A Tennessee businessman bought the two unfinished Bellefonte reactors from TVA for $111 million.

His plan to complete them may encounter serious headwinds.

The Tennessee Valley Authority (TVA) brought the long, sad saga of its failed attempt to build two 1,200 MW nuclear reactors at Scottsboro, AL, to a close this week with the sale of the 1,400 site to Franklin Haney and his firm Nuclear Development LLC. His plan to complete on both of the reactors with an investment of up to $13 billion has serious short comings.

Haney has promised to complete both units bringing upwards of 3,000-4000 jobs to the region during construction and 2,000 permanent jobs.

Why TVA Sold the Bellefonte Site

Back in 2011 TVA’s board of directors had a very different idea. It voted to complete the two Bellefonte reactors at an estimated cost of $11 billion. Later it hedged its bets saying it would only move forward with the twin reactors after fuel was loaded at Watts Bar II. That reactor was completed this year, the fuel has been loaded, and it entered revenue service earlier this year.

Previously, TVA had made several attempts to complete the Bellefonte reactors at one point hiring Areva to conduct engineering design studies to figure out whether it was technically feasible and cost effective to do so down that road. It also briefly entertained the idea of abandoning the partially built reactors altogether and building two Westinghouse AP1000s in their place. Neither option was pursued by the utility to any reasonable stage of maturity.

Is this the Current Project Viable?

As much as this blog has a pro-nuclear bias for topics it covers, this is one time where skepticism outweighs enthusiasm. Here is a discussion of some of the key issues.

The key question is whether there is a predictable and attractive return on investment (ROI) relative to cost of retro fitting one or both reactors. TVA stripped out most of the salvageable equipment out of both of them, except the RPVs, so any estimate of their degree of completion is a SWAG.

Areva had been under contract with TVA to do the engineering design work to bring back one of the two reactors. That was stopped some time ago. Haney would have to buy the IP. The good news is that no fuel was ever loaded so there is no residual radioactivity at the site.

Then there is the need for a customer, besides TVA, to buy the power. TVA has said that it doesn’t see the need for more nuclear power for at least the next 20 years. Plus, TVA is facing declining demand for electricity. Exactly what makes this plan work is a question that remains unanswered.

Where is the Power Market?

First, TVA has no plan nor the desire to buy the electricity that would be generated by the reactors should Haney succeed in completing one or both units that come in at 1,200 MW each. The utility has stated in its Integrated Resource Plan (IRP) that it has no plans to acquire or build any new nuclear generating capacity for up to the next 20 years.

The reason is slow or no growth in electricity demand in its protected service areas and it is closing coal fired plants and building new gas fired units at far less cost than new reactors. Plus, the price of natural gas shows no sign of moving north of $4/mbtu anytime soon.

According to Moody’s, “challenges confronting TVA include a decline in electric demand and a significant capital spending program driven by the replacement of coal-fired generating capacity in an effort to increase the company’s power supply from reduced CO2 emitting resources.”

In September 2015 TVA’s Board approved the retirement of coal units at three plant sites with 3,000 MW of combined generating capacity. In addition, TVA is building two new combined-cycle gas plants: the 1,000 MW Paradise plant, which is expected to achieve commercial operation in 2017 and the 1,046 MW Allen Plant (2018), at an estimated cost of $2.0 billion. These costs per kWh come in far below that of completing the Bellefonte reactors and far sooner in terms of time to have the capital assets in revenue service.

Combined with the anticipated commercial operation of Watts Bar Unit 2, TVA anticipates reducing the reliance on coal-fired generation from approximately 32% of total generation currently to approximately 22% by 2020. It will increase generation from gas-fired and nuclear generating assets to approximately 23% and 41% , respectively, from 19% and 35% as reported in 2015. This plan includes the now completed Watts Bar II unit.

It follows that other utilities in the region, which are outside of TVA’s ring fenced service area, are facing similar circumstances in terms of closing older coal plants and building new gas plants.

The tenuous futures of nuclear reactors in New York and Illinois are object lessons for any utility in a merchant market. In Ohio and Pennsylvania, First Energy is airing its plans to divest itself of its nuclear reactors and coal fired plans in unregulated markets because it can’t beat the price of natural gas unleashed by fracking in the Appalachian hills of eastern Ohio and western Pennsylvania. So who would Haney sell electricity to?

How far could would or could the power go to find customers?

Would Nuclear Development LLC, the firm that bought the reactors, be able to sell all the electricity it generates to customers? Each reactor is capable of generating 1,200 MW of electrical power. There are physical distance limits for sending AC power over high voltage lines and even conversion to high voltage direct current still has limits in terms of technology, power, and transmission infrastructure (transformers & substations).

If the reactors scram, and go off the grid, at 1,200 MW each, the sudden loss of 2,400 MW of power would scramble the surrounding suppliers. A regional brokerage agreement on how much power goes where might cap how much power could be sold to distant markets via high voltage direct current lines. New substations and transformers would be needed to convert the power at both ends. These costs would work against the competitiveness of the power offered for sale in unregulated markets.

Does Anyone Really Know What It Would Cost?

Second, the cost to complete even one of the Bellefonte reactors could be significantly higher than what it cost TVA to complete Watts Bar II which was $4.7 billion. The original estimated price to complete the unit was about $2.5 billion.

The utility ran into trouble in terms of cost overruns and schedule delays with the project which took an extra and unexpected $2.2 billion to cross the finish line last year.

TVA has been cannibalizing equipment from both Bellefonte units for years. A estimate a few years ago of the stage of completion of the two units was that one was about 55% complete and the other was about 80% complete. It’s unclear what remains in either unit besides the reactor pressure vessels and their containment buildings.

TVA decided against finished either Bellefonte reactor because it could not breach its congressionally mandated debt ceiling of $30 billion. With its current debt load of about $25 billion, there is no room for another $11 billion to take on completion of two 1200 MW reactors especially with the Watts Bar experience of of a 100% cost overrun looming in the background.

Haney says he needs to raise $13 billion for the project which clearly indicates he expects to complete both reactors. That price tag is $2 billion more than the 2011 estimate developed by TVA which it abandoned in 2014.

No SMRs for now

Third, TVA walked away from a collaborative effort with B&W to design and license its 180 MW mPower small modular reactor (SMR). It opted instead to apply to the Nuclear Regulatory Commission (NRC) for an Early Site Permit (ESP) for an SMR at its Clinch River site. Once issued the permit is good for 20 years. The application references four SMR designs and does not state a preference for any of them. Clearly, TVA is in no mood to make any near term commitment to any nuclear projects even if it at the same time hedges its bet with the ESP.

What Should Haney Do with his Purchase?

A number of economists believe that in the U.S. and globally we are in a period of secular stagnation and that we are not capturing the productivity gains of the digital transformation of our economy. It may be that except in highly regulated electricity markets, there are no new opportunities for large, full size nuclear reactors either of Gen III+ design or retrofitted like plans for the Bellefonte units.

The US is also at a disadvantage because just about every other country that builds or uses nuclear energy does so with the government partially or fully engaged in making the industry prosper. Even the UK, which just committed to the construction of of two 1,650 MW Arevas EPRs, made the deal work with a regulated rate for the electricity to be sold by the reactors once they are switched on six years from now.

Haney’s firm Nuclear Development LLC is a family owned business. It isn’t subject to the pressures for quarterly earnings of a publicly traded firm. That said, he could re-assess his plans for completing the two reactors and think along the lines of “small is beautiful.”

The economy may bring a reality check to his plans when he talks to investors, but here’s an alternative to his dream of reviving the full size units.

The economic principle that makes small modular reactors affordable is that the first one, at less than 200 MW, can fund with its revenue the construction of the next one, and so on.

Instead of having to commit $6.5 million for a 1200 MW unit and wait for eight years for revenue, a developer can get the same amount of nuclear generating capacity, in six increments, by committing about $1.1 billion each time and be making money in about four years from the time he first breaks ground. It follows that this slower ramping up of power generating capacity over a two decade period would be more logical in terms of the current conditions and prospects for U.S. energy markets.

Haney is an experienced businessman who can run a set of numbers. One hopes that his dream to finally do something with the Bellefonte site hasn’t clouded his financial horse sense about his more realistic options there.

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