Part 1 presented a new study by power plant cost expert Craig Severance that puts the generation costs for power from new nuclear plants at from 25 to 30 cents per kilowatt-hour — triple current U.S. electricity rates!

Those ideologically promiscuous folks at the Heritage Foundation have replied with “New Study on Staggering Cost of Nuclear Energy, Staggeringly Pessimistic.” Craig’s point by point response follows a few of my comments.

Heritage is a leader of the conservative movement stagnation. They have written “the only thing a green ‘New Deal’ will do is lead us down a Green Road to Serfdom,” comparing such a policy to “collectivism in the Soviet Union and Nazi Germany,” and their Senior Policy Analyst in Energy Economics and Climate Change is quite confused about both of the subjects he analyzes.

The key paragraph in Heritage’s new critique is:

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Aside from the cherry-picking of data and its clear tilt toward Big Green (the vast industrial complex and lobbying machine being built around global warming alarmism), its conclusions are potentially not that far off.

Yes Heritage is among those pushing the grand climate conspiracy, whereby the world’s National Academies of Science (including ours), the American Geophysical Union, the American Association for the Advancement of Science, every major government in the world, and the leading science journals are conspiring to deceive the public.

(Note to Heritage: ‘Big’ Green is a “Vast industrial complex”? The nuclear and fossil fuel industries have maybe 50 times the revenues of the cleantech industry. So what does that make them — gargantuan? Try not to be so paranoid — For 30 years now (100 years?), your guys have had the ball and written the rules.)

And still, they can’t really dispute the conclusions. They can only try to blame environmentalists (i.e. the public) for supposedly slowing down the construction of nuclear power plants and running up the costs. But given that the public is assuming most of the liability of any major nuclear accident and given that the public is now assuming most of the economic risk of new nuclear plants with major loan guarantees, it is hard to argue against the public weighing in to ensure that the plants are built and run safely and affordably!

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Indeed, to support the public taking all the risk of new plants while opposing the public having any say in the licensing process is some strange combination of socialism and totalitarianism. Hmm. Could that be Soviet collectivism? Nah.

The Heritage critique notes, “As one who believes in the value of nuclear energy, I am fully supportive of removing all the subsidies and government preferences and allowing the market to decide. If Big Green is so confident, then they should be prepared to do the same.”

If the government removed all subsidies and preferences for nuclear, we probably wouldn’t build another nuke. They simply couldn’t get insured or financed. I support removing subsidies and preferences for any power source that has more than a 5 percent market share. Nuclear is a mature technology and has seen vastly more subsidies than renewables, whereas many renewables are still coming down the cost curve and deserve government support.

That said, once we have correctly priced carbon dioxide to reflect its full harm to our health and well-being, then I would certainly be for removing virtually all subsidies and preferences for existing energy sources (though technologies with less than, say 1 percent marketshare could still get temporary support).

Finally, in Part 1, I wrote “So feel free to criticize the analysis, but anyone offering different all-in cost estimates for power from new nuclear plants should detail their own assumptions and calculation.” Heritage did not do that, so no one should take their critique too seriously. Nonetheless, here is Craig Severance’s detailed response:

Bravo! to the Heritage Foundation for calling for an end to all Federal subsidies for nuclear power, and “allowing the market to decide”.

I am a registered Republican and chaired my precinct caucus in this year’s Colorado caucus. However, John McCain’s and other supposed conservatives call for singling out nuclear power for massive Federal subsidies caught my attention last year. Heritage Foundation may recall that on June 20, 2008 I posted the following remarks on The Foundry:

I agree we should let the market work but McCain is proposing hundreds of billions in Federal pork for the nuclear industry that no other energy option will get. This is not letting the different industries (who also are American businesses creating American jobs) compete with nuclear on a fair basis.

McCain got it right proposing a “cap and trade” carbon emissions reduction plan that will allow the most cost-effective methods to be adopted using a free market approach to meet the mandates. For instance, if a limit is set on the utility industry, then the utilities will bid out proposals. Industries such as wind, solar, energy conservation, and nuclear will submit options, and if nuclear is the most cost-effective it could win some of those contracts.

The nuclear industry, however, with its $8000+/KW costs, knows it cannot compete on a level playing field, and has now convinced McCain to throw it billions in special subsidies.

This sounds like Energy Pork all over again. Round One was the corn ethanol lobby, now Round Two of Energy Pork is the nuclear lobby.

Is John McCain a true conservative, against pork projects for big lobbies, or not? No taxpayer funds should be needed whatsoever with a cap and trade plan. Why is it always the taxpayer who has to pay? Anyone who proposes cap-and-trade PLUS extra subsidies is just helping out a particular lobby group.

We should just cap-and-trade (which by definition achieves carbon reduction goals), and let the free market work out the best means to meet the goals.

I’m glad to see Heritage has purportedly adopted a position in concert with conservative principles. My suspicion, however, is that when actual legislation and budgets are proposed, the ire of the Right against government manipulation of free markets will not be levied equally. These are just technologies we’re talking about here, folks. Yet too often, as Jerry Taylor, Senior Fellow at the Cato Institute, commented in his article “Nuclear Energy: Risky Business” posted here:

“Nuclear energy is to the Right what solar energy is to the Left: Religious devotion in practice, a

wonderful technology in theory, but an economic white elephant in fact (some crossovers on both sides notwithstanding).”

Jerry Taylor’s full article is excellent, I suggest conservatives review it carefully. Of particular note is Taylor’s point “There’s another good reason why the [nuclear] industry is not protesting government intervention these days – the industry would not exist without it.

As regards to the numbers in my Study, I am glad we are now going to be talking about specific numbers and how they play out — we can get past the mysterious Black Box, and the “religious devotion” noted by Taylor. If you have read my Study, you can see the final cost outcomes depend upon certain key factors. Are any of the following “Staggeringly Pess

“Overnight” Cost Estimate — drawn directly from Florida Power & Light, using the midpoint of their Case A and Case C estimates. In other words, this is the industry’s own number. [See here for my discussion of the “nth” plant factor, in other words the advantages and realities of reaching economies from mass production.]

Cost of Capital — I use MIT’s assumption for the cost of equity capital but cut that cost by reducing the % assumed to be funded by Equity. I use 6.25% as the assumed cost of debt, which is 1.75% lower than the 8% rate assumed by MIT, and more than two full percentage points lower than current bond market rates. Also debt (the cheaper financing) is assumed to be 55% of funding instead of the 50% assumed by MIT or the 45% debt more commonly seen in public utility debt/equity ratios.

Escalation in Construction Costs During Construction Period — I plot out the effect of two different cost escalation rates, both of which are lower than recent experience with escalations in power plant construction costs. In other words, I optimistically assume that power plant construction costs will not continue to escalate as rapidly as they have.

Delays in Construction — I optimistically assume the proposed construction schedules laid out in utility dockets now underway will be achieved as proposed, with absolutely no delays. I do note with caution to investors, that if delays do occur, these utilities may face funding shortfalls so massive it may be impossible for the utility to obtain funds to complete the project. However, the cost projection numbers do not factor in any additional costs from delay.

Amortizing Capital Costs — David Bradish has suggested I should have assumed a higher initial cost/kWh for amortizing the capital costs, by assuming a shorter amortization period. He argues that once the power plants are finally paid off, the costs levied on ratepayers will decrease. Is this an advantage for nuclear, or is this a basic fact for all types of power plants? In other words, its ok for my family to buy a $2 million house, and its even better if I pay it off with a 15 year mortgage instead of a 30 year mortgage — because if I can just get past those 15 years, it will be a lot cheaper after that? Another example — a new movie house design is so expensive you will have to charge $50 a movie ticket, but that’s ok because you’ll only have to do that for the first 20 years? You won’t get past opening night.

My major concern is for the health of the electric utility industry (as also spelled out in Cato Institute Taylor’s article cited above). If a utility spends tens of billions and then tries to drastically raise electric rates to cover the costs, what will its customers do? If the increased rates dampen demand for kWh’s, the utility will not collect the projected revenues. Yet, almost none of its costs would go down, as they are fixed costs.

This is a setup for a spectacular insolvency and yet another trip to Washington for taxpayer bailouts. Have shareholders fared well in such cases? The nuclear industry has said not a single new nuclear plant can be built without Federal guarantees. What does that tell you?

This post was created for, a project of the Center for American Progress Action Fund.

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