The True Cost of Delays

In the March 2017 issue of Nuclear News

By Linda C. Byus

Historically, a major challenge facing the nuclear power industry in the United States and worldwide has been construction delays, which have created massive cost overruns, thereby limiting the economic competitiveness of nuclear plants. In late December 2016, Toshiba, the owner of Westinghouse Electric Company, announced that it would write down the value of its nuclear operations by several billion dollars in the current fiscal year ending March 2017. (Toshiba was to release the exact number for accounting charges in February; see stories in International, p. 66, and Late News, page 17.) The announced preview of the write-down prompted a 20 percent drop in Toshiba’s stock price in a single day. The company’s announcement is an indication that after 60 years of experience, the commercial nuclear power industry is struggling to establish a construction model that works.

The U.S. nuclear power industry grew out of the Atomic Energy Act of 1954, which encouraged private corporations to build nuclear reactors, and the passage of the Price Anderson Act in 1957 limited the potential liability for nuclear power plant owners, further encouraging private industry participation. In the earliest days of the industry, there was widespread participation by companies in reactor research, design, and construction. With the prospect of low-cost, environmentally clean power generation from nuclear plants, utility companies jumped on the bandwagon. The lesson learned over the last 60 years is that building and operating nuclear power plants is more difficult and more expensive than it looks.

Because of their size and complexity, nuclear power plants are expensive and take a long time to build. Extensive regulatory oversight adds to the cost and complexity. As the industry evolved, it became obvious that small to mid-size utilities did not have the management skills or the financial risk tolerance to construct nuclear plants. A large number of companies have sustained significant financial losses related to the construction and operation of nuclear power plants, and as a result, the U.S. nuclear industry has been consolidated into a few major players that are still committed to the industry.

In spite of the nuclear industry’s somewhat tumultuous history, nuclear power plants still generate almost 20 percent of the United States’ electricity. As a large-scale source of carbon-free electricity, nuclear remains an attractive technology if the industry can just figure out how to control the construction schedule and process. The Toshiba write-down is a reminder that the problem has not yet been solved.

This above is an excerpt from an article that appears in the Power section of 
the March 2017 issue of Nuclear News. The complete article begins on page 20;
members can also access it at click on Member Center; log in with your e-mail 
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Linda C. Byus is a Chartered Financial Analyst and currently runs her own business, BYI Consulting, established in 2004. As a consultant, she provides feedback to utilities’ senior management regarding industry trends and investor concerns as a basis for their strategic discussions and planning.

4 thoughts on “The True Cost of Delays

  1. James Joosten Jr.

    There is another point worth mentioning – namely the nuclear business model. Reactors were originally designed and developed based on a business model involving a very high capital cost complex technology having exceptionally low fuel costs. Utilities and investors expected to recover the large initial investment over time (30-40 years) thru an assured electricity rate recovery process. However, when the electricity markets were deregulated in 1996, those long term investment recovery periods were lost. The nuclear business model was lost. It no longer makes sense. That’s why nuclear construction costs have become a hot topic today. The only place nuclear plants are under construction (in USA) are those regions of the Southeast that resisted deregulation. The nuclear industry is now in a tough spot. It needs the FERC to re-regulate the electricity markets (but its unlikely that it can put the genie back in the bottle). Or the industry needs to re-invent itself with dramatically lower cost reactor designs that are cost- competitive and compatible with the current deregulated markets. Probably the only way to achieve such dramatic cost reductions is via dramatic nuclear safety deregulation. Not lowering safety itself but rather lowering the compliance cost of safety. Can Trump’s new NRC improve regulatory efficiency enough? Let’s hope so.

  2. James Joosten Jr.

    Opposing Views – I would take strong issue with the author’s premises and conclusion that seeks to lay the blame for rising nuclear construction costs onto NSSS vendors such as Westinghouse, Toshiba, GE, Combustion Engineering, and the various architect engineers (AEs). The author states: “The company’s announcement is an indication that after 60 years of experience, the commercial nuclear power industry is struggling to establish a construction model that works.” and “The lesson learned over the last 60 years is that building and operating nuclear power plants is more difficult and more expensive than it looks.” That’s an overly simplistic analysis and it is simply not what happened. Very detailed engineering cost analyses were performed prior to and during the construction of EVERY nuclear plant built in the USA. These analyses were reviewed by dozens, if not hundreds of vendor, AE, utility, and State financial analysts. They were also reviewed by public analysts, lawyers and administrative judges during rate hearings. These people were not all fools nor amateurs. To Monday morning quarterback them is wrong.

    The simple fact is that most nuclear construction costs evolved during the construction process itself due to (1) an evolving safety oversight process whose regulatory hose had no shut-off valve; and (2) due to an economic regulatory process that actually rewarded the utility and investors for regulatory cost increases.

    Virtually every U.S. nuclear plant except Watts Bar, Vogtle 3&4, and Summer 2&3, were built pre-deregulation. Under that old economic regulatory system, vertically integrated utilities were fully refunded for any “prudent” cost increases arising from safety oversight compliance. In fact, most utilities typically earned an additional 9 to 10 percent return (profit) on these capital additions. So, if a $1 billion plant ended up costing $2 billion. This wasn’t a disaster like many analysts naively assume. That’s because the investors not only got their funds back but also made an additional $100 million profit above the original expected $100 million profit. In short, in general, the more money the reactor cost, the more money the investors made. So, a utility would let the costs rise almost to the point of bankruptcy. Seabrook was a prime example.

    The main upside risk from the nuclear investment strategy was the possibility that the utility could run out of money before completing the plant. That’s because the economic regulations required the plant to go on line (i.e., be used and useful) in order to recover the investment in the rate base. Cost overruns were thus a safe bet, almost guaranteed income, unless the utility could not complete the plant.

    Also, during the main U.S. nuclear construction period, electric utility monopolies were considered too vital to fail. No economic regulator had ever allowed a utility to go bankrupt.

    Granted, the reactor vendors and AE’s did make occasional mistakes that increased costs. Some mistakes cost the investors millions. But these mistakes had trivial consequences in comparison to the overall rise in nuclear construction costs and overall profits. To blame the historic reactor cost increases on assumed incompetencies in the nuclear construction industry is simply wrong.

  3. Dennis Huber

    The key word is experience. The last generation of design / engineering / construction personnel that actually built plants has generally retired. So the next generation of competent, capable engineers and construction personnel are faced with a gaping hole in the experience category and are destined to make the same mistakes we made. The second point is that as with anything else, practice makes perfect, The more experience we have with the same design, the cheaper it will become. Prior financial analyses of this problem show that where there are plants with multiple identical reactors, the last reactor built is the cheapest. So the more we build a similar design the less expensive each one will become.

  4. John Kutsch

    This article should get into real cost drivers and delays of LWRs such as civil engineering cost overrun, lack of fabrication talent, rework brought on by excessive inspection etc.
    The core technology of Reactor, heat exchanges, pumps, B.O.P. etc. are almost never the long delay items or cost drivers