7.6: Funding and Licensing for United States Commercial Nuclear Reactors

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Funding and Licensing - An Introduction:

While nuclear reactors are an incredible source of carbon-free energy, it is important to note the various costs and licensing that are needed to successfully complete such a large-scale infrastructure project from start to finish. The largest hurdle in financing nuclear projects derives from the upfront construction costs required to assemble these infrastructure projects. All upfront costs fall under the responsibility of the project owner, which can be a massive undertaking. Before owners with sufficient capital can begin construction, however, they must go through a complicated and extensive licensing process.

Licensing:

The first step towards constructing a commercial nuclear power plant in the United States involves obtaining an official license from the Nuclear Regulatory Commission (NRC). In order to begin construction, overseers of this project must obtain two interrelated licenses: (1) a construction permit and (2) an operating license as underlined in Title 10 of the Code of Federal Regulations (10 CFR), Part 50.

The NRC conducts an incredibly thorough application process for licensure, stipulating that project managers go through several careful reviews, including NRC safety, environmental, and antitrust reviews. Interested applicants first prepare and submit a Safety Analysis Report that meticulously lists the design blueprints, local data pertaining to the prospective site, and security and/or safety features integrated into the plant’s design and construction that mitigates any future risks, accidents, or emergencies. Upon submission of this safety review, an applicant would then need to submit an environmental impact statement for the plant as well as an antitrust review to determine whether the participating company’s mergers and acquisitions are competitive and fair to their consumers, avoiding violations of federal antitrust laws. For those seeking a slightly simpler process of gaining a combined license, a similar process can be found below:

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Image is the intellectual property of the U.S. NRC and is taken from https://commons.wikimedia.org/wiki/F...275046722).jpg

Once an organization has submitted an application, the NRC carefully weighs each portion of the application and decides whether the party can move forward. After hosting a publicly advertised meeting to educate the public on the details of the potential plant, NRC staff will examine the application itself to ensure that the plant’s blueprint meets the required regulations, including:

The site’s surrounding population, seismology, meteorology, geology, and hydrology
The design of the plant itself
“Technical qualifications” and experience of the applicant related to running the plant
Plant emissions into the surrounding environment
Failsafe/emergency plans

Acting in tandem with the NRC, The Advisory Committee on Reactor Safeguards – an independent body that delivers an additional separate opinion regarding nuclear plants’ safety – will also examine the application and eventually contact the NRC with its own recommendation.

Lastly, the applicant, incorporating all prior reviews and suggestions throughout the licensing process, must complete a Final Safety Analysis Report to obtain an operating license. This final report should reiterate the applicant’s request for an operating license by articulating the power plant’s final design, operative policies, and precautionary measures. While an applicant for a construction permit is required by law to undergo an additional public hearing managed by an Atomic Safety and Licensing Board, that same applicant is not necessarily required to experience a similar public hearing to acquire an operating license.

Up-Front Financing I: Government and Private Ownership

The sponsor of nuclear power plant projects normally fits into two broad categories – public ownership by a country’s government or private ownership by corporations – or a combination of both. Through debt and equity financing, the project owner and manager can rely on bank loans and investors that both allow them to gain ownership in the project. The construction of a nuclear power plant carries with it a potential for financial risk initiated by a plethora of complications ranging from construction and scheduling delays to exchange and interest rate risks. While it is possible for multiple private corporate stakeholders to entirely finance a nuclear expansion project, government involvement as a partner in a project can provide financial stability, preventing this infrastructure project that takes, on average, half a decade to complete from suddenly going under. Above all, having multiple, financially independent stakeholders investing in a singular project is the best guarantee of its long-term success.

Up-Front Financing II: Capital Costs – Construction, Manpower, and Financing

Upon establishing their respective stakes in a nuclear project, investors must first address the capital costs – the sheer manpower, raw resources, component parts, and electrical systems necessary for the construction project’s completion. Project managers usually hire between 500-3500 nuclear power plant workers and are tasked with acquiring massive amounts of steel and concrete.

Additionally, they need to plan for Engineering, Procurement, and Construction (EPC) costs as well as owners’ costs. EPC costs are defined legally as any construction costs for which the owner can be held liable to cover. These costs most commonly include any monetary penalties or fees the owner of a project is lawfully bound to pay due to the termination of a construction contract. Owners’ Costs simply refer to the price of testing the plants’ systems and training its staff.

Lastly, Financing costs arise throughout the period of construction as a result of fluctuating interest rates based on the debt assumed by the plant project’s owner. The general rule for assessing these costs is that the longer the construction period is, the higher the financing cost will be.

Financing III: Overhead / Operating Costs

Nuclear Power Plant Operation costs refer to fuel costs, including the fuel itself such as Uranium, management of the fuel, and nuclear waste disposal. Project owners only shift to worrying about these costs when a commercial reactor is built and fully operational. Although the costs to provide up-front financing for a reactor are astronomically high, nuclear power plants compensate with fuel costs that are significantly lower than that of a coal-fired power plant. The World Nuclear Association (WNA) reports that on average the total fuel costs of a nuclear power plant in an Organization for Economic Co-Operation and Development (OCED) country like the United States are around a third to a half of those for a coal-fired plant. Plant owners save on these costs mainly because their plant’s source of energy, Uranium, is highly concentrated, cheap, and more accessible than coal. WNA cites that one kilogram of natural uranium yields about 20,000 times as much energy as one kilogram of coal.

Financing IV: Consumer Costs

Once a nuclear project is underway with an enormous amount of capital behind it, the project manager and relevant stakeholders offset these massive costs by ensuring its economic viability – i.e., its ability to generate a steady revenue stream greater than operating costs once fully operational. This revenue is largely generated through a fraction of the utility bills of local residents who will rely or continue to rely on the electricity generated by the commercial nuclear power plant in the future. It is often common that future customers financially contribute to a nuclear power plant through the entirety of its construction and that electricity bills will exponentially increase as a result of major project delays.

Total Estimated Costs

Since 2008, the total estimated costs required to fund a nuclear power plant’s construction have been $7-9 billion dollars for each new unit, which has continued to rise. These rapidly ballooning costs have prompted experts to examine the question of why these projects turn out to be so expensive for all involved parties. A recent MIT study focused on the frequent result that the projected cost of a plant frequently does not come close to matching the actual cost once construction begins. These researchers identified multiple key reasons why these costs often greatly exceed projections such as:

Tightening safety regulations
Declining labor productivity, which is disproportionately higher in the case of nuclear power plant construction
Rising costs of engineering services, on-site job supervision, and construction facilities
Rising costs of reactor component parts, particularly the steam supply system, turbine generator, and reactor containment building (more than doubled between 1976 and 2017)
The assumption by field experts that costs will decrease as new plant designs become more familiar when they continue to increase

MIT researchers present that a lethal combination of the factors above has contributed to heightened plant costs since the mid-1970s. Before deciding to undergo a massive nuclear power plant project, interested parties must over-estimate the up-front costs necessary to complete construction in order to succeed.

Managing Risk

Risk is the final factor to consider when deciding to finance a commercial reactor’s construction. The assumption of financial risk by the government of a particular country significantly improves its chances of success through loan guarantee, asset ownership, or equity share. However, oftentimes private commercial investors proceed without the government to fund these ‘capital intensive’ projects, as defined by the International Atomic Energy Agency (IAEA), that are exceptionally susceptible to the fluctuation in interest rates, inflation, and unforeseen delays in project construction. In 2005, Congress passed the Energy Policy Act that established a production tax credit – 1.8 cents per kWh of electricity for each tax credit – that project owners could qualify for up until the first eight years of the plant’s operation. While the federal support is helpful in stabilizing costs at the front end, companies cannot retain these tax credits after experiencing multiple long project delays that expand beyond the eight-year period and will therefore have to rely on their own funds.

Case Study: VC Summer, Tax Credits, and Risk

The long duration of these projects coupled with their financial unpredictability makes project owners particularly vulnerable to civil litigation. The VC Summer Expansion project serves as a cautionary lesson for those interested in financing a nuclear power plant that lacks up-front capital, a fiscally stable contracting company, and governmental support. After the newly bankrupted contractor pulled out of the expansion project for Units 2 and 3 and the plant experienced continuous delays, project owners Santee Cooper and the SCANA Corporation failed to qualify for a much-needed tax credit from the federal government and were subject to multiple lawsuits. For more on the details of this failed nuclear expansion project, see Section 7.7 on South Carolina Energy.

Contributors:

Andrew Allen (Furman University)