Aaron Zahn, the interim managing director and CEO of the Jacksonville Electric Authority (JEA), believes it is time to give up on the Vogtle expansion project. On August 17, he sent a letter to James Fuller, the President and CEO of of MEAG (Municipal Electric Authority of Georgia) Power detailing his company’s desire to rid itself of its 2008 agreement to purchase 206 MWe for 20 years from Vogtle Units 3 & 4 at a price that will be based on capital recovery over a 40 year facility life plus operations and maintenance.
His company’s proposed action is to cancel the project, pay a cancellation fee, and pay off its share of the already expended plant costs over the initial 20 year period of its agreement.
According to a report provided by Navigant Consulting in September 2017 (starting on page 5), the company could accept paying off those obligations without receiving any electricity, buy market priced electricity and generating capacity and still save its customers between $345 to $727 million (present value in 2017 dollars). Though Georgia Power, the Georgia Public Utility Commission and the other partners in the project decided in December 2017 to continue construction, that decision was based on a cost to complete estimate that has recently grown by another $2.3 billion.
JEA does not have a direct vote in determining whether or not Vogtle 3 & 4 construction continues; its interests are represented by MEAG Power, which also represents a 49 municipal electric utilities located throughout the state of Georgia.
Before making such an impactful decision, it would be prudent for JEA directors to invest in an updated analysis that includes information that was not available in September 2017 and that more fully explores the risks associated with the “no-go” decision.
Limitations of existing analysis
When Navigant Consulting produced its report in September 2017, there was still deep uncertainty regarding the project’s eligibility for an $18 per megawatt-hour production tax credit that was provided by the Energy Policy Act of 2005 and used as part of the financial modeling that supported the initial final investment decision to start the project. The uncertainty related to the expiration date of project eligibility.
During the period since September 2017, legislation has been enacted that eliminates the expiration date and removes the risk that the project will not receive the federal assistance promised. Everyone needs to remember that the assistance was provided as an incentive to attract leaders in what was expected to be a difficult process of restoring the US’s nuclear plant construction capability after a hiatus lasting more than three decades.
The cancellation costs assumed in the September 2017 report must also be revised to take into account the expenditures that have been made during the past year.
The final area where the Navigant analysis needs improvement is in the range of future natural gas prices considered. When the analysis was produced, there was a tightly limited range of modeled price trends, essentially all of which assumed that the abundance of gas stored in tight shale rock will keep gas prices low with annual increases that are only 1% above an assumed rate of general inflation. Here is how the report deals with the magnitude of the risks associated with variations in the future price of natural gas.
There are also risks around the replacement power forecast in the No Go scenario. While the No Go scenario eliminates the significant construction cost risk related to Vogtle, there is some uncertainty around the replacement power forecasts which are driven by gas prices over the 20-year period, environmental regulations, future technological advancement and potentially carbon prices.
Though many energy analysts believe that future gas prices will be relatively low and will increase slowly at a moderate pace, that belief isn’t justified by the volatile history of natural gas prices during the 30 years since they were deregulated. Large abundant reservoirs do not eliminate the risks associated with weather variations, changes in regulations, successful efforts to increase demand through both positive and negative marketing, or more concentrated dependence on a single fuel choice.
Navigant’s future gas price model is proprietary, but it has published at least one slide show that provides clues about underlying assumptions.
Interestingly, one of the assumptions used in its prediction that gas prices will remain low is that the amount of electricity generated by US nuclear plants each year will grow by 25 billion kilowatt hours between now and 2030. That assumption – derived from an EIA prediction – rests on completing both Vogtle and VC Summer while also maintaining existing plants through the end of their licensed operation. Think about that assumption in the context of using it as one of the inputs for a decision about whether or not to complete the only remaining nuclear construction project in the US.
It’s also a questionable assumption to believe that there will not be any price associated with carbon emissions during the 25 years between now and the end of JEA’s 20 year power purchase agreement for 206 MW of emission-free electricity from Vogtle Units 3 & 4.
There is certainly a risk that the cost to complete Vogtle is still underestimated, but the risk that natural gas prices will misbehave should be quantified. No one should forget that today’s gas prices are still less than half of the level they achieved during the period from 2006-2008. That statement does not even consider any inflation adjustment for the 10 years that have elapsed since that apparently dimming memory.
JEA tells its customers that their rates are kept in check by a diverse portfolio of fuels and the capability to switch between them. Unfortunately the current menu includes coal, residual oil, pet coke and natural gas. JEA’s ability to switch between those fuels is likely to be more and more constrained to the single, historically volatile choice of natural gas if they manage to back out of the Vogtle PPA.