U.S. nuclear plant costs may soar after Japan quake

BOSTON/HOUSTON Fri Mar 25, 2011 1:03pm EDT

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BOSTON/HOUSTON (Reuters) - The crisis at Japan's Fukushima plant could hit the U.S. nuclear-power industry in its weakest spot -- by raising costs.

Plant developers have spent years seeking approvals to build the nation's first new nuclear reactors in three decades, arguing that nuclear power offered the United States an opportunity to reduce its greenhouse-gas emissions and become less dependent on imported oil.

They have been less vocal about the cost of building a nuclear plant -- two to four times as much as for a coal or natural gas-burning power station. And with regulators seen mandating new safety measures in the wake of Japan's crisis, the gap will only widen.

The U.S. Nuclear Regulatory Commission has already launched a review of the nation's 104 nuclear plants.

It could consider an array of new safety measures at U.S. plants, from requiring passive cooling systems that could keep reactors and spent-fuel pools safe in the event of a power loss such as the Fukushima plant faces, to seeking stronger containment around spent-fuel pools, to mandating additional backup generators, experts interviewed by Reuters said.

"This is going to impose significant costs, perhaps material costs, before we are done," said John Rowe, chairman of Chicago-based power company Exelon Corp, the nation's largest operator of nuclear power plants.

The Fukushima plant was hit by a March 11 disaster beyond what the engineers who designed it some four decades ago had planned for. It was first rocked by a magnitude 9 earthquake that cut its connection to the power grid, then hammered by a tsunami that knocked out its backup electric systems.

Just as the September 11, 2001 terrorist attacks prompted security agencies around the world to redefine their concept of "worst-case scenario," the Fukushima accident could prompt regulators to demand more robust nuclear plants.

"I would hope that an accident of this significance ... would lay bare the reality of nuclear power," said Jim Riccio, nuclear policy analyst at environmental group Greenpeace. "If it doesn't lead to a much higher level of questioning of the nuclear industry, then there's something seriously wrong."

ECONOMICS 'NOT GOOD'

Tougher defenses could raise the cost of new plants and force operators of current facilities -- including the 23 using the General Electric Co Mark I design used at Fukushima -- to pay for pricey upgrades.

"The economics were not good at all for the U.S. to build new nuclear plants given the low (natural) gas prices and the outlook for huge reserves of gas," said Jone-Lin Wang, managing director for global power for IHS CERA, a Cambridge, Massachusetts-based consultancy that focuses on energy issues.

The cost of building a new nuclear plant in the United States could range from $5 billion to $12 billion depending on the facility's size.

The higher debt burdens that nuclear plant operators carry due to their higher construction costs effectively erase the economic benefit of using a cheaper fuel stock.

Prices of natural gas -- another major source of electricity in the United States -- have fallen about 69 percent from their last peak in July 2008, and the discovery of new supplies of shale gas leave some forecasters to conclude they will remain low for some time.

At the current low for natural gas prices in the United States, electricity from nuclear plants and gas-fired plants is comparably priced.

While some of the proposed design modifications may be comparatively inexpensive -- diesel generators could add $10 million to $15 million to the tab -- observers say new plants are on the margins of economic feasibility already.

NRG Energy Inc has all but stopped work on a $10 billion Texas project, which Fukushima operator Tokyo Electric Power Co helped it to develop. NRG warned that even a slight change in its design could kill the project outright.

"The economics related to the capital budget are right on the edge of viability," said NRG Chief Executive David Crane.

Other companies that have proposed new U.S. nuclear plants include Southern Co, SCANA Corp, NextEra Energy Inc, Progress Energy and Duke Energy.

PASSIVE APPEAL

One technology that may gain more fans in the wake of the Fukushima crisis is passive cooling. At its simplest, such a system amounts to a large reservoir of water stored over the reactor that can slowly release its contents over time, keeping the reactor cool even if a blackout disables other systems.

The idea of passive protection evolved after the partial meltdown of the Three Mile Island reactor in Pennsylvania, the worst nuclear accident in U.S. history.

"Following the Three Mile Island accident in 1979, there was interest in developing a reactor with passive safety features and less dependence on operator actions," said GE spokesman Andy Katell. "Utilities requested a reactor that was simpler to operate, with fewer components and no dependence on diesel generators for safety."

France's Areva SA, Toshiba Corp's Westinghouse unit and GE-Hitachi have all designed reactors with such passive protections as an inherent part of their design.

"Adding more safety features can be expected to make nuclear power more expensive compared with other low-carbon alternatives that do not carry the same risk," said Ellen Vancko, manager of the Union of Concerned Scientists' nuclear energy and climate change project. "We all will have to decide at the end of the day, once lessons are learned, how much safety we are willing to pay for."

But there are engineering limits to how much can be done to make an existing nuclear plant safer.

"Retrofitting an existing fleet of nuclear plants with new passive design is not practical and would require extensive re-engineering of the plant and changing out major pieces of equipment," said Dean Oskvig, chief executive of Black & Veatch Corp's energy arm, which helps engineer and build nuclear plants. "Passive designs are an advanced technology and not an add-on feature."

Companies that operate older reactors will likely face costly upgrades over the longer term, said Fitch Ratings. It noted that plants located in coastal and earthquake-prone areas -- such as California -- are most likely to be affected and that higher costs could weigh plant operators' credit ratings.

COSTS TO HIT OPERATORS

History suggests that any large-scale retrofits of existing nuclear plants would be borne by plant operators, not the companies that designed and built the reactors.

"We have gone through this after (Three Mile Island), where there were major retrofits," said Fitch Ratings Senior Director Phil Smyth. "Ultimately, it becomes a capital/operating cost of the owner."

He said it is too early to say what these upgrades will cost.

Meanwhile, huge new supplies of natural gas in the U.S. and the absence of any cost on carbon emissions have pared nuclear's price advantage to near parity with gas and coal, according to a Massachusetts Institute of Technology study.

"The design issues of the reactors are going to be less important to the future of the nuclear industry than the economic ones," said nuclear critic Michael Mariotte, executive director of the Nuclear Information and Resource Service. "This is a reminder that a $5 billion investment can go to a multibillion liability in a few hours."

(Reporting by Scott Malone in Boston and Eileen O'Grady in Houston, additional reporting by Scott DiSavino and Matt Daily in New York. Editing by Martin Howell)

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