At the heart of Exelon Corporation's electricity-generating capacity are 17 nuclear reactors–the largest nuclear fleet in the United States. With so much experience operating nuclear plants, why is Exelon tepid about being the first company to order a new nuclear power plant in more than two decades? One reason could be the know-how of chief executive officer John Rowe. “I've seen the cycle of politics and economics of nuclear energy, in different capacities, since 1970. It gives me a very complicated view of the importance of nuclear energy in a low-carbon world and the business risks of building nuclear power plants,” Rowe says.
In his lengthy career as a utility executive, Rowe has licensed new nuclear plants and shut them down when alternatives were cheaper. With economic and political conditions shifting within the last decade, Rowe is edging Exelon toward adding an18th reactor. The company is applying for a combined construction and operating license to build a reactor in southeast Texas and also holds the option of adding a reactor to its existing Clinton, Illinois, plant.
Yet, Rowe is cautious. “I'm in business,” he says. “My job is to build things that provide efficient power and make money for my investors.” Is a nuclear reactor one of those “things”? Rowe sat down with the Bulletin to spell out the economic and political conditions necessary for a new age of nuclear power.
BAS: How important should cost be when considering whether or not to build new nuclear plants?
ROWE: Well, cost is fundamental. The issue before the nation, simply put, is how to meet our energy needs in a way that makes us less dependent on international diplomacy and military action and lower in carbon emissions, while preserving American business and standard of living. You can't deal with any of these four subparts without cost being an absolute key driver. At the present time, we see nuclear as very expensive for a new plant, but less expensive and far more reliable than wind; much less expensive than solar is today; and probably much less expensive than coal with carbon sequestration.
We virtually cannot imagine the United States dealing with the climate issue, let alone the climate and international security issues, without a substantial increment to the nation's nuclear fleet. But these are very costly investments. Our best judgment is that a pair of new nuclear plants would cost in the neighborhood of $12 billion in today's dollars; that's $6 billion a piece. Those would be 1,500-megawatt plants. That works out to something in the neighborhood of a dime a kilowatt-hour, which is expensive supply compared to what's in the market at the present time, but less so when you take into account the fact that it's available around the clock, that it's much less expensive than wind or solar, and that it's also less expensive than gas if you're running it extensively. So, cost is key.
BAS: How can Exelon manage the financial risk of building new nuclear plants, since they are not typically built at estimated cost?
ROWE: There are a lot of reasons for that. For one, don't start building them unless you have a whole lot of political support. If you try to build nuclear plants against the grain, they will cost more than you expect. You have to have a large degree of public consensus that these plants are needed to build them. And in my view, you need a bipartisan political consensus that the plants are needed. That's one way to do it: Wait until you have consensus. Another way is to use the Japanese experience of more rapid and effective construction. Another way is to get the vendors to fix their prices. That's a tough one. They are in no great hurry to do that, by and large.
Nuclear plants are inextricably entwined with what government wants. If Congress and the president don't want there to be nuclear plants, or want them to be too expensive, the result will be a foregone conclusion. I'm not into swimming upstream against political majorities.
Yet another way you do it is to be suspicious of your early numbers. The numbers I gave you are the third generation of our estimates, and we haven't turned dirt yet. Finally, and perhaps I should have put this one up front, we're not big enough to build nuclear plants into the market without the initial government assistance that's in the loan guarantee program. Exelon has taken a very clear position that unless we get the federal loan guarantees or equivalent financing, we will not go forward. Our company has $10 billion of book equity. You can't put all of that at risk on one project. Not unless you're a little goofy.
BAS: How do you reconcile the loan guarantees and subsidies for nuclear energy with calls for letting the market decide what type of energy capacity to build?
ROWE: Every form of energy that we're coping with has some federal assistance at the moment. And cap-and-trade legislation, or other carbon legislation, is in itself a massive intrusion into the market. So, if the negative intrusion must come–and I share the view that it must, not only that it will, but it must–then what's wrong with the government doing something positive also? All stick and no carrot makes poor donkeys. Beyond that, there's a more subtle point, and different utilities would answer this question differently. Because Exelon is the most market-based utility in the United States, we would probably take the position that if you can have a loan guarantee program that works for the first dozen or so nuclear plants, then that program could be phased out as legislation phases in the cost of carbon. When you see carbon at around $40 a ton, you've got a nuclear plant that shouldn't need further support. The carbon pricing itself should do it.
Now, wearing my hat as chairman of the Nuclear Energy Institute, I assure you that I'm not authorized to say on behalf of other utilities what I just said on behalf of Exelon. But we at Exelon believe that all of these technologies should have to stand without federal aid sooner or later, and that the proper way of incorporating the costs into the market is the carbon tax or cap-and-trade system.
BAS: Do you have a preference among the legislative proposals being debated?
ROWE: I have a preference for one that isn't there–I prefer the carbon tax. But of the ones that are out there today, I prefer Bingaman-Specter [Low Carbon Economy Act].
BAS: Why is that?
ROWE: Because it has not only a cap-and-trade system, it has a safety valve so that the economic cost is phased in rather than hits all at once. But I think the latest versions of Lieberman-Warner [Climate Security Act] are making progress in that regard. We also like the allocation of allowances to load rather than to generators that's in the Lieberman-Warner bill. It isn't our generation company that should be getting allowances; it's our delivery companies that actually deal with the customers and buy power from fossil fuel-producing companies as well as from us. My own guess is that we'll see at least one or two more major bills, and then we'll see a lot of compromising. We'll probably support all the bills, being good-hearted folk.
BAS: Why do you prefer a carbon tax over cap and trade?
ROWE: Because you know what it costs when you set the tax, and because it deals explicitly with the issue of the revenue. The revenue goes to the federal government, and it makes its own decisions about what to do with it. It's simpler and more efficient. I also think it's politically unsustainable, which is why you go to cap-and-trade systems with some kind of cost constraint in the early years, because people seem to like hidden taxes better than they like explicit taxes.
BAS: The current fleet of U.S. nuclear plants is operating at a capacity factor [percentage of potential output] of more than 90 percent. Will this change if new plants go online?
ROWE: If the reactors are built by people with a lot of operating experience, you ought to see capacity factors similar to the current ones within a three-year period, or something like that. There will have to be some shakedown. But the plant designs have the benefit of a lot of industry knowledge, and the whole level of operating expertise in the industry is night and day different than it was in the 1970s.
BAS: But a nuclear reactor hasn't been ordered in the United States in more than 30 years.
ROWE: That's a piece of it, although of course they have been built in Asia, which is one of the reasons why we're looking at working with Hitachi on a new one. I also think people who don't operate many nuclear plants can't help the builder much. These are jobs for companies that have a lot of experience, and, you know, we know we don't have it in building anymore. We weren't that good at it back when we did it. If we go ahead with the project we're looking at in Texas [in Victoria County], we'll be looking at it as a partnership between us and General Electric and Hitachi. And we'll have to have very clear terms as to who's responsible for what.
BAS: Will you lose sleep if three years after this plant breaks ground, you don't see the progress you'd like?
ROWE: Well, by that time I'll be retired. But whether I'll lose sleep or not is a question that has more to do with what else I'm doing. Let me say it a different way. I would lose sleep if I let this project go ahead without a much higher degree of confidence than I yet have that we have the right partnership between the designer, the engineering and contracting firms, and us, and that I know everybody has skin in the game. I also would lose sleep if I didn't think that I had very strong support at the state political level where it's being built.
BAS: How do you get to that place where you feel more confident?
ROWE: There's no magic pill. No little pixie comes to me and says, “If you do these three things, your numbers will be locked, and all will be safe.” This is why the loan guarantee program is so important for the early units. We've got to have some pattern of success.
BAS: Exelon is also putting money into new gas plants. Is that an indication that the market is not ready for nuclear or that you have doubts about whether new nuclear plants will be built?
ROWE: I have a lot of doubts. You're not talking to the Mahdi here. I'm in business. My job is to build things that provide efficient power and make money for my investors. I saw what happened to a number of my predecessors in the last generation of building nuclear plants, so I have a lot of questions that have to be resolved yet. Our board has only authorized $100 million for the Texas project. And Texas is a place where both the energy prices are high and the politics are quite positive for nuclear. Now, in Pennsylvania, the prices are getting high enough, but I don't think the politics is ready for nuclear yet. And in Illinois, neither is ready. That's not meant as a caustic thing. The reason prices are lower here is we have 11 nuclear plants in this state, and I've been doing a great deal to keep costs down at the moment.
To move forward with new projects, I've got to have very high confidence in the construction estimates. I don't have it yet. I've got to have some confidence that the state is happy with whatever we're doing on the spent fuel issue. Don't have that yet. I've got to have the loan guarantees. Don't have that yet. So I'm proceeding very slowly. Now we're looking at a gas plant in Texas, too. We're looking at a gas plant in Pennsylvania. We haven't finished that project analysis yet either, but that's an $800-million project as opposed to a $12-billion project. It's more in the range of … well, my mother wouldn't have thought I was up to it either, but it's at least more in the range of what she might have thought to be sane. The real issue with the gas plants, as well as with solar or wind, is that they are individually less risky, but if any of our numbers are close to right, those less risky projects are a lot more expensive in the end.
BAS: If the conditions supporting new nuclear development improve, will the regulatory infrastructure be ready to handle it?
ROWE: The Nuclear Regulatory Commission [NRC] is capable, but whether it's fully ready is another issue. They're going to be looking at at least two designs, perhaps three, from different groups of utilities. It's a major challenge, and in my opinion, they have the competence to do it. They can get the depth to do it. The issue is, will they have the support from the next president and from the Congress to review these designs efficiently and get on with it? In other words, nuclear plants are inextricably entwined with what government wants. If Congress and the president don't want there to be nuclear plants, or want them to be too expensive, the result will be a foregone conclusion. I'm not into swimming upstream against political majorities.
BAS: What's your sense of how each presidential candidate would affect Exelon's nuclear plans?
ROWE: I think Sen. Barack Obama has an open mind, but is much less initially committed to nuclear than is Sen. John McCain. Either of them will have many constraints on funding when they get in. So I don't know whether McCain can fully fund the loan guarantee program. Again, I go back to the magic word bipartisan. If the whole nuclear industry is dependent on who wins this presidential election, we're not going to see a real renaissance very soon. My own view is that McCain would be interested in this technology from day one. Obama, if he wins, will want to have some people he really trusts look very carefully at the relative costs between nuclear and the alternatives, before he's willing to put any of his administration's imprimatur on it. That's just a guess. So much of this depends on people like Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi. Everything I see says both of them will be there with stronger majorities than they have today. If they don't want this technology, it's not going to happen.
BAS: How many nuclear plants need to be built in the United States to make a real impact on energy use and carbon emissions? And how do you replace the plants that are going to start going offline at some point?
ROWE: Well, you can do the numbers probably better than I. There are 100 now. Most of them hit the end of their current licenses sometime between 2025 and 2040. So it would take 100 new ones just to replace that group. And you aren't going to start having any real impact on carbon without at least another 100.
I try to calibrate the numbers to something more real. If by 2016 or 2018, we have 48 new nuclear plants, that would be a lot. And basically that's just a demonstration that the technology is back. If those plants are on budget and the government sticks to carbon regulation, then I think you could double or triple that number in the early 2020s. But you're not going to get the number of plants that significantly impacts the carbon issue until 2030 or 2040. On the other hand, that is even more true of coal-fired plants with carbon sequestration. At least we have real designs that can be built and designs that are analogs to large machines that already exist. The technological hurdles are much larger to coal-fired plants with carbon sequestration. Again, we don't know what the cost of those plants will be. Pick whatever number you like for nuclear and add 20 or 30 percent to that. It looks to us like a very expensive, cumbersome technology.
I've lived through a number of stages of this, and I'm keenly aware that from a business point of view, you just have to be very cold-blooded when you think about decisions that involve many billions of dollars for one project.
BAS: So we're going to have fewer nuclear power plants in the future than we have now.
ROWE: I don't draw that conclusion, but I can't deny it either. It depends on whether we end up with a national energy policy in this country. If we don't have those plants, if we don't replace the current generation and add to it, then I submit you are making one dreadfully large bet on carbon sequestration.
BAS: What role would investments in energy efficiency have?
ROWE: The cheapest things that we can do are largely in the energy efficiency area, and I believe we'll see substantial improvements in energy efficiency, partly because technological innovation occurs much more rapidly at the end-use than it does in large facilities. There's something that says that small things can be changed much faster than big things. It must be one of the laws of conservation of energy or matter–I'm not sure which.
BAS: Can improvements in efficiency stem the need for new power plants?
ROWE: No, because you also have to replace a lot of the existing fleet. That's true with the coal fleet, even more than the nuclear fleet. I don't believe–but I've been wrong before–that efficiency will eliminate the need for incremental capacity. Efficiency will significantly reduce the need for incremental capacity, but I will be very surprised if it eliminates that need, and I'm absolutely certain it won't eliminate the need for new capacity to replace a lot of the existing machines.
BAS: How does the uncertainty about what to do with spent fuel affect pricing and strategy? After all, there's no certainty that Yucca Mountain will ever open.
ROWE: At the moment–and this is unfortunate–it's one of those imponderables that mostly affects pricing and strategy in my mind. This is an issue on which my board will ultimately make the decision as to how much risk we're prepared to accept. But I don't think the industry will go much beyond a demonstration generation of four to eight plants without some federal solution.
I believe we have to have several layers to a solution. We have to have federally owned regional surface storage facilities, because Yucca simply isn't going anywhere as long as Senator Reid has a veto on it, and he does. And ultimately, I believe we'll have to go to some kind of advanced reprocessing technology that is less plutonium-diversion vulnerable and reduces the total volumes of waste.
What I'm really trying to say is that to go beyond an initial phase that proves we can build nuclear plants again and shows what their economics are, I think you have to have some federal solution to the waste problem. The federal government promised to solve it 50 years ago. It hasn't. If it ultimately can't, I don't see this technology fulfilling a major role.
BAS: What personal experiences formed your thinking about nuclear power?
ROWE: I got out of law school in 1970 and came to a law firm that worked for utilities. I volunteered to work on nuclear plants because to me they looked clean and advanced and better than burning coal. In my gut I still feel that way. Now, I'll do what's economic, as a businessperson. If somebody would bring me an easier technology that was equally economic I'd leap to it in a second, because these things are not matters of faith and morals to me. They're matters of economics and engineering. Exelon's a very successful company at the moment because of our nuclear plants. We all deeply believe that they're an essential part of the future, and we'd all like to be putting a constructive stamp on the future instead of just taking the benefit of what other people did before us.
Six of our nuclear plants were ordered by former ComEd chief executive Tom Ayers. I went to his wake a year and a half or so ago, and I was sitting there like you do at wakes–they make you think–thinking I've become wealthy because of things he bought. But they didn't make any money until he was near death. It's a very chastening way of thinking, because you realize that if nobody makes big bets like that, then we're condemning ourselves to what we perceive to be higher-cost technologies. On the other hand, if you do make those bets, you've made the company vulnerable to their being right for a very long time. Both of our predecessor companies–ComEd and PECO–were brought to their knees by the costs and operating problems of the second generation of nuclear plants. If I forgot that for a minute, I wouldn't have learned much in my 25 years in the industry. So I'm very patient and careful. But who really wants their legacy to be that you didn't do anything to make a better country for the future? And at some point you have to be committed to what you are.
I got to run my first utility when I was 38 years old. It was a little electric company in Maine called Central Maine Power. It owned 6 percent of the famous Seabrook nuclear project. That 6 percent when I went there was more than the entire equity of the company. Seabrook almost broke that company.
When I was hired at ComEd, it was because the company was staggering under both the cost and operating performance of its nuclear fleet. I've been fortunate, and Oliver Kingsley, Chris Crane, Jack Skolds, Chip Pardee, and others turned that fleet around, and now it's something to be very proud of. But for many years, it was almost a destructive burden. So, I've lived through a number of stages of this, and I'm keenly aware that from a business point of view, you just have to be very cold-blooded when you think about decisions that involve many billions of dollars for one project.
You asked about sleeping at night. I'll have trouble sleeping over what my legacy is, either way. Because I don't like the thought that we don't do more to provide for the future. But for whomever succeeds me, the economics of that nuclear project, if we do it, will become the dominant fact of that person's existence, every day and every week.
BAS: What could change public perception of nuclear energy? An attack on a plant? A safety issue?
ROWE: Nuclear plants are almost infinitely harder targets than a great many other things in our society, but if there was an attack that caused harm–yes, that would change it. Much more likely changes are a failure to solve the spent fuel issue, or people getting into new plant projects without adequate management of the construction risks so the costs soar even higher. If you start off with a $6-billion project, you can't very well afford to have it turn into $12 billion. No utility executive ever was foolish enough to say that nuclear would make electricity too cheap to meter. That was Lewis Strauss. That was a very foolish statement.
What makes nuclear especially risky is one, it comes in very big bites. And two, it's dependent on solidifying that political consensus. You also have to realize that even if the number of people who think we need nuclear is going up again–and it is–that doesn't necessarily mean that enough people near to a new nuclear site are supportive. This doesn't just apply to nuclear, it applies to transmission lines, it applies to coal plants with carbon sequestration, it applies in spades to wind. There are places were wind is popular, and there are places such as Nantucket where it's not popular at all. One of our fundamental issues as a democratic society is whether we are willing to accept the building of things that keep our costs down as an economy.
BAS: Does Exelon's support of cap-and-trade and carbon emissions reduction cause friction in the utility industry?
ROWE: Southern Company, American Electric Power, and Duke Energy, which are the three biggest coal burners, have very different interests in this issue than Exelon, as the biggest nuclear company, does. And yes, it causes friction. And it's even more complex than that, because the people who have historically supported nuclear in Congress are also the people who have historically supported coal in Congress.
Out of the first four utilities that are likely to build the first four to eight new nuclear plants, you've got Florida Power and Light, which is relatively green like us. You've got Duke, Southern, and Dominion. Those three companies are very heavily coal. And they're not going to take a position on climate legislation that reaches as far as the ones I would feel free to take. And they're going to have more trouble building mitigation strategies.
BAS: Does it hamstring policy options if utilities are at odds with one another?
ROWE: At odds is as good a word as any. I mean, we're genteel about it; we don't call each other dirty personal names. But yeah, it's going to hamstring the development of the ultimate bill next year. What you see is a sort of pendulum swing. After futzing with the legislation for a couple of years, Congress started to get serious this year. And all of a sudden, you see people having more and more dramatic ideas of how severe the bill should be. And then when it comes to the floor, all of a sudden you realize that you don't just have Republicans expressing concern. You have a whole lot of Democrats, from states that are very coal dependent. And they start saying, hey, wait a minute. I've got to go home and face the next election. So right now, you see the debate going from grandstanding–in both directions–to all of a sudden Congress is forced to get down to the hard compromises that go into real legislation. And that's not just a partisan issue. That's an issue within both parties.
BAS: Is that going to keep Exelon from building its first new nuclear plant?
ROWE: No. What makes us less likely to do the first build is that we're in competitive states, and we have to take the full market risk, whereas other utilities are in rate-based states, which gives them at least some protection if they're close to right. No one should think it's absolute protection. They know better. These are not foolish people. But it gives them some protection that we don't have. Now take Dominion, which is probably the leader on the GE plant proposed for Virginia. Dominion has one of the best state laws to encourage the building of a rate-based nuclear plant there is. And so they have a lot of legislative support for it. That affects the risk. We have to do it purely at market.
BAS: How would a national energy policy help to resolve these issues?
ROWE: I've been waiting for a national energy policy since I was a lad, so I'm not too convinced we're going to have one anytime soon. But again I go back to the word bipartisan. You have to have enough of a national energy policy that leadership in both parties wants to see these plants built, and so the NRC feels that it's their job to make the plants safe, but also not to let the process string out too long. You've got to have a political commitment, or this technology does not fill its economic role. This is hard stuff. Unfortunately, it's easy to put a solar panel on a roof. It just doesn't make it economical.
