Yesterday I wrote about the need to rationally compare the physical risks associated with producing energy by burning natural gas against the similar risks of producing energy by fissioning uranium in a nuclear power plant. However, even when decision makers includes some reasonable estimates for those kinds of risks, they are still often choosing to build natural gas infrastructure instead of nuclear infrastructure.
They do that because they have run the numbers using todays rules and their normal investment time horizons. Under those initial conditions, analysts can rationally determine that the financial risk associated with building machines that are technically capable of burning only natural gas or distillate fuel is more acceptable than the financial risk of building, owning and operating a nuclear fission power plant.
Part of the multifront approach I would take in an effort to market fission energy – if that was my job – would be seeking to change the rules of the game. If you happen to be a Star Trek fan, you please recall the story of Captain Kirk’s solution to the purposely unsolvable Star Fleet Academy test scenario called the Kobayashi Maru. If you’re not a fan or have never heard of the story, it is best summarized by this short interaction:
Saavik: “Sir, may I ask you a question?”
Kirk: “What’s on your mind, Lieutenant?”
Saavik: “The Kobayashi Maru, sir.”
Kirk: “Are you asking me if we’re playing out that scenario now?”
Saavik: “On the test, sir. Will you tell me what you did? I would really like to know.”
McCoy: “Lieutenant, you are looking at the only Starfleet cadet who ever beat the no-win scenario.”
Kirk: “I reprogrammed the simulation so it was possible to rescue the ship.”
David: “He cheated.”
Kirk: “I changed the conditions of the test. Got a commendation for original thinking. I don’t like to lose.”
In order to successfully change the rules and model assumptions that disadvantage nuclear energy when compared to natural gas, it is important to understand how those rules currently work. (Kirk could not have reprogrammed the computer without first recognizing how it was programmed to force a no-win scenario in the first place.)
In rate-regulated utility markets, power plant owners bear virtually no risk of fuel price volatility. Nearly every one of those markets includes something akin to Kentucky’s fuel adjustment clause that can be modified as often as monthly to reflect variations in fuel prices. There was some logic associated with establishing that rule, but the effect has been to remove one of the largest financial risks associated with building a power plant from the entity that gets to choose which kind of power plant technology to build. Fuel price volatility risk gets covered by the customers – not just households, but large commercial customers as well.
This graph of fuel prices for electric utilities demonstrates the stark difference between fuel price effects on total production costs between natural gas and the commercial nuclear fuel used in a fission power plant.
Though there are no fuel price adjustments in the unregulated wholesale markets, the way that the markets are structured to set the price based on the “last-in” supplier serves to mitigate fuel price worries — for power plant owners. The market price for natural gas will be roughly the same for all competitors for those last needed kilowatts of capacity, so there is little chance that large suppliers will be underbid by an independent power producer with substantially lower fuel costs.
A factor often referred to as sovereign risk also comes into play. In financial models for nearly all other industries, countries that are not the United States end up with a larger factor assumed for the possibility of negative actions or corruption associated with the country’s leadership. In the models for power plants, however, nuclear energy proposals include a large risk factor for the possibility that a local, state or federal government decision will have a negative impact on the cost and schedule for the project. In the worst case scenario, the project could become another Shoreham, where the owner completes the plant, tests it with commercial nuclear fuel providing the heat and then is forced to decommission the plant without ever generating any revenue.
There are other factors in the complex financial risk model associated with determining whether to build a natural gas plant or a nuclear plant, but I am running short of time, so this discussion will have to be continued. Once we’ve identified the risk factors that put nuclear energy at a disadvantage — in most of the United States — under currently existing conditions, I’ll write about how those rules and assumptions can be mitigated, altered, or overcome. Your comments are welcome and might influence the future posts in the series.