Policies that Support New Nuclear Power Plant Development

Transcription

1 October 2009 Policies that Support New Nuclear Power Plant Development Executive Summary The Investment Challenge 1 Why Incentives are Needed 2 Energy Policy Act of 2005 Production Tax Credit 3 Standby Support 4 Loan Guarantee Program 4 State Policies 5 Electric utilities must build new baseload generating plants to meet future electricity demand. Because of concern over carbon dioxide emissions from fossil-fuel plants, uncertainty over federal climate change policy, and the volatility of natural gas prices, new nuclear power plants must be part of the portfolio. New nuclear power plants are large, capital-intensive projects. Financing these projects will be a challenge for the U.S. electric industry, since the size of the projects is large relative to the size of the electric companies that will build them. These projects will require financing support from the federal government, state governments or both. The Energy Policy Act of 2005 included three forms of financial support for new nuclear plants. Some states have enacted legislation or implemented regulations, or both, to support the construction of new nuclear plants. The Investment Challenge Facing the U.S. Electric Sector Over the past 16 years the electric power sector has invested heavily in new gas-fired generation and in upgrading existing baseload generating assets, but has not invested in new capital-intensive baseload generating technologies. Between 1994 and 2008, the United States commissioned only 11,000 megawatts of new coal-fired capacity and 1,300 megawatts of new nuclear capacity. During that same period, however, generating com-

2 2 panies built approximately 311,000 megawatts of new gas-fired capacity. Gasfired capacity was preferred because it represented the lowest possible investment risk since it could be built quickly and had low capital cost. It is now clear, however, that the construction of large amounts of gas-fired capacity placed unsustainable pressure on natural gas supply, which resulted in periods of intense price volatility and higher electricity costs. It is equally clear that U.S. electricity markets need new baseload generating capacity, and that the U.S. electric industry is on the threshold of a major construction cycle for new baseload generating capacity and new electric transmission. Consensus estimates suggest that the industry, between now and 2030, must invest between $1.5 trillion and $2 trillion in new generating capacity, new transmission and distribution infrastructure, and energy efficiency and demand response technologies. This new capital spending represents a major challenge to the electric power Energy Industry Investment Through 2030 industry. Reasonable Achievable Efficiency No Carbon Policy Maximum Achievable Efficiency No Carbon Policy Maximum Achievable Efficiency Carbon Policy Generation $505 $455 $951 Transmission $298 $298 $298 Distribution $582 $582 $582 The Energy Policy Act of 2005 recognized this financing challenge and provided limited investment stimulus for construction of new baseload power plants. That stimulus includes production tax credits for new nuclear plants, investment tax credits for advanced coal-based projects, and authorization for a loan guarantee program within the Department of Energy to support financing and commercial deployment of innovative technologies that reduce emissions. Why Incentives Are Needed to Support New Nuclear Plant Construction Energy Efficiency and Demand Response Technologies $85 $192 $192 Federal and state government support for new nuclear plant construction is both necessary and appropriate to ensure equitable sharing of benefits and risks. Without that support, the benefits of nuclear power Total $1.5 trillion $2 trillion (large amounts of reliable, emission-free electricity; stable electricity prices; reduced pressure on natural gas supply and price) accrue to society at large and the economy as a whole, but the investment risk associated with building a new nuclear power plant rests entirely on the company building it. In addition, the cost of a new nuclear plant is high compared to the size and financing capability of the typical U.S. electric company. The U.S. electric power sector consists of many relatively small companies. The largest U.S. electric company has a market value of approximately $33 billion; most are much smaller. This compares with major oil companies like ExxonMobil and Chevron (with market values of approximately $332 billion and $146 billion, respectively).

3 3 New nuclear power plants are expected to cost $6-8 billion each (in 2008 dollars). Although $6-8 billion projects are not unique in the energy business, such projects are typically built by the major oil companies. The relatively small U.S. electric power companies do not have the financing capability or financial strength to finance new nuclear power projects on their own. Finally, investors believe new nuclear plants face political and regulatory risks. The financial markets remember the experience during construction of today s operating plants longer-than-expected construction times and cost overruns caused by the licensing process and litigation. The financial markets are concerned that new nuclear plants could face similar political and regulatory risks. Although the risk may be low, the potential consequences of licensing delays (given the cost of new nuclear plants) are high. Although the federal government has created a more efficient and predictable licensing process, which should reduce licensing risk, investors remain concerned given the high cost and long development times for nuclear power plants. Since this licensing risk is a function of the federal government s regulatory process, only the federal government can offset that risk. For electric customers to receive the benefits associated with new nuclear power plants, the construction risk must be spread among the federal government, the states and shareholders. Federal policymakers see the value of nuclear energy and have supported new nuclear plant construction by including three incentives in the Energy Policy Act of Policymakers in some states have also implemented legislation or regulations that support construction of new plants. Energy Policy Act of 2005 Production Tax Credits Production Tax Credits $18/MWh for 6,000 MW of new capacity Worth up to $125 million in tax credits per year for 8 years for 1,000 MW of capacity Reduces cost of electricity from these new plants Does not offset construction risk The production tax credit (PTC) for new nuclear generation (section 1306 of the Energy Policy Act of 2005) allows 6,000 megawatts of new nuclear capacity to earn $18 per megawatt-hour for the first 8 years of operation. The maximum tax credit for any one plant is capped at $125 million per year. In 2005, $18 per megawatt-hour was comparable to the PTC for renewable resources. Unlike the renewable PTC, which increases annually with inflation, the nuclear PTC does not escalate. In May 2006, the Internal Revenue Service (IRS) published guidelines for implementing the nuclear PTC program. For a facility to be eligible for credits: the construction and operating license (COL) application must be submitted to the Nuclear Regulatory Commission (NRC) by December 31, 2008 the plant must be under construction by January 1, 2014, and the plant must be operating by January 1, 2021.

4 The 6,000 megawatts of available credits will be divided among eligible facilities on a pro rata basis according to the facilities nameplate capacities. 4 While the PTC reduces the cost of the power generated by these new plants once they are up and running, it does little to offset the construction and commissioning risk. Standby Support Standby support is a type of risk insurance created by section 638 of the Energy Policy Act of This insurance covers licensing and litigation risk for the first six new nuclear plants. Standby support covers delays caused only by factors outside a company s control. Standby Support $500 million of risk coverage for each of the first two new plants $250 million of risk coverage for each of the subsequent four new plants Covers delays resulting from licensing or litigation Provides limited value, particularly coverage for subsequent four plants The standby support program is administered by the Department of Energy (DOE). Final regulations for the standby support program were issued by DOE in August Each of the first two new nuclear power plants constructed are eligible for up to $500 million of standby support coverage. Each of the subsequent four new plants can receive up to $250 million of coverage. This coverage can only be applied to debt service (principal and interest). In addition, the law placed additional limits on the coverage provided plants three through six: delay coverage begins 6 months into a covered delay, and the program only covers 50 percent of eligible delay costs. Project sponsors receiving the standby support coverage will pay a premium for the insurance coverage. Standby support has limited value for companies building new plants. If licensing or litigation delays occur, the project sponsor will incur substantial delay costs in addition to debt service. These costs include manpower costs, replacement power and other items. Although standby support does provide some financing support, the financial community and the industry look to the loan guarantee program as the primary instrument to protect project sponsors and lenders from unanticipated delays in plant operations. Loan Guarantee Program To support financing of new nuclear plants, the most useful federal incentive is the loan guarantee program established by Title XVII of the Energy Policy Act of Title XVII allows DOE to grant federal loan guarantees to projects that avoid, reduce or sequester greenhouse gas emissions by employing a new or significantly improved technology. It is intended to encourage construction of

5 projects that have difficulty securing financing on reasonable terms because they use technology not yet common to the market place. 5 New nuclear power plants qualify for the loan guarantee program, as do renewable generation facilities, clean coal plants, and other energy-related projects. A federal loan guarantee allows companies to use project finance structures to finance nuclear projects non-recourse to the project sponsor s balance sheet. This helps overcome the major financing challenge discussed earlier the cost of these projects relative to the size and financing capability of the companies that will build Loan Guarantee Program them. Covers 100% of debt up to 80% of project costs Allows more highly leveraged capital structure, which reduces cost of capital Reduces cost of electricity from these new plants Allows non-recourse project financing Useful to projects in both regulated and deregulated markets The loan guarantee also allows a more highly leveraged capital structure (the statute specifies that guaranteed project debt cannot exceed 80 percent of total project cost). This results in a lower weighted average cost of capital and a lower cost of electricity for consumers. Loan guarantees can help finance projects in both regulated and deregulated markets. The loan guarantee program is self-funded through loan guarantee fees charged to participants. A well-managed loan guarantee program will cost the taxpayers nothing, but will create significant value by increasing the country s energy supply and reducing emissions. Final regulations for the loan guarantee program were published by DOE in October In July 2009, DOE proposed a change to those rules, which would improve the regulations significantly; that rule change will likely be promulgated by the end of the year. The rule change would allow DOE to share collateral with other lenders, thus making it possible for partnerships and export credit agencies to participate as co-lenders in projects. Congress has authorized $51 billion in loan volume for the loan guarantee program $18.5 billion for nuclear power projects, $2 billion for uranium enrichment projects, and the balance for advanced coal, renewable energy and energy efficiency projects. Through the American Recovery and Reinvestment Act, enacted in February of 2009, renewable energy and transmission projects received an additional $40-60 billion in loan volume. The Department is now reviewing loan guarantee applications from a number of nuclear projects. Four projects have been selected for detailed due diligence and term sheet negotiations. The $18.5 billion in loan volume will provide financing support for, at best, two or three projects (the four projects requested loan volume of $38 billion). Additional loan volume is clearly necessary to support the four to eight nuclear plants expected in the first wave of new construction. State Policies Several states have passed legislation or implemented regulations, or both, to support construction of new nuclear power plants.

6 These policies range from property tax incentives to pre-determination of rate-making principles for a project before construction begins. 6 The policies that help most with financing new plants in regulated states are those that: require the state public utility commission (PUC) to determine if a proposed plant is prudent before construction begins and approve costs periodically during construction, thereby guaranteeing these capital costs will be added to the rate base when the plant comes online allow the carrying cost of construction work in progress (CWIP) or the financing cost associated with construction to be passed on to ratepayers during construction. Allowing CWIP reduces the cost ratepayers will pay for power from the plant when it goes into commercial operation. Some unregulated states assist with financing for unregulated plants by allowing pre-negotiated long-term power purchase agreements (PPAs). PPAs guarantee the project will have a source of cash flow (and cost recovery) once it is operational. State-level policies send positive signals to the financial community helping companies finance projects reasonably, and, thereby, keeping the cost of electricity for consumers lower. States with Policies Supporting New Nuclear Construction Legislation in place that helps secure financing Regulation in place that helps secure financing Both legislation & regulation Potential location for new nuclear facility