer.  In fact, the federal government will receive substantial payments from project sponsors.

The financing challenges are, of course, somewhat different for the regulated integrated utilities than for the merchant generating companies in those states that have restructured.  But these challenges can be managed with appropriate rate treatment from state regulators, credit support from the federal government’s loan guarantee program, or a combination of both.

V.    Conclusion

In conclusion, the need for advanced nuclear plants is well established.  Nuclear energy clearly can and must play a strategic role in meeting national environmental, energy security and economic development goals.  The industry will benefit from lessons learned, new design and management tools as well as international and domestic construction projects to ensure new nuclear deployment is successful.  The structural challenge posed by the financing requirements for large capital projects can be managed through supportive state policies such as CWIP and federal policies like the Title XVII loan guarantee program.

Thank you for the opportunity to testify, and this completes my testimony.