Navigant Research Blog

The Problem With Pay as You Go

— April 7, 2013

A “pay as you go” strategy for critical infrastructure, such as power supply – wherein infrastructure is financed incrementally, during the construction process – could make sense when applied to small remote microgrids supplying small solar systems in the developing world.   End-users in these countries often earn subsistence wages and need only enough juice for lights, computers, and cell phones.

When applied to nuclear power, though, the pay as you go concept dramatically increases the risks to end-users.   Just ask residents of Florida, where ratepayers are discovering that utilities can actually make more money – and consumers pay more for electricity – the longer it takes to build nuclear power stations.  The culprit is something called “construction work in progress,” or CWIP.

The Nuclear Energy Institute (NEI) has made a convincing argument that CWIP should actually save consumers money.  By collecting funds from ratepayers in advance of actual power production, sudden rate shocks can be avoided.  Financing costs for such large infrastructure projects can be reduced under CWIP, since investors have more certainty that debts will be paid off.  Since the investment ratings of utilities are protected, borrowing costs also shrink.

In the case of a proposed nuclear reactor by Progress Energy in Levy County, Florida, NEI estimated that CWIP program financing would save consumers $13 billion over the life of these nuclear reactors.  When Florida passed a bill in 2009 authorizing CWIP, it sailed through the state legislature with only a single dissenting vote.

After 6 years of CWIP financing, residential customer bills in Florida are projected to increase by $50 a month this year, even before the nuclear reactors generate a single kilowatt-hour of electricity.  Progress Energy originally estimated that building the two unit reactors would cost $5 billion and would be generating carbon-free power by 2016.  Instead, the construction costs have ballooned to $22.4 billion, and the plant – if ever completed – will not be generating power until 2021.

Ironically, this revised price tag and construction schedule mean that Progress Energy will generate more – not less – revenue the longer it takes to build the nuclear reactor.  If the project were cancelled today, the utility would still walk away with $150 million in profit.  So far, ratepayers have committed to over $1 billion dollars for a nuclear plant that won’t produce any power  for almost a decade.

If nuclear power could be financed in a way that makes economic sense, then proceeding down that path might make sense.  “Distributed nukes” – which would be deployed at a much smaller scale, reducing large investment risks – could be a better fit for CWIP and provide the form of financial innovation that might lead to a nuclear renaissance.  (Both water and transmission facilities have deployed CWIP with little controversy).  Unfortunately, the experience in Florida is turning former nuclear advocates and supporters of CWIP into skeptics, though the practice still has its defenders.

All eyes are on Florida to see if and when the plug is pulled on CWIP for large-scale nuclear power plants, with Republican state representative Mike Fasano, who voted for the CWIP state legislation in 2009 and supports nuclear power, leading the charge to shift financial risks away from ratepayers and to utility shareholders with new state legislation.


ARPA-E Top Prize Goes to Nuclear Start-Up

— March 8, 2013

Source: Transatomic PowerLast fall I blogged about Transatomic Power, a startup founded by a couple of MIT grad students that aims to build innovative molten salt nuclear reactors that can consume spent fuel from existing conventional reactors.  Transatomic got a big boost when it took the top prize at this year’s ARPA-E Innovation Summit.

ARPA-E is the advanced R&D arm of the U.S. Department of Energy, the counterpart to DARPA at the Pentagon.  Transatomic, whose technology is based on work done at Oak Ridge National Laboratory in the 1960s, under Alvin Weinberg (a period covered in detail in my book, SuperFuel), won out from around 200 clean energy startups.  Among the finalists were BDL Water, which aims to treat water used for fracking; Hevo, which is developing a wireless charging system for electric vehicles; and Altenera, which uses “oscillating reeds” to harvest wind energy.

Called a “Waste Annihilating Molten Salt Reactor,”  Transatomic’s system sustains nuclear fission in a liquid, molten-salt fuel, rather than in solid fuel rods.  Liquid-fuel reactors have several advantages over conventional solid-fuel rods, including safety – they operate at atmospheric pressure, obviating the need for huge pressurized containment vessels, and if the reactor begins to overheat, a “freeze plug” at the bottom of the core melts, draining the liquid fuel into a radiation-proof underground tank.

Thorium Shift

Molten-salt reactors are also the preferred technology for shifting to thorium, an alternative nuclear fuel that is cleaner, safer, and more abundant than uranium.  Leslie Dewan and Mark Massie, the founders of Transatomic, say that their design is “fuel-agnostic” in the sense that it can run on either uranium or thorium.  Using spent fuel from conventional light-water reactors, to help solve the nuclear waste-disposal problem, is a good way to get the initial reactors built.  CEO Russ Wilcox told Mark Halper, of Smart Planet, that the uranium reactor would serve as “a stepping stone” to a thorium-fueled version.

It will probably cost $2 billion or so to get the first Transatomic reactor built.  Winning a DOE contest is a long way from getting serious funding, but ARPA-E has an increased emphasis on commercialization, and the judges are largely drawn from big Silicon Valley venture capital firms.  So the ARPA-E win is a big step for a small company that hopes to transform the nuclear power industry.


In the Gas Age, Rays of Hope for Nuclear Power

— February 24, 2013

Duke Energy’s decision to close the Crystal River nuclear reactor, following on the heels of announced closures for Dominion Energy Resources’ Kewaunee nuclear reactor in Wisconsin and Exelon’s Oyster Creek plant in New Jersey, raises some intriguing questions about efforts to combat climate change.  The list of nuclear shutdowns is likely to grow.

This shift away from nuclear in the United States  is seen by many as a boon to natural gas.  Although natural gas has been touted as a “bridging fuel” to a renewable energy future, and as a flexible resource capable of filling in the gaps when the sun doesn’t shine and the wind doesn’t blow, scientists are discovering that a growing reliance upon natural gas could actually be accelerating global climate change.

How? While burning natural gas is cleaner than coal, leaks of methane – which is more than 20 times more threatening to our climate than carbon dioxide – are far more prevalent than previously realized.  And while fracking has been viewed as a godsend, giving rise to a revived U.S. petroleum industry, there is a growing movement to tighten regulations of the controversial shale gas extraction method due to water quality concerns.  If leakage rates into the atmosphere stick to about 3%, the net benefit of natural gas to the climate is a net positive.  Anything higher and the reverse is true; recent samplings suggest in Utah suggested leakage of 9%.  Even among utilities, there is growing concern about over reliance upon natural gas.

Japan Reverses Course

The challenges facing nuclear power mirror those of increasing renewable sources.  They include high up-front capital costs and reliance upon government subsidies. Once externalities are factored in, I believe wind power will be the ultimate winner among carbon free power sources. Evidence supporting this prediction comes from markets such as Australia, where wind power is now cheaper than natural gas or coal, thanks to a recently imposed carbon tax.

Despite the gloom and doom facing the nuclear industry, a ray of hope has emerged for this purported solution to climate change in, of all places, Japan, site of the world’s greatest nuclear mishap.  Almost 2 years after the triple meltdown at Fukushima Daiichi power plant, Japan‘s government is reversing course.  Japan appeared to have ended its heavy commitment to nuclear power when the previous center-left government pledged last year to phase out all of the country’s 50 working reactors by 2040.  The return to office of the conservative government under Shinzo Abe is giving the nuclear industry a second chance.


Responding to China’s Monopoly, U.S. Creates Rare Earths Institute

— January 18, 2013

Source: DOEDespite international outcry and an investigation by the World Trade Organization, China still controls at least 95% of the world market for rare earth elements – a group of 17 chemically related elements that are used in a variety of high tech applications including electric vehicles, wind turbine blades, smartphone displays, and missile guidance systems.  At the end of 2012, China actually said it would further restrict exports, in defiance of international trade groups and governments of heavy rare-earth using nations, like the United States and Japan.

Responding to the demand for diverse supplies of these strategic elements, the U.S. Department of Energy is establishing a Critical Materials Institute.  Based in Ames, Iowa, the new institute, one of five Energy Innovation Hubs set up by DOE around the country, will use a DOE grant of $120 million over 5 years to “develop solutions to the domestic shortages of rare earth metals and other materials critical for U.S. energy security,” according to a statement.

One focus will be to “eliminate the need for materials that are subject to supply disruptions.”  Translation: come up with new materials that serve the same purposes as rare earths, but are not controlled by China.

Japanese automakers have scored some early successes in that effort.  According to a roundup by Asahi Shimbun, Honda plans to recycle rare earth components from nickel-metal hydride batteries used in hybrid cars, and Panasonic has instituted a similar recycling program for home electric appliances.  TDK Corp. has developed a magnet with the rare earth element dysprosium painted onto the surface, rather than blended into the magnetic material itself, achieving the same effect.  In possibly the most significant development, in early 2012, Reuters reported that Toyota “has developed a way to make hybrid and electric vehicles without the use of expensive rare earth metals, in which China has a near monopoly.”  No specifics were given.

Around 60% of China’s rare earths supply goes to Japan, much of it to the major Japanese automakers.

Chinese Takeover

The growing likelihood of recycling and substitution programs has lessened the possibility of a global rare earths shortage – which the new DOE institute is being created to avoid – and has driven prices for lanthanum, cerium, terbium, and other rare earth elements off their record highs of 2011-2012.  That in turn has undermined the strategy of Molycorp, the Denver-based mining company that, in 2011, re-opened the Mountain Pass mine on the Nevada-California border, once the world’s largest supplier of rare earths.  Molycorp’s 2010 IPO was among the most successful public offerings of that year, but its stock has plummeted from its early 2012 highs to below $10 a share.  Molycorp investors lost some $600 million in market capitalization in 2012, the company’s CEO Mark Smith departed under a cloud, and the company is now the subject of a federal investigation into its public disclosures.  Bloomberg News reported in late 2012 that the company is now a likely takeover target – possibly by Chinese interests such as industrial giant Baotou Steel Rare Earth.

All of this turmoil makes the mission of the new Critical Materials Institute murkier, but it doesn’t lessen the need for a U.S. reaction to China’s mercantilist policies regarding its rare earth elements export industry.  Proponents of advanced nuclear power also point to another reason to support U.S. efforts to secure a reliable supply of rare earths: many of the elements are found in monazite, an ore that also carries high concentrations of thorium – the radioactive element that could provide a safer, cleaner, and more abundant alternative to uranium for a new generation of nuclear reactors.

The most direct solution to the international rare earths imbroglio, of course, would be to find new supplies that are economical to recover and process.  In June, Japanese geologists reported that they had found a huge, previously undiscovered rare earths deposit.  The only problem with that is that the deposits are under the ocean, about 1200 miles off the coast of Tokyo.


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