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Vogtle Nuclear Project: More Overruns, More Delay (Georgia Power reconfirms the perils of government-subsidized energy)

Late last month, Georgia Power (Southern Company) filed its eighth semi-annual report on the construction progress of its 2,240-MW two-unit Vogtle nuclear plant to the Georgia Public Service Commission (GPSC).

The already bad news got still worse–not surprising for a project that is all but financially insulated from its own failure. As I previously wrote at MasterResource:

With a pending $8.6 billion federal loan guarantee, a cap on liability, production tax credits and pre-collection of profits this makes Georgia Power the nation’s biggest welfare queen.

Georgia Power’s latest report to state regulators indulges in self-praise, shifts blame for growing problems, and employs misleading analysis. The Company asks the GPSC to approve an additional $737 million in cost and add 15 months to the project’s schedule. Since Georgia Power has 45.7% ownership, the entire $14 billion project has additional cost of over $1.6 billion.

Still, Georgia Power sports an A+ rating credit rating. Why? Because regulators are expected to approve this and future cost overruns for automatic recovery. This would include adverse litigation judgements (see below).

Fitch expects that any adjustments to the overall project costs are deemed recoverable by the GPSC,” the A+ report explains. However: “Significant project cost overruns that cannot be recovered in rates or unexpected long deferral periods for project cost recovery would be adverse credit factors.”

The Winners (Them, not Us)

Throughout the report, Georgia Power repeatedly assures that the project is “safe, clean, reliable and affordable.” Presumably, this applies to the cost overruns as well.

The nuclear industry applauds the cost inflation, which means more jobs and longer work hours for workers. More ratebase also means more local tax collection. The Nuclear Energy Institute’s SVP of communications tweeted the good news.

 

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But what about consumers, not to mention federal taxpayers who are involuntary underwriting of the project?

And what about opportunity cost given that resources spent in one direction are lost elsewhere? Scarce means to unlimited ends necessitates economy to do as much with our limited resources as possible. Less spent on generating and consuming electricity leaves money (resources) for other things, from education to family outings.

Cost maximization (read overruns) is hardly good news to anyone but the cronies.

Completion Still Expected

One of the excuses for delay is that there is slow approval by the Nuclear Regulatory Commission for completed and changed designs. However, the independent monitor for the project says the NRC is being very cooperative and that slow approvals are a result of the contractor and Georgia Power not having their act together.

In each of these six-month reports, the Company has placed great emphasis on the cost-to-complete analysis. Here they compare the cost to finish the project to the cost for the same capacity using an alternate technology; namely natural gas-fired units.

Since this is comparing a half-built nuclear plant against the full cost of gas plants, the analysis unsurprisingly shows the better option is finishing the nuclear units.

Georgia Power concludes from the analysis that finishing the plant is a $4 billion benefit for customers. Yet utilities all over the country are saying gas beats nuclear. To determine if customers are better off, an analysis must be made comparing the two options at full cost for each–if for no other reason than Vogtle being the Never Again poster child for nuclear.

“Nuclear Renaissance”

Georgia’s elected Commissioners have bragged in regulator meetings all across the country about their leadership in the “nuclear renaissance.” They can never cancel the project even if Georgia Power were not water-boarding the numbers into the appropriate confession.

When Georgia Power was seeking approval for the project, they demanded that they could collect all sunk cost, with profit, if the project were cancelled. In what must have been a mere oversight, this cost was left out of the analysis of customer benefits.

Still pending out there is the matter of about $900 million in contract disputes. Both Georgia Power and the contractor say these are real costs that were incurred. Despite whoever ends up paying for this, it is an addition to the total cost of the facility.

… Fading

Vogtle #3 and #4 started at $14 billion. There is $900 million in cost that may be paid by others and $1.6 billion in acknowledged over-runs (and counting).

That puts us at $16.5 billion and causes us to wonder if the project could have gotten the go-ahead if these numbers were known earlier. Georgia Power asserts the final rate impact on customers when the project is complete is the same or better. Smoke and mirrors: The project now has an additional 15 months of collections through a surcharge that recovers interest and profits.

Meanwhile, the Sanmen project in China, which is identical to the Vogtle project using the same contractor, is under budget at $5.9 billion and ahead on its 4-year schedule. The difference between the projects is the perverse incentives of the U.S. regulatory system that rewards failure and managerial incompetence.

The verdict is clear. Nuclear needs its own market test outside of  public-utility regulation and without federal loan guarantees. That’s called market capitalism. Cronyism and rent-seeking are just too expensive to let this happen again.

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Jim Clarkson, president of Resource Supply Management, an energy procurement and management firm based in Sumter, South Carolina, is a director of the Institute for Energy Research and IER’s advocacy arm, the American Energy Alliance.

2 comments

1 JohnInMA { 03.28.13 at 8:26 am }

Some very good points made here about what I view as essentially the overwhelming, uncontrollable nature of massive nuclear facility builds and commissioning/decomissioning. (Deliberately left out operations.) As with so many huge projects burdened with increasing federal regulatory entanglements, much of the problem is below the surface and attributable to another key factor. In other words, with Vogtle, I suspect a lot of the overrun costs aren’t just attributable to mistakes in execution. (Likewise for the high original costs.) Every supplier of materials and services is equally affected and equally burdened, anxiously looking for every opportunity to recoup. From my exposure a generation ago, here is one example (all 1980s references, including dollars): Two liquid injection systems – meaning very small bore (0.5″ or so) were to be reworked in construction phase due to new seismic data. One system was benign (not related to the primary reactor loops), the other was considered high requirement (injected liquid into the primary loop). Two identical valves were needed among other things. For the benign system, cost was approximately $1.5k. For the higher class (A? Don’t recall), $4.5k. Same materials, same build, different certifications (material traceability, testing, etc.). Time for redesign approval: Benign – two weeks. Higher class – three months, including two extra agency reviews. Not designers. Not builders. Not inspectors. Agencies. With that time and extra ‘handling’ comes costs, of course. When you dig into the ballooning cost differentials you find a significant indirect cost associated exclusively with risk. Attorneys. Lawsuits. Some might be valid, some surely frivolous, if and when they occur. The bankrolls many suppliers work to accumulate are admittedly insufficient (or most likely insufficient) to battle more severe litigation, were it to happen. But the money certainly is sound in the most pure actuarial sense.

So, I suspect in the case of Vogtle and its doppelganger in China, there are different entanglements below the surface as well as obvious ones. My instinct says the ability for the same designers, suppliers, and builders (not sure exactly who is meant by “contractors”) to be more financially successful in China is strongly related to behind the scenes risk-induced costs rather than engineering or scheduling prowess, for example.

The boogeyman of potential ‘nuclear catastrophe’, whose eventuality is highly debatable (especially how much it has ever really occurred) gives license to all kinds of risk feeders to enrich themselves, beginning with activism at the first notion of a project’s life, through every possible event during construction and operation, ending in the decommissioning and disposal. Within an hour of me there are two gas-fired plants, one suffered a test-phase explosion at an earlier date, killing a number of contractors. The second was a little more current, so was resisted by activists for that reason and the usual (what I call the ‘smokestack resistance’.) Neither of those incidences and efforts added any significant cost or delay. In fact, the resistance is often short lived by comparison to nuclear plants.

As a criticism – it’s totally unclear how the tweet relates to only the cost overruns or that it was generated only as a response to them. It seems to me it was simply a knee-jerk action in keeping with the political climate that has been created since the first “investment” of taxpayer dollars into the ‘ailing’ economy (i.e. “stimulus”). If you aren’t putting job numbers and “revenue” persistently out front, you risk losing the PR battle.

2 Weekly Climate and Energy News Roundup | Watts Up With That? { 03.31.13 at 9:22 pm }

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