The U.S. Nuclear Regulatory Commission (NRC) has cleared the way for the that agency’s Office of New Reactors to issue a license to DTE Energy to build and operate a GE-Hitachi 1500 MW Economic Simplified Boiling Water Reactor (ESBWR). While the utility has long sought the license for its planned FERMI III power station located near Detroit, under the “prudent investor” rules that affect publicly traded firms, the company said it has not yet committed to build the plant.

The NRC imposed several post Fukushima provisions on the license. They includes specific accident mitigation measures and provisions for instrumentation of the spent fuel pool. The start-up schedule contains requirements for enhanced emergency preparedness plans and procedures.

Steam Dryer gets special attention

The steam drying will get extra attention. The NRC will require as a condition of the license monitoring and analysis of the steam dryer’s performance during start-up. The reason is a lingering cloud that hangs over the NRC’s design review of the ESBWR. In January 2014 GE-Hitachi paid a $2.7 million settlement to the U.S. Department of Justice to put an end to allegations that GE-Hitachi had made false statements that concealed known flaws in the design of the steam dryer equipment for the ESBWR.

GE-Hitachi denied the allegations. The DOJ said that the claims resolved by the settlement are allegations only; there has been no determination of liability.

Will DTE ever build the plant?

The question at this point, after six years and perhaps between $50-100 million, or more, in combined costs to approve the design and license the plant, will DTE actually build a new reactor in Michigan? According to various news media and trade press reports, no one expects DTE to break ground anytime soon.

The reasons are well known. Demand for electricity is way down due to the lingering effects of the recession on Michigan’s industrial base, including the auto industry, natural gas prices are still at rock bottom, and DTE’s largest coal and gas plants have years to go before they reach the end of their service lives. Even if DTE started work today on FERMI III, the plant would not be likely to enter revenue service until 2021 or later.

Bet the company or maybe not?

The decision to build the plant is what economists call a “bet the company” decision. DTE’s current market capitalization is just over $14 billion. The ESBWR design selected by DTE has never been built making it a first of a kind construction project. A good rule of thumb about such efforts is never believe that the original quoted fixed price will be the estimate at completion. Just ask Areva about their experience with their first EPR in Finland.

So assuming the cost of the plant is in the range of $6,000/Kw, that would put the estimated cost of a 1530 MW plant at between $9 and $10 billion or about two-third’s of DTE’s total market capitalization. DTE would have to front that money for up to eight years before the plant entered revenue service since Michigan does not allow utilities to recover construction costs from rate payers while a plant is being built.

Future of CO2 emissions control

In the longer term the plant may make economic sense. EPA’s rules on CO2 reductions may significantly reduce DTE’s fleet of coal fired plants and there may not always be a market pipeline of cheap natural gas available as a replacement. It could be 10-20 years before such conditions shift the balance to make the investment in a new reactor worthwhile.

Once built the plant would likely have a life cycle of at least 60 years. This scenario suggests that if a reactor were completed by 2030, it would be in operation for most of the remainder of the 21st century.

What might also change prospects for construction is that if the four plants now under construction in George and South Carolina enter revenue service without horrendous cost overruns, other states, including Michigan, might be willing to change their policies on recovery of construction costs. Another factor is that rate setting agencies might allow utilities to charge a premium for carbon emission free power. However, neither option is available in Michigan today.

One other factor in DTE’s favor is that the construction and operating license when issued by the NRC will never expire so long as DTE doesn’t change its mind about which reactor it wants to build at the site.

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