Key Issues
Policies That Support New Nuclear Power Plant Development
<< Previous
The Investment Challenge Facing the U.S. Electric Sector
Over the past 16 years, the electric power sector has invested heavily in new gas-fired generation and in upgrading existing baseload generating assets, but has not invested in new capital-intensive baseload generating technologies.
Between 1994 and 2008, the United States commissioned only 11,000 megawatts of new coal-fired capacity and 1,300 megawatts of new nuclear capacity. During that same period, however, generating companies built approximately 311,000 megawatts of new gas-fired capacity. Gas-fired capacity was preferred because it represented the lowest possible investment risk since it could be built quickly and had low capital cost.
It is now clear, however, that the construction of large amounts of gas-fired capacity placed unsustainable pressure on natural gas supply, which resulted in periods of intense price volatility and higher electricity costs.
It is equally clear that U.S. electricity markets need new baseload generating capacity, and that the U.S. electric industry is on the threshold of a major construction cycle for new baseload generating capacity and new electric transmission.
Consensus estimates suggest that the industry between now and 2030 must invest between $1.5 trillion and $2 trillion in new generating capacity, new transmission and distribution infrastructure, and energy efficiency and demand response technologies. This new capital spending represents a major challenge to the electric power industry.
The Energy Policy Act of 2005 recognized this financing challenge and provided limited investment stimulus for construction of new baseload power plants. That stimulus includes production tax credits for new nuclear plants, investment tax credits for advanced coal-based projects, and authorization for a loan guarantee program within the Department of Energy to support financing and commercial deployment of innovative technologies that reduce emissions.
Why Incentives Are Needed to Support New Nuclear Plant Construction
Federal and state government support for new nuclear plant construction is both necessary and appropriate to ensure equitable sharing of benefits and risks. Without that support, the benefits of nuclear power (large amounts of reliable, emission-free electricity; stable electricity prices; reduced pressure on natural gas supply and price) accrue to society at large and the economy as a whole, but the investment risk associated with building a new nuclear power plant rests entirely on the company building it.
In addition, the cost of a new nuclear plant is high compared to the size and financing capability of the typical U.S. electric company. The U.S. electric power sector consists of many relatively small companies. The largest U.S. electric company has a market value of approximately $33 billion; most are much smaller. This compares with major oil companies like ExxonMobil and Chevron (with market values of approximately $332 billion and $146 billion, respectively).
New nuclear power plants are expected to cost $6-8 billion each (in 2008 dollars). Although $6-8 billion projects are not unique in the energy business, such projects are typically built by the major oil companies. The relatively small U.S. electric power companies do not have the financing capability or financial strength to finance new nuclear power projects on their own.
Finally, investors believe new nuclear plants face political and regulatory risks. The financial markets remember the experience during construction of today's operating plants -- longer-than-expected construction times and cost overruns caused by the licensing process and litigation.
The financial markets are concerned that new nuclear plants could face similar political and regulatory risks. Although the risk may be low, the potential consequences of licensing delays (given the cost of new nuclear plants) are high. Although the federal government has created a more efficient and predictable licensing process, which should reduce licensing risk, investors remain concerned given the high cost and long development times for nuclear power plants.
Since this licensing risk is a function of the federal government's regulatory process, only the federal government can offset that risk.
For electric customers to receive the benefits associated with new nuclear power plants, the construction risk must be spread among the federal government, the states and shareholders.
Federal policymakers see the value of nuclear energy and have supported new nuclear plant construction by including three incentives in the Energy Policy Act of 2005. Policymakers in some states have also implemented legislation or regulations that support construction of new plants.
The Investment Challenge Facing the U.S. Electric Sector
Over the past 16 years, the electric power sector has invested heavily in new gas-fired generation and in upgrading existing baseload generating assets, but has not invested in new capital-intensive baseload generating technologies.
Between 1994 and 2008, the United States commissioned only 11,000 megawatts of new coal-fired capacity and 1,300 megawatts of new nuclear capacity. During that same period, however, generating companies built approximately 311,000 megawatts of new gas-fired capacity. Gas-fired capacity was preferred because it represented the lowest possible investment risk since it could be built quickly and had low capital cost.
It is now clear, however, that the construction of large amounts of gas-fired capacity placed unsustainable pressure on natural gas supply, which resulted in periods of intense price volatility and higher electricity costs.
It is equally clear that U.S. electricity markets need new baseload generating capacity, and that the U.S. electric industry is on the threshold of a major construction cycle for new baseload generating capacity and new electric transmission.
Consensus estimates suggest that the industry between now and 2030 must invest between $1.5 trillion and $2 trillion in new generating capacity, new transmission and distribution infrastructure, and energy efficiency and demand response technologies. This new capital spending represents a major challenge to the electric power industry.
The Energy Policy Act of 2005 recognized this financing challenge and provided limited investment stimulus for construction of new baseload power plants. That stimulus includes production tax credits for new nuclear plants, investment tax credits for advanced coal-based projects, and authorization for a loan guarantee program within the Department of Energy to support financing and commercial deployment of innovative technologies that reduce emissions.
Why Incentives Are Needed to Support New Nuclear Plant Construction
Federal and state government support for new nuclear plant construction is both necessary and appropriate to ensure equitable sharing of benefits and risks. Without that support, the benefits of nuclear power (large amounts of reliable, emission-free electricity; stable electricity prices; reduced pressure on natural gas supply and price) accrue to society at large and the economy as a whole, but the investment risk associated with building a new nuclear power plant rests entirely on the company building it.
In addition, the cost of a new nuclear plant is high compared to the size and financing capability of the typical U.S. electric company. The U.S. electric power sector consists of many relatively small companies. The largest U.S. electric company has a market value of approximately $33 billion; most are much smaller. This compares with major oil companies like ExxonMobil and Chevron (with market values of approximately $332 billion and $146 billion, respectively).
New nuclear power plants are expected to cost $6-8 billion each (in 2008 dollars). Although $6-8 billion projects are not unique in the energy business, such projects are typically built by the major oil companies. The relatively small U.S. electric power companies do not have the financing capability or financial strength to finance new nuclear power projects on their own.
Finally, investors believe new nuclear plants face political and regulatory risks. The financial markets remember the experience during construction of today's operating plants -- longer-than-expected construction times and cost overruns caused by the licensing process and litigation.
The financial markets are concerned that new nuclear plants could face similar political and regulatory risks. Although the risk may be low, the potential consequences of licensing delays (given the cost of new nuclear plants) are high. Although the federal government has created a more efficient and predictable licensing process, which should reduce licensing risk, investors remain concerned given the high cost and long development times for nuclear power plants.
Since this licensing risk is a function of the federal government's regulatory process, only the federal government can offset that risk.
For electric customers to receive the benefits associated with new nuclear power plants, the construction risk must be spread among the federal government, the states and shareholders.
Federal policymakers see the value of nuclear energy and have supported new nuclear plant construction by including three incentives in the Energy Policy Act of 2005. Policymakers in some states have also implemented legislation or regulations that support construction of new plants.
