Creating the Business

Environment for New Nuclear

Plants:

Financing, Regulatory, Workforce,

and Manufacturing/Supplier Issues

Tom HoughtonSeptember 20, 2005

Momentum Toward New Plants

• Proven performance, safety• Improved regulatory oversight, licensing• Need for Power and other benefits• New License Process being tested• Barriers:

– Financial– Regulatory?– Workforce– Manufacturing/Suppliers

577

763

500

600

700

800

1990 2003

Nuclear Plant Output:Growth During the Last Decade

Equivalent to 23 new 1,000-megawatt power plants

Year

Bill

ion k

Wh

Source: EIA – Updated 11/04

'82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04*

55

60

65

70

75

80

85

90

95

Ca

pa

cit

y F

ac

tor

(%)

Industry PerformanceIs Consistently Excellent

90.7% in 2001

91.9% in 2002

89.6% in 2003

90.5% in 2004*

*NEI Estimate for first three quarters of 2004

Source: EIA & NRC

85 87 89 91 93 95 97 99 01 03

0

1

2

3

4

5

6

7

8

9

10

11

Source: Federal Energy Regulatory Commission/EUCG

Nuclear 1.72

Coal 1.8

Gas 5.77

Oil 5.53

U.S. Electricity Production Costs(in constant 2003 cents/kWh )

U.S. Electricity Production Costs(in constant 2003 cents/kWh )

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

72.4% 25.3% 1.2% 1.0% 0.1%

Nuclear Hydro Geothermal Wind Solar

Emission-Free Sources of Electricity

Emission-Free Sources of Electricity

Source: U.S. Energy Information Administration

The Need for New Generation

• US needs 300,000+MW of new generation by 2025– Baseload needed after 2010

• Increased environmental controls raise siting and cost problems for fossil fuel plants

• US industry needs low cost energy to sustain global competitiveness– A diverse and balanced generating portfolio– Non/low-emission base-load generation – Nuclear -- lowest cost base-load generating option

Reduce US Dependency on Foreign Suppliers

• 1,000MW capacity combined cycle plant operating at 90% capacity factor

• Natural gas fired ~ 77 billion cu.ft/yr.

• Oil fired ~ 12 million barrels/yr

• By 2015 10% - 15% of US natural gas supplies will be from non-North American sources

• Nuclear can help stabilize natural gas demand, lower costs, improve price predictability, and reduce dependency on foreign suppliers

New Nuclear Plants?

• None ordered for 30 years• Reasons

– Poor industry project management• Design/Construct-As-You-Go approach• Unreliable and prolonged construction

– Massive financial impact for some companies

– Inefficient, unpredictable & unmanageable licensing process

– Until mid ‘90s an anemic operating record

Industry Project Management Problems -- Addressed

• Industry initiatives to improve economic competitiveness– Applied lessons learned from problematic construction

projects– Standardization

• Intensive planning using standard practices• Modularized construction

– Computerized design and scheduling– Outages reduced ~ 30 days– Benchmarking

Licensing Problems Being Addressed

• 1989 – 10 CFR Part 52• Introduced a new licensing process for new

nuclear plants– ITAAC (Inspections, Tests, Analyses and Acceptance

Criteria)• Provides more information earlier with more

opportunity for public comment and input• Resolves issues and contentions earlier

– Reduces uncertainty• Requires increased planning and project discipline

How Does The NewLicensing Process Work?

Three-part process:

Early site approval

Design certification

Combined license for construction and operation

Early Site Permits

• Site approval obtained before company decides to build

• Company “banks” site up to 20 years

• Decision made, design chosen later

• Greater certainty in moving forward

Design Certification

• Advance NRC approval for standardized plant designs

• Lengthy delays avoided before site preparation, construction

• Four designs approved to date

Combined Construction and Operating License

• One license for operating, building plant

• Option for referencing certified design, early site permit or both

• Early focus of public comment on plant ownership, organization, operations

• Greater regulatory certainty, bolstering financial certainty

Public Comment Opportunity: Old Licensing Process

Construction Permit Application *

Construction Permit Application *

ConstructionConstruction Operating License Application

Operating License Application

Operating License Issued *

Operating License Issued *

OperationsOperations

* Public Comment Opportunity

Public Comment Opportunity: New Licensing Process

Early Site Permit *

Early Site Permit *

ConstructionConstructionConstruction

ITAAC satisfied *

Construction ITAAC

satisfied *

OperationOperation

* Public Comment Opportunity

Combined License *

Combined License *

Design Certification *

Design Certification *

NEI 2006 Business PlanCORE ESSENTIAL

ACTIVITY

Enhancing the Business

Environment for Operating Plants

CORE ESSENTIAL ACTIVITY

Creating the Business

Environment for New Plants

Managing Used Nuclear

Fuel

Advancing a National

Energy Policy

Sustaining the Nuclear

Infrastructure

Branding, Building

Public Support

Enhancing The Regulatory Environment

Security

Emergency Planning

Materials

Risk-Informed Regulation

New Plant Regs.

NRC Effectiveness

New Plant Incentives

Price-Anderson Renewal

Appropriations for R&D, Nuclear Power 2010

Environmental Policy

Fuel Supply

Workforce

Manufacturing Base

Financial Community Outreach

Adequate Funding

Funding Reform

Licensing

EPA Standard

Nevada

Project Support

Advertising

Media Relations

State Govt., Labor Outreach

Environmental Programs

5 ESSENTIAL ACTIVITIES

Sustaining Nuclear Infrastructure

3-5 year GoalProvide industry leadership and coordination in identifying and addressing the critical nuclear workforce, fuel, and physical (manufacturing/ supplier) infrastructure needs that will:– Support continued safe, reliable and economic

operation of current plants, – Ensure that physical and human resources are

available for new plant design, licensing, construction and operation, and

– Maintain investor confidence in the industry and its future

New Plant Objectives & Goals

• Start construction of at least one new commercial nuclear power plant in 2010

• Start construction on at least three additional plants, including at least one merchant plant by 2012

NEI New Plant Task Forces

CIP-IMS TF

Financial &Environmental

Issues

NEI &New PlantExecutiveOversight

Group

New PlantSecurity TF

COL TF

COL ApplicationTF

Early Site PermitTF

New Plant SeismicTF

EPRI New PlantCommittee

SecurityWorking Group

New Plant LegislativeTF

New Plant(Executive) TF

ESP Applicants

InfrastructureWorkforce &Equiipment

Outreach &Communications

Financing Issues• Significant changes in electricity industry since

1970s– Many companies not operating in cost-of-service

• Wall St. uncertainty over unproven licensing process– 2% - 5% Premium for first new plants

• Large capital projects diminish financial performance metrics – earnings per share, etc

• Innovative approaches to financing large capital projects– Consortium approach– Financial structure & incentives to overcome first-of-a

kind costs and perceived licensing uncertainty– Loan guarantees, accelerated depreciation, tax credits,…

Financing: Industry Requirements

• Investment stimulus– Offset higher cost of first units– Ensure first new plants are economically viable– Mitigate earnings dilution– Provide required returns to debt investors (8-

9%) and shareholders (15%)

• Investment protection– Protect project developer against delays due to

factors beyond project developer’s control

The Energy Policy Act of 2005

• Price-Anderson Act renewed for 20 years– Crucial for new plants to proceed

• Antitrust review eliminated• Nuclear Security

– New rulemaking for Design Basis Threat

– Force-on-Force

• Personnel and Training– Exempts nuclear industry from implementing DOL

training guidelines

– Saves millions of dollars in addition to what has already been done to meet NRC requirements

The Energy Policy Act of 2005• Loan Guarantees up to 80% of project cost

– Self-financing Energy Loan Guarantee Fund– Any innovative energy technologies that “avoid, reduce,

sequester air pollutants or anthropogenic emissions of greenhouse gases”

– Either pay cost of guarantee upfront or over life of project

– Could save $ 300 million in interest costs• Standby Support for New Reactor Delays

– Financial/lost sales for delays beyond control of owner• Regulatory Failures• Litigation

– 100% cost of delay up to $500 million for first two plants– 50% cost up to $250 million for plants 3-6

Production Tax Credit of 1.8¢ / kwh

• Places nuclear on equal footing with renewables

• For 6000 MW of capacity from new nuclear power plants for their first eight years of operation

• Pro rated between new plants based on Secy Energy allocation

– = Allocation in MW/nameplate MW* 1.8¢ * KWH generated

– Example: 750MW allowance/1000MW plant could receive 1.35¢ * KWH generated

• Limited to $125 million/ 1000MW allocated

– Example: a 1350MW plant with a 1350MW allowance could receive up to $169million

• 1350MW * ($125M/1000MW) = $168million

Decommissiong Funds

• Eliminates distinction between qualified and non-qualified funds

• Amounts collected prior to 1984 were non-qualified

– Can now be expensed over life of plant

– and earnings taxed at 20% vs. 35%

• Represents about $1.3 billion in industry savings

• Also eliminates distinction between “cost-of-service” and merchant plants

– Will allow new plants to deduct payments into decommissioning fund

– Net Present Value of funds needed: $108million

Authorizes $ 2.7 Billion for Nuclear Research and Development

• Advanced fuel cycle initiative to evaluate recycling and transmutation

• University science and engineering support• Nuclear Power 2010 Program• Generation IV reactor initiative• Next generation nuclear-hydrogen cogeneration

($1.25 billion)• Demonstration of hydrogen generation at two

existing nuclear plants ($100 million)

Current Deployment Status• 3 ESP applications progressing

– Permits to be issued in 2006/7• AP 1000 on track for being certified • GE ESBWR submitted in August 2005• Framatome EPR DC submittal in 2007• DOE signed agreements with three consortia

– Detailed design & preparation of COL applications

– Dominion & 2 NuStart COL submittals late 2007

Regulatory Process & Technical Issues

• ESP– Environmental finality– Seismic ground motion methodology and high

frequency• ITAAC process and Construction Inspection

Program• Industry & NRC comprehension of Part 52 process

– Contents of a COL application (NEI 04-01)

Time-to-Market

• First applications– ESP 33 – 36 months– Design Certification 36 – 60+ months– COL 27 – 48+ months depending on whether

application references DC and/or ESP• Nth applications

– COL 22 months – 36 months• Does the applicant reference ESP?

– Environmental reviews controlling factor• COL issuance to commercial operations 48 - 54

months

Workforce Issues

• 50% of workforce will retire in the next decade– Knowledge retention a major issue

• Shortages in engineers & health physics– Hiring now to ensure knowledge and

experience is transferred before 2015• Major concern in shortages of skilled trades

– Health physics technicians, I&C, welders• National program with Dept. of Labor, unions,

schools, universities & community colleges to ensure sufficient skilled workers are available

2001 Survey Predicted Need for 90,000 New Workers

Cumulative Demand for New Workers By Segment

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Universities

Fuel Cycle

Outages

Eng Design, Svcs & Const

Production Plants

Govt & Contractors

2001 Survey Predicted Insufficient Number of Degreed HPs and Nuclear Engineers

10 Year New Worker Demand As A % Of New Worker Availability

0%

50%

100%

150%

200%

250%

2003 Survey Indicated Challenges

0

4,000

8,000

12,000

16,000

18-22 23-27 28-32 33-37 38-42 43-47 48-52 53-57 58-62 63-67 67+

1. Potential Retirees are defined as employees that will be older than 53 with 25+ years of service, or older than 63 with 20 years of service, or older than 67 within the next five years.

Source: NEI Nuclear Staffing Survey

General Attrition ~10,000 (18%) Potential Retirees: ~16,000 (28%)

Workforce Deliverables• Report on workforce needs through 2020• Expand state and federal funding for workforce

programs• Conduct senior leadership development on

strategic issues, policy interactions, and communications

• Implement supplemental staffing action plan• Coordinate nuclear focus at three national

recruiting events• Increase NEI participation on visiting

committees of engineering schools

Physical Infrastructure Issues• Qualified suppliers of nuclear equipment, components,

materials and commodities• Fabrication capability and capacity for forging large

components such as reactor vessels• Long lead times for major components• Adequate supplies of commodities (e.g., SS pipe,

specialty metals)• Modular construction capabilities• Transportation• Competition for scarce resources should worldwide

demand for reactors surge• Political and economic risks of offshore production

Physical Infrastructure Deliverables

• Establish industry task force to frame physical infrastructure issues (8/3/05)

• Conduct analysis of key components/commodities– Based on vendor construction schedules/lead times– Apply plant order scenarios to determine demand

• Conduct analysis of current suppliers vs. planned needs for new construction

– Demand scenarios– Global demand– Other US infrastructure demand (Power plants/Refineries

• Develop integrated strategy to address physical infrastructure issues

Conclusion

• NEI is moving forward on many fronts to support new plant deployment– Regulatory– Financial– Workforce– Manufacturing and Supply