Legal and Regulatory Frameworks for Nuclear · PDF file · 2014-07-03Legal and Regulatory Frameworks for Nuclear Power Risks, ... • The regulatory framework must address economic

© 2014 Winston & Strawn LLP

Legal and Regulatory Frameworks for Nuclear Power

Risks, “Subsidies” and Public Acceptance

David A. Repka June 30, 2014


Which Generation

Technology?

Value of Baseload

Power

Cost of Energy Storage

Value of Carbon

Reduction

Impact on Supply

Diversity

Impact on Grid

Reliability Potential Scale of

Generation

Supply Resilience

Value of Technology

Number and Type of Jobs

The Basis for an Electricity Policy


• “We live in an era of man-made climate change” (IPCC 2014)

Climate

• Retiring baseload plants means loss of grid reliability (FERC/NERC 2014)

Reliability

• Nuclear plants bring significant potential for economic development

Economic Development

The Case for Nuclear Deployment


Obstacles to Nuclear Development

• Project schedule, cost • Licensing/regulatory

uncertainties • Safety and liability uncertainties

Risks

• Need consistent regulatory framework and support

• Political & public opposition to “subsidies”

Markets & “Subsidies”

• Reliable + Cheap + Safe + Green Public Acceptance


Estimated Costs of Power Plants/Electricity

Levelized Capital (2012

$/MWh)

Fixed O&M (2012

$/MWh)

Variable O&M (2012

$/MWh)

Natural Gas – CC 14.3 1.7 49.1 Coal 60.0 4.2 30.3 Wind – Onshore 64.1 13.0 0 Nuclear 71.4 11.8 11.8 Solar PV 114.5 11.4 0 Wind – Offshore 175.4 22.8 0 Solar – Thermal 195.0 42.1 0

Source: U.S. Energy Information Agency, Annual Energy Outlook 2014

U.S. Average Levelized Costs (2012 $/MWh)

Natural Gas – CC 61.1 – 75.8

Wind – Onshore 71.3 – 90.3

Coal 87.0 – 114.4

Nuclear 92.6 – 102.0

Solar PV 101.4 – 200.9

Wind – Offshore 168.7 – 271.0

Solar – Thermal 176.8 – 388.0


Financing Issues

• Balance sheet/revenue stream financing • Generally not viable for U.S.

electricity generators: market capitalization too small, risks too high

• Project financing • Skepticism in capital markets

• Flat electricity demand

• Regulatory (NRC) issues • Financial qualifications

• Foreign ownership


Tilted Playing Field?


Does a national or regional economic framework

foster or inhibit nuclear

deployment?

• The regulatory framework must address economic risks: • Financing • Capital cost curves • Operating cost recovery • Safety

• “All of the Above” is not a nuclear energy strategy

Varying Models

• Public Utility: Cost-of-Service Rate Regulation

• Market: Merchant Generators

• Sovereign / State-Owned

• Long-Term Power Purchase Agreements

Legal and Regulatory Economic Framework


Traditional U.S. Model

Central station generation, long

distance AC transmission

Vertically integrated

generation, transmission, distribution

Not distributed generation

Planned Generation

Mix

Low cost sources

“subsidize” higher cost

sources

Supports policy goals (fuel

diversity, grid reliability,

environment)

Allows local siting of facilities

Cost Recovery

Cost-of-service rate regulation

Reviewed for prudency

Construction-work-in-

progress rate recovery

U.S. Projects

• Vogtle 3, 4 (Georgia)

• Summer 2, 3 (S. Carolina)

• Turkey Point (Florida)

Public Utility Model (Rate Recovery)


Cost-of-Service : Direct – Goal Oriented


Market approach: • Reduces cost • Fosters economic

efficiency • No central authority

specifying generation mix

Cost may trump policy: • Grid reliability • Fuel price volatility • Carbon profile • Diversity of supply • Innovation

Negative pricing due to production

tax credits for wind – Quad Cities (Illinois, USA)

Capacity zones inadequate to

value baseload – Indian Point (New

York)

Nuclear units uneconomic in short term (gas prices): early

closures in U.S. – Kewaunee,

Vermont Yankee

New merchant development

stagnant in U.S. – South Texas

Project, Calvert Cliffs 3

“Deregulated” Market-Based Supply (Merchant)

Distortions in Overall Energy/Capacity Supply


Everyone Goes for the Ball?


Demand-Side Policy Tools (Market Influencers)

User Incentives • Feed in Tariffs • Investment tax credits • Tax-exempt financing • “Green certificates” • Rebates • Matching grants

Pricing •Externality pricing (e.g., taxes, cap-and-trade)

•Price stabilization (e.g., floors or caps)

Regulatory Mandates • Portfolio standards • Efficiency codes and standards • “Best Available Control Technology” • Government procurement • “Net Metering”

Industry/Market Restructuring •Deregulation •Re-regulation •Mandatory unbundling •Nationalization


Supply-Side Policy Tools (Technology Push)

Direct Public Funding of Research & Development

Indirect Subsidies to Innovators

• Production tax credit • Accelerated depreciation • Matching grants • Loan guarantees • Procurement programs • Purchase guarantees • Price guarantees

Government-Financed Seed and Venture Funds Monetary Prizes and

Awards


Direct Expenditures

Tax Expenditures

Research & Development

Fed & RUS Electricity Support

Loan Guarantee Total

Share of Total

Subsidies and Support

Coal 37 486 575 91 0 1,189 10.0%

Natural Gas/ Petroleum Liquids 1

583 15 56 0 654 5.5%

Nuclear 0 908 1,169 157 265 2,499 21.0%

Renewables 4,178 1,347 632 133 269 6,560 55.3%

Biomass 6 54 55 0 0 114 1.0%

Geothermal 115 1 72 0 12 200 1.7%

Hydro 17 17 51 130 0 215 1.8%

Solar 409 99 287 0 173 968 8.2%

Wind 3,556 1,178 166 1 85 4,986 42.0%

Unallocated 75 0 0 0 0 75 0.6%

Transmission & Distribution 461 58 222 211 20 971 8.2%

TOTAL 4,677 3,382 2,613 648 555 11,873 100%

Source: EIA, Direct Federal Financial Interventions and Subsidies in Energy Markets in Fiscal Year 2010 (July 2011)

U.S. Electricity Support and Subsidies – 2010


Complex Markets: Tiki Taka?


Consistent Support or Subsidies? (Renewables in Europe) • A number of countries introduced incentives for renewables – Feed-in-Tariffs

(FiTs)

- Guaranteed electricity purchase price above market prices

• After the financial crisis, many countries reduced the FiTs • Spain: reduced solar FiTs = reduced rates of return on investment

• Czech Republic: 26% levy on FiT

• Romania: suspended Green Certificates, cut incentives

• Bulgaria: 20% tax on income from solar and wind, effectively reducing FiT

• International investors in these countries may seek redress under international instruments such as Energy Charter Treaty or bilateral investment treaties • International arbitration


Other Economic Models

• Sovereign/State-Owned Model: Government bears all the risk

• Public Corporation Model: TVA in U.S.

• Build-Own-Operate (BOO): Allows for contractual allocation of construction risks, operation/revenue risks, political risks

• Finnish model (Okiluoto 3): TVO joint venture comprised of energy consumers to invest in new units: expanding equity partners/diversify risk

• Long-Term Power Purchase Agreements: • Hinkley Point

• Contracts for Difference (CFD): “Strike price” – floor or guaranteed base price

• EU concerns regarding State aid (“subsidies ”)

• Akkuyu • Long-term (15-year) power purchase agreement


Legal and Regulatory Liability Framework

• Necessary for vendors and operators

• Crucial for Public Acceptance • But, is this a “Subsidy”?

• Nuclear is not really unique…

• Accident and security risks of other infrastructure facilities

• Insurance schemes effective for other high-cost events • Catastrophic crop failures

• Major floods, hurricanes, and earthquakes

• Bank failures

Strict liability

Exclusive liability

(operator)

Financial Protection

Liability limit

(time and amount)

Single tribunal for recovery

IAEA Principle Elements


Nuclear Safety Regulation

• Public Acceptance! • Requirements justified by

safety benefits?

• Sufficiently predictable to support business decisions?

• Is the regulatory burden an undue disadvantage in competitive markets?

• Does regulatory process truly support energy innovation?

• Independent • Well-funded • Robust and visible

oversight Regulator

• Predictable licensing • Regulatory stability

Framework

• Promotes acceptance • Transparency • Can cause delays

Public Participation


In Search Of: Joga Bonito


Nuclear Innovation

and Deployment

Clear and Consistent

Political Support

Public Acceptance

Comprehensive Legal and Regulatory Framework

Conclusions: The Nuclear Challenge


Thank You!

Documents

Legal and Regulatory Frameworks for Nuclear · PDF file · 2014-07-03Legal and Regulatory Frameworks for Nuclear Power Risks, ... • The regulatory framework must address economic