NRG, a merchant, is first in three decades to file to build nuclear, but utilities lining up

Jeff Ryser

1 October 2007
Electric Utility Week
English (c) 2007 McGraw-Hill, Inc.

NRG Energy last week became the first company in almost 30 years to submit to the Nuclear Regulatory Commission an application for a "construction permit-operating license" for new nuclear power units.

The September 24 filing of the COL application by the merchant generator, whose shareholders will bear the financial risk of the project, covers two advanced boiling water reactor units with a combined capacity of 2,700 MW. They could cost as much as $6 billion to build at a site in south Texas where two other units already operate.

The first COL filing since 1978 probably will not be lonely for long. The NRC says it expects 21 applications for 32 new reactor units in the next two years, with five companies proposing 10,800 MW ready to follow in NRG's footsteps before the end of this year (see table, page 9). So far, 17 companies have told the NRC that they are considering building new reactors, and most of these are regulated utilities, which can pass on costs to their customers.

Before the end of this year, the NRC expects COLs to be submitted by Duke, the 10-company consortium NuStart Energy, Progress Energy, Dominion and South Carolina Electric & Gas, with six of the 10 new units to be sited at existing facilities.

Last week a senior utility executive warned that the costs of building "greenfield" nuclear projects, where units do not already exist, are expected to be so large that only the largest utilities would likely be able to afford them.

NRG began life as the independent power producing unit of Minneapolis-based Xcel. It emerged from bankruptcy almost four years ago. In February 2006, NRG concluded its $5.8 acquisition of Texas Genco and its roughly 11,000 MW of generating capacity. With that deal, NRG had a total of 23,000 MW of capacity, including participation in the two South Texas Project units - with a combined 2,500 MW of capacity - that fed the cities of Houston, San Antonio and Austin.

In June 2006, Chairman and CEO David Crane announced a plan for a 10,000-MW capacity expansion that included the two new nuclear units but also new integrated gasification combined-cycle units on the East Coast.

NRG devised what it believes is a conservative strategy for its nuclear project - choosing an already NRC-certified ABWR design, building at its existing plant site, and relying on vendors that have built four units of the same design in Japan in 42 months or less.

NRC staff is set to begin a 60-day acceptance review of the 20,000-page application to determine whether the application is complete and has enough depth for a full technical review. Once NRC begins its review, it will begin charging the company $258 per hour of staff time and sending bills quarterly for payment.

The company expects that if NRC's review takes 42 months to complete, it would receive approval for the two ABWRs and could begin construction in 2010 at the South Texas Project site, where two units have been operating since the late 1980s. Its schedule projects Unit 3 coming online in 2014, and Unit 4 in 2015. Savings due to siting

NRG has indicated it expects to spend a total of about $100 million over the course of a year and a half, starting in third-quarter 2006. The money is expected to cover long lead-time equipment, engineering expenses, completing certified design work, site-specific work, and preparing the COL application. "We're going to have partners in the projects, so not all of that is going to be borne by our shareholders," NRG Executive Vice President Steven Winn said last week.

CEO Crane, speaking at the Merrill Lynch Power & Gas Leaders Conference in New York last week, said "Nuclear development is not for the faint of heart." He said the classic project finance, risk-sharing, risk-spreading techniques that the power industry uses are "far more applicable for this size and this type of project than a plain old gas-fired combined-cycle plant, and of course it helps when you have significant federal support on the debt side." He said that nuclear power's potential for cutting carbon and other air emissions and increasing energy independence makes it a "calculated risk, well worth taking."

NRG owns 44% of the South Texas Project, with Austin Energy owning a 16% share and CPS Energy, the municipal utility in San Antonio, Texas, owning 40%. CPS has agreed to take a stake in the new units, but must get city approval before a final deal can be announced, Crane said.

NRG expects to own 40%, or 1,200 MW, of the new units, he said. To reduce project risk, the company plans to sell at least 800 MW of its share under long-term contract, while keeping the remaining capacity to sell into the market in order to retain any benefits from owning carbon-free generation.

Besides receiving financial support from the US government, NRG expects some financial help from the Japanese government through Toshiba, which will help build the plant, Crane said.

Crane said NRG expects the new South Texas units to cost about $2,250/kW, or roughly $6 billion, and that building them onsite would cut the project's cost by a total of about $500 million.

CO2 as driver

All new nuclear plants in the US will likely be built alongside existing plants, in part because those communities already support the plants, Crane said. "All the successful developments are going to be at existing sites where the local population is extremely comfortable with the project," he said.

On September 24, at a World Association of Nuclear Operators meeting in Chicago, Lew Hay, the chairman and CEO of FPL Group, said that a new FPL analysis suggested that a new two-unit US nuclear greenfield facility would likely cost between $13 and $14 billion, and thus outstrip the market capitalization of all but the biggest utilities. "It is a huge bet for any CEO to take to his or her board," he said.

Mindful of earlier days when overruns were rampant, Hay said that FPL's figures were based on "full costs" of a project, including an owner's costs that are not included in cost estimates of suppliers, which Hay said are still quoting a range of $2,500-$3,500 per installed kilowatt. The FPL figures also include inflation and cost escalation to 2018.

The FPL chairman argued that a new nuclear plant "won't be economic without a carbon tax of at least $30 a ton," but added that carbon regulation is unlikely in the US before 2009, "if then."

Hay said the conclusion of FPL's assessment was that the two main drivers behind nuclear power's competitiveness in the future is the spread between the prices of natural gas and coal, and the cost of CO2 emissions. Unfortunately, he said, both of these factors are difficult to project over the lifetime of a nuclear plant.

Speaking to financial analysts recently in New York (EUW, 17 Sept, 2), Duke Chairman, President and CEO Jim Rogers argued that nuclear power was destined to play "a key role" in the North American generation portfolio precisely because carbon capture and storage technology has been "oversold from a standpoint of timing." Rogers predicted it would be 10 to 15 years before carbon sequestration is commercially available in the US.

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