Tag Archives: nuclear power

We’ve already paid for Diablo Canyon

As I wrote last week, PG&E is proposing that a share of Diablo Canyon nuclear plant output be allocated to community choice aggregators (CCAs) as part of the resolution of issues related to the Integrated Resource Plan (IRP), Resource Adequacy (RA) and Power Charge Indifference Adjustment (PCIA) rulemakings. While the allocation makes sense for CCAs, it does not solve the problem that PG&E ratepayers are paying for Diablo Canyon twice.

In reviewing the second proposed settlement on PG&E costs in 1994, we took a detailed look at PG&E’s costs and revenues at Diablo. Our analysis revealed a shocking finding.

Diablo Canyon was infamous for increasing in cost by more than ten-fold from the initial investment to coming on line. PG&E and ratepayer groups fought over whether to allow $2.3 billion dollars.  The compromise in 1988 was to essentially shift the risk of cost recovery from ratepayers to PG&E through a power purchase agreement modeled on the Interim Standard Offer Number 4 contract offered to qualifying facilities (but suspended as oversubscribed in 1985).

However, the contract terms were so favorable and rich to PG&E, that Diablo costs negatively impacted overall retail rates. These costs were a key contributing factor that caused industrial customers to push for deregulation and restructuring. As an interim solution in 1995 in anticipation of forthcoming restructuring, PG&E and ratepayer groups arrived at a new settlement that moved Diablo Canyon back into PG&E’s regulated ratebase, earning the utilities allowed return on capital. PG&E was allowed to keep 100% of profit collected between 1988 and 1995. The subsequent 1996 settlement made some adjustments but arrived at essentially the same result. (See Decision 97-05-088.)

While PG&E had borne the risks for seven years, that was during the plant startup and its earliest years of operation.  As we’ve seen with San Onofre NGS and other nuclear plants, operational reliability is most at risk late in the life of the plant. PG&E’s originally took on the risk of recovering its entire investment over the entire life of the plant.  The 1995 settlement transferred the risk for recovering costs over the remaining life of the plant back to ratepayers. In addition, PG&E was allowed to roll into rate base the disputed $2.3 billion. This shifted cost recovery back to the standard rate of depreciation over the 40 year life of the NRC license. In other words, PG&E had done an end-run on the original 1988 settlement AND got to keep the excess profits.

The fact that PG&E accelerated its investment recovery over the first seven years and then shifted recovery risk to ratepayers implies that PG&E should be allowed to recover only the amount that it would have earned at a regulated return under the original 1988 settlement. This is equal to the discounted net present value of the net income earned by Diablo Canyon, over both the periods of the 1988 (PPA) and 1995 settlements.

In 1996, we calculated what PG&E should be allowed to recover in the settlement given this premise.  We assumed that PG&E would be allowed to recover the disputed $2.3 billion because it had taken on that risk in 1988, but the net income stream should be discounted at the historic allowed rate of return over the seven year period.  Based on these assumptions, PG&E had recovered its entire $7.7 billion investment by October 1997, just prior to the opening of the restructured market in March 1998.  In other words, PG&E shareholders were already made whole by 1998 as the cost recovery for Diablo was shifted back to ratepayers.  Instead the settlement agreement has caused ratepayers to pay twice for Diablo Canyon.

PG&E has made annual capital additions to continue operation at Diablo Canyon since then and a regulated return is allowed under the regulatory compact.  Nevertheless, the correct method for analyzing the potential loss to PG&E shareholders from closing Diablo is to first subtract $5.1 billion from the plant in service, reducing the current ratebase to capital additions incurred since 1998. This would reduces the sunk costs that are to be recovered in rates from $31 to $3 per megawatt-hour.

Note that PG&E shareholders and bondholders have earned a weighted return of approximately 10% annually on this $5.1 billion since 1998. The compounded present value of that excess return was $18.1 billion by 2014 earned by PG&E.

Calculating the risk reduction benefits of closing Germany’s nuclear plants

Max Aufhammer at the Energy Institute at Haas posted a discussion of this recent paper reviewing the benefits and costs of the closure of much of the German nuclear fleet after the Fukushima accident in 2011.

Quickly reading the paper, I don’t see how the risk of a nuclear accident is computed, but it looks like the value per MWH was taken from a different paper. So I did a quick back of the envelope calculation for the benefit of the avoided consequences of an accident. This paper estimates a risk of an accident once every 3,704 reactor-operating years (which is very close to a calculation I made a few years ago). (There are other estimates showing significant risk as well.) For 10 German reactors, this translates to 0.27% per year.

However, this is not a one-off risk, but rather a cumulative risk over time, as noted in the referenced study. This is akin to the seismic risk on the Hayward Fault that threatens the Delta levees, and is estimated at 62% over the next 30 years. For the the German plants, this cumulative probability over 30 years is 8.4%. Using the Fukushima damages noted in the paper, this represents $25 to $63 billion. Assuming an average annual output of 7,884 GWH, the benefit from risk reduction ranges from $11 to $27 per MWH.

The paper appears to make a further error in using only the short-run nuclear fuel costs of $10 per MWH as representing the avoided costs created by closing the plants. Additional avoided costs include avoided capital additions that accrue with refueling and plant labor and O&M costs. For Diablo Canyon, I calculated in PG&E’s 2019 ERRA proceeding that these costs were close to an additional $20 per MWH. I don’t know the values for the German plants, but clearly they should be significant.

CCAs don’t undermine their mission by taking a share of Diablo Canyon

Northern California community choice aggregators (CCAs) are considering whether to accept an offer from PG&E to allocate a proportionate share of its “large carbon-free” generation as a credit against the power charge indifference adjustment (PCIA) exit fee.  The allocation would include a share of Diablo Canyon power. The allocation for 2019 and 2020; an extension of this allocation is being discussed on the PCIA rulemaking.

The proposal faces opposition from anti-nuclear and local community activists who point to the policy adopted by many CCAs not to accept any nuclear power in their portfolios. However, this opposition is misguided for several reasons, some of which are discussed in this East Bay Community Energy staff report.

  • The CCAs already receive and pay for nuclear generation as part of the mix of “unspecified” power that the CCAs buy through the California Independent System Operator (CAISO). The entire cost of Diablo Canyon is included in the Total Portfolio Cost used to calculate the PCIA. The CCAs receive a “market value” credit against this generation, but the excess cost of recovering the investment in Diablo Canyon (for which PG&E is receiving double payment based on calculations I made in 1996) is recovered through the PCIA. The CCAs can either continue to pay for Diablo through the PCIA without receiving any direct benefits, or they can at least gain some benefits and potentially lower their overall costs. (CCAs need to be looking at their TOTAL generation costs, not just their individual portfolio, when resource planning.)
  • Diablo Canyon is already scheduled to close Unit 1 in 2024 and Unit 2 in 2025 after a contentious proceeding. This allocation is unlikely to change this decision as PG&E has said that the relicensed plant would cost in excess of $100 per megawatt-hour, well in excess of its going market value. I have written extensively here about how costly nuclear power has been and has yet to show that it can reduce those costs. Unless the situation changes significantly, Diablo Canyon will close then.
  • Given that Diablo is already scheduled for closure, the California Public Utilities Commission (CPUC) is unlikely to revisit this decision. But even so, a decision to either reopen A.16-08-006 or to open a new rulemaking or application would probably take close to a year, so the proceeding probably would not open until almost 2021. The actual proceeding would take up to a year, so now we are to 2022 before an actual decision. PG&E would have to take up to a year to plan the closure at that point, which then takes us to 2023. So at best the plant closes a year earlier than currently scheduled. In addition, PG&E still receives the full payments for its investments and there is likely no capital additions avoided by the early closure, so the cost savings would be minimal.

Nuclear vs. storage: which is in our future?

Two articles with contrasting views of the future showed up in Utility Dive this week. The first was an opinion piece by an MIT professor referencing a study he coauthored comparing the costs of an electricity network where renewables supply more than 40% of generation compared to using advanced nuclear power. However, the report’s analysis relied on two key assumptions:

  1. Current battery storage costs are about $300/kW-hr and will remain static into the future.
  2. Current nuclear technology costs about $76 per MWh and advanced nuclear technology can achieve costs of $50 per MWh.

The second article immediately refuted the first assumption in the MIT study. A report from BloombergNEF found that average battery storage prices fell to $156/kW-hr in 2019, and projected further decreases to $100/kW-hr by 2024.

The reason that this price drop is so important is that, as the MIT study pointed out, renewables will be producing excess power at certain times and underproducing during other peak periods. MIT assumes that system operators will have to curtail renewable generation during low load periods and run gas plants to fill in at the peaks. (MIT pointed to California curtailing about 190 GWh in April. However, that added only 0.1% to the CAISO’s total generation cost.) But if storage is so cheap, along with inexpensive solar and wind, additional renewable capacity can be built to store power for the early evening peaks. This could enable us to free ourselves from having to plan for system peak periods and focus largely on energy production.

MIT’s second assumption is not validated by recent experience. As I posted earlier, the about to be completed Vogtle nuclear plant will cost ratepayers in Georgia and South Carolina about $100 per MWh–more than 30% more than the assumption used by MIT. PG&E withdrew its relicensing request for Diablo Canyon because the utility projected the cost to be $100 to $120 per MWh. Another recent study found nuclear costs worldwide exceeded $100/MWh and it takes an average of a decade finish a plant.

Another group at MIT issued a report earlier intended to revive interest in using nuclear power. I’m not sure of why MIT is so focused on this issue and continuing to rely on data and projections that are clearly outdated or wrong, but it does have one of the leading departments in nuclear science and engineering. It’s sad to see that such a prestigious institution is allowing its economic self interest to cloud its vision of the future.

What do you see in the future of relying on renewables? Is it economically feasible to build excess renewable capacity that can supply enough storage to run the system the rest of the day? How would the costs of this system compare to nuclear power at actual current costs? Will advanced nuclear power drop costs by 50%? Let us know your thoughts and add any useful references.

The two problems to be addressed head on by nuclear power advocates

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Nuclear power advocates bring up the technology as a supposedly necessary part of a zero-GHG portfolio to address climate change. They insist that the “next generation” technology will be a winner if it is allowed to be developed.

Nevertheless, nuclear has two significant problems beyond whatever is in the next generation technology:

  1. Construction cost overruns are the single biggest liability that has been killing the technology. While most large engineering projects have contingencies for 25-30% overruns, almost all nuclear plants have overruns that are multiples of the original cost estimates. This has been driving the most experienced engineering/construction firms into bankruptcies. Until that problem is resolved, all energy providers should be very leery of making commitments to a technology that takes at least 7 years to build.
  2. We still haven’t addressed waste disposal and storage over the course of decades, much less millennia. No other energy technology presents such a degree of catastrophic failure from a single source. Again, this liability needs to be addressed head on and not ignored or dismissed if the technology is to be pursued.

MIT tries to resurrect nuclear power

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I received a notice of a new MIT study entitled “The Future of Nuclear Energy in a Carbon-Constrained World” which looks at the technological, regulatory and economic changes required to make nuclear power viable again. A summary states

The findings are that new policy models and cost-cutting technologies would help nuclear play vital role in climate solutions. Progress in reducing carbon emissions requires a broad range of actions to effectively leverage nuclear energy.

However, nothing in the summary reveals the paradigm-shattering innovation that will be required to make nuclear power competitive with a diverse fleet of renewables plus storage that would achieve the same goals. The cost of a solar plant plus storage with today’s technology still costs less than a current technology nuclear plant. That alternative fleet would also provide better reliability by diversifying the generation sources through smaller plants and avoid any radiation contamination risk.

The nuclear industry must clearly demonstrate that it can get past the many hurdles that led to the recent cancellation of two projects in the southeast U.S. Reviving nuclear power will require more than fantasies about what might be.