‘We’re not going to cost cut our way out of this problem’

By Hannah Northey, Kristi E. Swartz | 07/25/2016 07:13 AM EDT

A handful of the nation’s top nuclear executives huddled last summer in Atlanta to tackle a pressing question facing the industry as rumblings of additional reactor closures grew. At what cost could nuclear power survive in gas-rich electricity markets?

A handful of the nation’s top nuclear executives huddled last summer in Atlanta to tackle a pressing question facing the industry as rumblings of additional reactor closures grew.

At what cost could nuclear power survive in gas-rich electricity markets?

The operators had plenty of troubling signs after crunching the numbers. Companies had seen a 25 percent jump in fuel costs during the past decade, while capital expenditures increased by 109 percent and operating costs by 13 percent.


The executives agreed to aim high and slash almost a third of their total electric generating costs by 2018.

"We needed an audacious, motivational goal, and that’s how 30 percent was [agreed upon]," said Tony Pietrangelo, the Nuclear Energy Institute’s senior vice president and chief nuclear officer.

They took aim at 2012, a tumultuous year when generating costs soared to $40 per megawatt-hour as companies complied with new safety rules following the 2001 terrorist attacks and made equipment upgrades to extend the life of some reactors. The goal — or "promise" — of reducing costs from $35 per megawatt-hour to $28 per megawatt-hour was born.

"People looked around the table and said, ‘Is that enough?’" Pietrangelo said. "The answer was ‘you’ll live to fight another day at that level.’"

Since then, the industry has gone into survival mode. Reactor operators, eyeing possible shutdown over their plants’ economics, are looking for ways to slash ballooning staffs, redundancies and decades’ worth of bureaucracy. The goal is to lower operating costs while increasing their game. "Everybody thinks we can be competitive even in the existing environment at that cost," Steve Kuczynski, chairman of Southern Nuclear Operating Co. Inc., told attendees at a recent industry gathering in Washington, D.C.

But NEI’s goal of curbing a total of $3 billion in costs is only one part of the equation, Pietrangelo said. Reactor operators need revenue. And they’re angling to get it through U.S. EPA’s Clean Power Plan or state proposals like the grid-reform scheme being discussed in New York.

Whether the "nuclear promise" will save at-risk plants is anyone’s guess. Exelon Corp.’s Quad Cities Nuclear Generating Station in Illinois, for example, is already operating close to the industry target, yet the utility has warned it will be closed without additional carbon credits or financial assistance, Pietrangelo said. And the Kewaunee Power Station in Wisconsin that closed a few years ago was operating near $33 per megawatt-hour, he added.

"We’re not going to cost cut our way out of this problem," he said. "[$28 per megawatt-hour] may not be sufficient depending on what market you’re in and where your plant is located."

‘Guns, guards and gates’

Curbing generating costs by a third might sound like a daunting task. But the industry’s reference year was a particularly expensive one.

Operators spent millions of dollars in 2012 implementing the Nuclear Regulatory Commission’s orders in 2009 to address security concerns post-9/11. All told, the industry has paid about $3 billion to harden plants against terrorist threats, according to NEI.

"We’re talking guns, guards and gates, barriers," Pietrangelo said.

Capital spending in 2012 was also buoyed by investments into equipment like steam generators to comply with license extensions. And many companies had to replace reactor parts after workers at FirstEnergy’s Davis-Besse Nuclear Power Station in Ohio discovered that corrosion had eaten a football-sized hole into the reactor vessel head of the plant.

Costs have fallen since then and will continue to fall because the price of fuel is expected to drop further given reactor closures in Germany and Japan, Pietrangelo said. Another option for meeting the goal is attrition, given that a third of the industry workforce is expected to retire in the coming years, he added.

"We’ve never left anything off the table," Pietrangelo said.

Southern has discussed scrapping its engineering training program and Kuczynski signaled the company could be taking a second look at the size of its staff. Of the company’s 950 employees, he noted that only a third actually do physical work at the company’s reactors or oversee workers conducting physical labor.

"That’s a lot of overhead, and that’s built over time," Kuczynski said. "My experience is, we’re just going to have to, as leaders, get over the cultural hurdle of saying … ‘we don’t need to do many of the things that have been added on in our industry that we’ve accepted.’"

As part of the "nuclear promise," industry teams led by chief nuclear officers will propose improvements and make recommendations to a steering committee made up of senior industry representatives and their peers. The boards of directors for NEI, the Electric Power Research Institute and the Institute of Nuclear Power Operations are overseeing the entire initiative.

All proposals, Pietrangelo said, are vetted to ensure they do not jeopardize safety and that costs align with benefits.

But David Lochbaum, director of the Union of Concerned Scientists’ Nuclear Safety Project, said that he’s concerned about the industry making a host of changes all at once right when the NRC is also downsizing.

"If you change how you’re doing something, you may change to something that’s unintentionally worse," Lochbaum said. "The more things you change, the more likely you are to have problems crop up."

Nuclear must ‘make its case’

More than a dozen nuclear units in the United States have been slated for decommissioning since 2013 as cheap shale gas and the growth of renewable energy has rendered them uneconomical to operate.

Those reactors operate in mainly merchant markets, but Paul Patterson, a utility analyst with Glenrock Associates LLC, said what is happening there will have ramifications on the tightly regulated electric markets in the Southeast and elsewhere.

While utilities can tout lower operational and fuel costs for nuclear, reactors are getting older and cost money to keep running.

Even in regulated markets, where electric utilities can recoup costs, plus a profit, from customers, it still doesn’t make economic sense to operate a nuclear plant just for the sake of doing so, he said. The $300 million a utility needs to upgrade an aging reactor may be better spent building a combined-cycle natural gas plant, for example, he said.

"Nuclear power has to make its economic case in the regulated markets, as well," Patterson said. "What are you putting into this, and what are you getting out of it?"

Although Southern Co. has been eyeing cost-cutting measures for two years and some of the utility’s units are on track to meet the NEI goal, Kuczynski said Southern’s plants still feel the pinch. "My most efficient plants, Vogtle 1 and 2, I’m about [$31.5 per megawatt-hour], my other two are $34 and one at $37, a lot of it is just the size of the units," he said.

That grim backdrop has cast a shadow over a new generation of nuclear development.

Southern’s Georgia Power Co. is building two nuclear reactors from scratch — with the help of a billion-dollar federal loan guarantee. The project is more than three years behind schedule, and reasons range from components that weren’t shipped on time to paperwork that lacked all of the documents, or documents that were without signatures. The same has happened at SCANA Corp.’s Virgil C. Summer Nuclear Generating Station project, which is using the same reactor design and contractors.

Southern also is looking ahead at nuclear. Georgia Power is pushing state utility regulators to let the company spend $175 million on licensing applications for two more reactors in the western part of the Peach State.

And not all of the electric company’s models show a need for nuclear in the future. More than half show no need for nuclear in the next 30 years, and one shows a need in 17 years (EnergyWire, July 18).

Besides Southern, the Tennessee Valley Authority is the only utility considering building nuclear. TVA is the first company in the United States to officially explore the option of building small modular reactors.

Duke Energy Corp. and Florida Power & Light Co. continue to pursue regulatory licenses to build reactors in South Carolina and Florida, respectively. Both have said their projects would have to make economic sense, but with natural gas prices where they are, that’s currently unlikely.

"There’s no question that the industry is facing substantial and aggressive economic and competitive pressure, and it behooves the operators and the regulators to look at lower costs that would not jeopardize safety," Patterson said.