Did the Republican Tax Reform Bill Add the Last Straw that Halts Large Nuclear Plant Construction in U.S.?
Recently, Senate Republicans passed a tax reform package. Despite passing generous, deficit-increasing legislation that includes many provisions that favor corporations and most forms of energy production, it did not include an extension of the operational deadline that must be met to qualify for the nuclear production tax credit.
In my analysis, there is a high probability that the failure to extend that deadline will result in cancelling the Plant Vogtle Expansion project. The most immediate result will be several thousand layoff notices just a few days before Christmas.
The longer term effect of the decision might be the complete loss of the large nuclear plant construction business in the U.S.
A corollary effect should be the complete elimination of the myth that nuclear energy is a partisan issue that gets support from Republicans and opposition from Democrats. Not a single Democrat voted for a tax reform bill that clearly disadvantaged nuclear energy while every Republican senator that is not being treated for brain cancer voted for the bill.
Importance of the nuclear production tax credit
Way back in the summer of 2005, before the beginning of the Great Recession and before the revolution in natural gas production, Congress passed the Energy Policy Act of 2005 (EPA 2005). That sweeping legislation included several provisions designed to stimulate a revival of the large nuclear plant construction industry.
That industry needed help. It had atrophied and nearly disappeared during the three decades since the last nuclear power plant order. New orders had slowed in the early 1970s with some cancellations in the wake of the recession following the Arab Oil Embargo.
Before the industry could work off the construction backlog, Three Mile Island (TMI) happened. That event created a regulatory panic reaction that halted nuclear plant operating license issuance for three years.
Project delays combined with double digit inflation and interest rates approaching 20% added to the reluctance to make major investments in new projects, though some plants were eventually completed through the 1980s, with the last construction project – Watts Bar unit 1 – finishing in 1996.
EPA 2005 negotiators recognized that it wasn’t going to be easy to revive the nuclear plant construction industry after such a lengthy hiatus.
All potential customers recognized that there were going to be substantial costs associated with being in the first wave of new plant construction, before the supply chain had been restored and before work forces learned how to complete work to the exacting standards that the regulators required.
There appeared to be some advanced designs that were ready to go, but government support was needed to reduce some of the risks for the early adopters. One of the incentives included in EPA 2005 was the production tax credit (PTC).
It was structured to encourage leaders while not providing unearned cash payments to reluctant followers. Legislation drafters did feel the need to incentivize a wait and see approach that allowed others to make all of the mistakes and suffer through all of the start-up delays.
Only the first 6 GWe of new nuclear plant construction could qualify. Designs that had already been built and proven were not acceptable choices; the political decision makers had made a determination that they wanted to limit incentives to advanced systems that were designed to be less vulnerable to the type of event that resulted in a partial core melt at TMI. Only advanced systems approved after 1993 were eligible.
The PTC incentive was substantial, though significantly more limited per unit of produced electricity than the similar production tax credits that have been providing millions to billions in support for the wind industry since 1992.
Unlike the wind PTC, the nuclear PTC was fixed at no more than 1.8 cents per kilowatt hour. Wind had been set initially at 1.5 cents in the early 1990s, but the provision included an inflation adjustment that had raised it to 2.2 cents by 2005 (it’s now at 2.3 cents).
There was also a per unit cap put on annual payments. During years without any scheduled or unscheduled outages, the nuclear PTC cap would limit payments to about 1.25 cents per kilowatt hour. ($125 M for each 1,000 MWe of nameplate capacity.)
Even with the limitations, the nuclear PTC had the potential to provide $1 billion over an 8-year period for each new nuclear plant that qualified. It successfully helped to encourage the early start of four new plants – two projects with 2 units each.
Those plants were begun by regulated monopoly utilities whose rate of return and investment decisions are overseen by state level public servants. In all cases, the cash flows associated with the PTC were part of the utility decision to submit and the PSC decision to approve the final investment decision.
Why did Congress need to include a PTC extension in the recently passed tax reform bill.
As an additional means of encouraging an early revival, EPA 2005 included a qualification deadline. The deadline, however, was not put on the project start date, but on project completion as measured by the beginning of commercial operation.
Conversations with some of the people involved in drafting the legislation lead me to believe that there was some concern about using up the incentive authority on projects that were started without serious intention of dedicated progress towards completion.
From the perspective of 2005, the completion deadline of commercial operation before January 1, 2021 seemed entirely reasonable. It even appeared to provide some buffer for unforeseen delays.
Since no advanced nuclear plants have been completed, there has not been a single dime of taxpayer money transferred to nuclear plant owners in the form of a production tax credit as a result of the promises made in August of 2005.
One of the two 2-unit projects has already been suspended, and without the potential of qualifying for the PTC it is even less likely to be revived.
The other two unit project, the Plant Vogtle Expansion, will be reviewed again by the Georgia Public Service Commission on Thursday. Even with the prospect of receiving some federal support for the first 8 years of operation the PSC staff has determined that completion is uneconomic compared to an alternative involving natural gas using a reasonable price projection.
There is strenuous opposition to the project continuation from the usual suspects including professional antinuclear groups and groups that oppose electricity rate increases.
The failure by Congress to extend the commercial operation deadline for qualification means that the Public Service Commissioners will have an even more challenging barrier blocking them from approving project completion, even though project cancellation will have some serious negative consequences.
There have already been several opportunities to include the PTC extension. The tax reform bill was the last chance before the GA PSC review that will result in a go or no-go decision. There is no way I could advise the PSC to trust that the federal government will eventually do the right thing and extend the deadline.
I can hope, however, that the PSC will decide to go forward even without the possibility of receiving $2 billion in compensation for their leadership and willingness to step out to restore an important national capability.
Photo Credit: Intrepid00 via Flickr