I have been musing a bit this morning about the impact of the cost of money for nuclear projects in the United States compared to the cost of money for other energy investments. I have a spreadsheet model that I built based on the methodology described in Appendix 5.A — Calculation of the Levelized Cost of Electricity of the MIT Future of Nuclear Power study.
Though I do not know ALL of the required input numbers, I can make some educated guesses based on published information. I thought it might be a useful exercise to determine just how large an impact an $880 million credit subsidy cost would have on the economics of the Calvert Cliffs Unit 3 nuclear power plant project.
Here are the assumptions that I made, just in case someone wants to check my math or challenge the basis for the numbers I chose.
Model Variables
| Overnight cost ($/kWe) | 6500 |
| construction time (years) | 5 |
| Total construction cost ($/kWe) | 6126 |
| Debt fraction of initial investment (%) | 80 |
| Equity fraction of initial investment (%) | 20 |
| Nominal cost of debt (%) | 4 |
| Nominal cost of equity (%) | 10 |
| Plant life (years) | 40 |
| Plant net capacity (Mwe) | 1600 |
| Capacity factor (%) | 85 |
| Marginal composite corporate income tax rate (%) | 39 |
| Heat rate (BTU/kWh) | 10400 |
| Unit cost of fuel ($/mmBTU) (not including disposal) | 0.39 |
| Nuclear waste fee (mills/Kwh) | 1 |
| real fuel escalation | 0.5 |
| Fixed O&M ($/kWe/yr) | 47 |
| Variable O&M (mills/kWh) | 8 |
| Incremental capital costs ($/kWe/yr) | 20 |
| Decommissioning cost ($million/GWe capacity) | 2000 |
| Carbon emissions tax ($/tonne-C) | 0 |
| assumed rate of inflation (%) | 2 |
| Debt term | 15 |
| Assumed rate of electricity price inflation (%) | 0.500 |
| Depreciation schedule | 15 year MARCS |
Using all of those assumptions, I computed that the sales price for electricity required would be about 10.7 cents per kilowatt hour at the time that the plant started operating, assuming that the credit subsidy cost was zero. With a credit subsidy cost of $880 million, required to be paid at the beginning of the loan period when construction begins, the electricity price needed for exactly the same return on invested capital would increase to 13.85 cents per kilowatt hour. That represents a 30% price increase completely due to the cost of paying for loan insurance.
(Aside: These numbers are not levelized cost of electricity. They are the prices required to produce free cash flow providing a 10% return on invested capital in year 2 of the project. Due to the effects of depreciation on reported profits, the ROE based on after tax profits is lower during the first 15 years than the ROE based on free cash flow.
Once depreciation is complete and the loans are repaid, ROE on profit and free cash flow are equal to each other and increase to about 21% in the case of no CSC and a lower 17% (with 30% higher electricity prices) in the case where the CSC was imposed using the above assumptions. End Aside.)
I am not advocating that the CSC should be zero; I am trying to illustrate the effect of the proposed fee on the price of electricity.
Since Constellation Energy is not a regulated monopoly utility with a guaranteed customer base, the sales price of electricity cannot be fixed to provide a given rate of return. The company would have to compete in the open market to sell its product at whatever the going rate would be.
Like other companies that sell their products in unregulated markets, Constellation would have the option of accepting lower margins in order to maintain sales volume. However, Constellation, like any other company, has a limited amount of capital to invest and a limited amount of managerial attention that can be applied to capital investments. It is not hard to see why model results like this would cause the company's board of directors to determine that they have less risky investments available.
In a rank ordering of available investment opportunities, this particular project would have fallen quite far down on the list, especially after a long period of fruitless negotiation. The recent announcements by DOE and OMB officials that express surprise merely indicate a lack of ability to read the handwriting on the wall. It is hard to believe that anyone would fail to understand that the company did all they could - even to the extent of obtaining a hearing on the topic with pointed questioning by the Senate Energy and Natural Resources committee.
Please do not read this as uncritical defense of Constellation Energy. It is also not a political commentary. I will take the OMB evaluators at their word and assume that the structure of the project as a merchant power plant without a guaranteed power purchase agreement is responsible for the high level of project risk that led to the associated fee computation result.
The point is that the story helps to illustrate why many observers have come to the conclusion that electricity is too important to the functioning of modern societies to be left up to market forces. That is especially true when it takes so long to build the most promising types of new generating capacity. The short term nature of market trading does not contain the mechanisms required to support the long range planning and sustained effort required for a reliable electrical power grid.
For the past several years, the Maryland government has debated the issue of regulating electrical power production again. Perhaps it is time to recognize that the effort needs to move forward. Regulation would alleviate the concerns about the financial risk associated with market generators building very large projects that take a half a decade or more to construct and put into operation.
