American Nuclear Energy in a Globalized Economy

Session I
Thursday June 14, 2007

Introductions by Charles:
-Matt Wald: what’s current in nuclear energy, at NY Times.

Matt Wald
We’re here at a rather odd moment in the history of nuclear power. We’re in our 4th year
of the “renaissance” without any actual orders. The TVA (sp) recently put $1.9 billion
into a 25-year old reactor. You should be able to build a new one for not much more than
that but if you spent the $1.9 billion on the old one, you don’t need a new license, which
does not say wonderful things about people’s confidence in going forward and getting
licenses. On the other hand, for reasons we all understand, we’re worried about carbon.
We have panelists today who are going to help up parse this out.
-Christian Nadal, Tom Cochran, Al Carr.

Al Carr
I do have a little bit of experience in the nuclear business. I started with the Atomic
Energy Commission NRC, was in private practice in DC and was with Duke for a
number of years. I worked in most of the electric areas but had a heavy concentration on
nuclear.

I’d like to do a brief overview of what happened to put us where we are, what processes
are in place now, and what are the issues moving forward. What happened basically was
a result of the licensing process that we had back in the late ‘60s, mid ‘70s, that led to the
current generation of plants. Most of you know it was a 2-stage licensing process in
which you received a construction permit based on a design-concept and then the plant
was designed as you moved through the construction phase and once you finished
construction and had enormous amounts of capital invested you then went to a hearing to
decide whether you would be allowed to operate the plant. Then you went to your state
regulator to see if you could collect (?) the costs associated with building the plant.

Now that process in itself was awkward enough, but it was exacerbated by 2 events that
took place in the ‘70s, one being the Arab oil embargo, and the second being the Three
Mile Island incident. What that did was have the effect of stretching out construction at
the time when the utility was the most vulnerable because it was working with borrowed
money and the 1970s was a period of rampant inflation. Coupled with that was the
requirement to go back and redesign a number of systems because of Three Mile Island
and the result was we had a generation of plants which in large measure were orders of
magnitude in final costs above what had been projected.

When the utilities finally got the plants finished and permission to operate, and they went
to the state regulators, customers were looking sometimes at rates twice their current
level. Consequently there were substantial numbers of what were referred to as
disallowances where utilities were not allowed to recover on various grounds, the full
costs of the plants that they had constructed.

That was looked on as the breach of the “Regulatory Compact” which basically says,
your franchising body says you have an exclusive right to serve, you must serve all
modes (?), you have a public utility obligation to do so, in exchange for that you will be
able to recover your costs of return.

There weren’t many utilities, after they went through that process interested in sitting
back down on that stove. Utilities may not be the smartest people in the world, but like a
cat they understand when they get burnt. It didn’t anyone very well, it didn’t serve the
public well and it didn’t serve the industry well. So what do we have now? As a result of
a number of years of work that many of you in this room are more familiar with than I
am, we now have a process that the Congress and the NRC have put in place that
provides finality (?), certainty, and it consists of three parts.

The first is a pre-approved plant design, the second is a pre-approved site, the reactor
design is married to the site, and then they combined the construction permit and
operating licenses issued. There are various avenues for public participation in each of
those steps, and perhaps most important your site issues are already determined and the
process sets out the test and acceptance criteria by which the plant must be built.

Following construction then there will be the regulatory process to see to what extent it
would be permitted to recover the entire amount. That is, I would submit, a vastly
preferable process to the one that brought us to where we are. But I would point out that
even though essentially all of the 104 reactors that are operating now were almost custom
built. The industry has learned to run those plants, and run them very well.

We’re looking at capacity factors now in the range of 90%, in excess of 90%. When we
move forward there are two other issues that have to be addressed and considered. One is
decommissioning, which I believe is in fair shape. The second is the storage of spent fuel,
and that breaks down into two areas: on-site and the federal repository. There is a process
in place and frankly if we can ever get the thing to Hearing, a lot of issues that are
currently floating around will get resolved one way or the other.

So let’s look now, very briefly, at two other issues. We do have the revived (?) licensing
process in place. Let’s look first a financial and divide that into two areas. One if the
financial impact on the industry as a whole, not just from nuclear but from the panoply of
measures that are going to be needed. The second is the individual utility needs. If the
figures that I’ve seen are correct, we’re looking at a 50% increase in demand for
electricity over the next 25 years. That means we need to grow new capacity by about
245GW. The cost of that is estimated to be, just the generation portion, in the $275 to
$300 billion. And again that’s the panoply of generation, that’s not just nuclear. The point
is that when we add the coat of generation into the other costs associated with providing
the service that utilities are obligated by law to provide, we’re looking at a net
capitalization in the order of $600 billion. That doubles roughly the net capitalization of
the U.S. electric utility industry. That money is going to have to be raised in competition
with every other industry in the country. The second, if we look at individual plants,
that’s where the hard decisions are made. A senior executive was quoted as saying:
“nuclear power is a business, it’s not a religion.” the people in the boardrooms have to
decide if the cost of the nuclear reactors currently planned are in the $300 to $500 billion
range, that is a significant amount of money for any industry to raise under any
circumstances. The disparity now (nuclear is primarily in competition with coal) between
nuclear and coal’s capital costs is $22 to $25/kw for nuclear and $15 to $18/kw for coal.
(he rectified his numbers saying he dropped some zeros but I don’t know how many).
The point is I don’t think anybody’s really sure what the next generation of coal plants is
going to wind up costing.

I saw a story in the Wash Post a month ago that said that Seminole Electric Cooperative
is planning a 750 mgw coal plant in the state of Florida and Seminole, which gets
extremely inexpensive money, is projecting the cost of that plant to be $1.8 billion. So it
looks like over the timeframe in which we’re going to have to increase capacity, it looks
like we’re going to see a narrowing of the gap in capitol costs between nuclear and coal.

Finally, it’s been discussed here, there is what’s called the infrastructure problem. It’s a
problem, not just of personnel, but also of manufacturing capability. A lot of people in
the nuclear business are getting old and they’re retiring and there’s not a strong subset
coming behind. We’re talking about designers, constructors, operators, Q8 (?) people.
And then, if we look at the fabrication, as I understand it, when we’re looking at the large
(inaudible) of the type it takes to build reactor pressure vessels and some other parts of
the nuclear steam supply system, there’s only one place in the world that can do it and
that’s Japan, and there’s at least a two-year backlog. And then we finally get to the point
of how does the utility, if it moves forward, cover its costs? And that’s a matter of state
law, state regulation, and under the current system, you essentially advance to your
customers your investment. Well $2 to $4 billion is a lot of money to put out over a 4 or 5
year period of time before you start recovering.

Let me just close by saying, there have been some remarks made about people, maybe
not bellying up to the bar or getting excited. Right now, as I understand it, there are four
advanced plant designs that have received design-certification from the NRC. There’s
one under review, one in the final stages before submittal, and the NRC anticipates
several more. Not just Duke, but 16 utilities have announced, and so informed the NRC,
that they’re pursuing nuclear plants. Roughly 30 units at 25 potential sites, nine
applications for early site permits have already been filed, 2 have been approved, and it’s
projected that there will be 14 applications for combined licensing filed in ’08, three in
’09, and 4 undetermined.

So the process is in place, decisions are being made. My own view, for whatever it’s
worth, is that nuclear is only one part of the panoply. Everything is going to be needed.
We’re going to have to replace a lot of capacity in the next 25 years. Most of the nuclear
plants have received, or are in the process of receiving, life extensions. Their original 40-
year licenses either have been or will be extended for a 20-year period. But nevertheless,
they’re going to start being taken out of service between now and, say, 2050. So none of
us know if the process is going to work, if it’s going to come to fruition. But as I said at
the outset, I was just hoping to provide an overview of where things stand from a high-
level perspective.

Matt Wald
I would note that Al Carr assumes that is will be regulated utilities that build these things
and not independent venture capital finance. He is also assuming that the Chinese will
finance these things.

Tom Cochran
I come from the environmental community and the main focus right now is on global
warming. So to put this into perspective, the 441 nuclear plants operating worldwide are
operable producing about 370 gigawatts per hour. There were a couple of analysts at
Princeton, working on understanding the global warming issue, said to think of it in terms
of the requirements for reducing as seven wedges that we can provide from a variety of
energy technologies. Essentially one wedge, in their model, was a reduction of one
gigaton of carbon per year or, so over the next 50 year a total of 25 gigatons of carbon.
The existing fleet globally of nuclear power plants, is about equivalent to one wedge.
Over the 50 years, one would assume most of the plants would have to be replaced but
they wouldn’t all be replaced in the first year so if you don’t replace the existing fleet,
you have to make that up with half a wedge. You can do this wedge analogue in terms of
the U.S. capacity. The U.S. has 104 reactors, they are roughly 1 gigawatt each, on
average (the world average is more like 800 megawatts or 0.8 gigawatts).

So as we move forward in terms of displacing carbon using nuclear, a number of things

are going to happen. Old plants are going to be retired globally. The average capacity of
the newer plants is going to be larger than the capacity of the older plants. Even if you
don’t change the total number of plants worldwide, there’s going to be some increase in
the amount of power coming from the nuclear fleet. There will also be upgrading existing
plants, as we’ve done in the U.S., to higher power levels. In the U.S. that’s been typically
a 5% increase or so. The U.S. plants are now running at 90% capacity, the world average
is less. We have to get an increase in capacity from nuclear without changing the net
number of nuclear plants.

Since 1988, the average net increase, new plants minus the ones that have been retired,
we’ve increased the number of plants at the rate of about one plant per year. So if that
trend continues, we will see additional capacity. I think you’re not going to see over the
next 30 years a huge additional increase of carbon displacement from the nuclear side.
Plants are expensive, they take a long time to build, and there are a lot of problems. There
is going to be some net increase but probably less than half a wedge. (inaudible) That
would be my guestimate on how things are going to play out.

From my own point of view I think it makes no sense to talk about being for nuclear
power or against nuclear power. I think we should look realistically at what nuclear is
going to do over the next 30 to 50 years, and when you do that, you see that you really
have to find your global warming solutions from combinations of other technologies and
improvements.

I will focus on three problems associated with use of nuclear energy: safety, proliferation,
and waste disposal. I will briefly touch on each of those. On the safety issue, the safety of
U.S. plants has improved since Three Mile Island, I don’t think there’s any question
about that. There’s been consolidation, fewer nuclear power plant operators. The most
important factor affecting the safety of plants is the safety culture of the plant and
consolidation has improved the safety culture of most plants. The concern is whether
there are outliers like the Davis-Bessie event a few years ago. The safety culture is sort of
not all there at a few plants.

But globally the problem is that the new plants are in China and India and Asian
countries, and that’s going to be a big unknown, at least for me, as to what the safety
culture is going to be in those sectors. Take China: if their nuclear plant safety culture is
like the U.S., then it’s not going to be a problem (inaudible). China is talking about a
number of plants opening over the next 50 comparable to what’s in the U.S. today. But if
their safety culture is like their safety culture in everything else they do, for example their
coal mining industry, you’ve got serious problems. We kill 20 to 30 coal miners a year,
they kill 1500 coal miners a year.

On the proliferation issue, the problem is not with the power plants. The problem is with
fuel cycles and the problem is with a very limited number of countries in the future. I
would think about the countries after this round of concerns about Iran, you’re hearing a
lot of talk among Gulf states, in the Gulf region, about getting into the nuclear business.
That should certainly be of great concern to a country like Israel. The concern is going to
be over enrichment, reprocessing plants in non-weapon states (inaudible).

On the waste issue, we’re 50 years into this business. We’re relicensing plants that have
gone through their 40-year license and we don’t have a solution in the U.S. to the waste
disposal problem. Everyone agrees that the real solution is deep geologic disposal of the
spent fuel or high-level waste. In the U.S., we sort of tripped over this issue three times:
first in Lyons, Kansas, second with the retrievable surface storage facility that
Schlesinger recommended at DOE, and then Yucca Mountain. No other country has a
waste disposal facility. The ones that are doing the best are probably Finland, Sweden,
countries that don’t have a lot of nuclear plants and it’s a lot easier.

You can store this safely in interim storage as long as you’re willing to get out there and
(inaudible). But that’s not a viable really long-term solution. So what’s going to happen
in the U.S., I think the 104 reactors, there are the B52s, they’ve got a shell layer. Once
you own it, it’s the cheapest way to make electricity and you’re going to try and keep that
sucker running as long as you can, and they’ll replace everything in it except everything I
guess (laughs).

I think about 2030 is going to come crunch time because if we’re relicensing all of these
plants for 40 to 60 years, at about 2030 to 2050, in that period, well the 60-year licenses
all go out, and so around 2025 or so, people are going to look at these suckers and they’re
going to say: “this is going to be a problem for global warming and everything else, we
probably ought to relicense them one more time and take the risk.” That’s kind of what I
think the future holds for us.

Matt Wald
So I draw two conclusions here. One is that we’ve show leadership in nuclear waste
because we’ve failed three times while others have not even failed once. (laughs). And
that if the Pennsylvanians can’t get it straight, what can we hope for from the rest of the
world? And Christian Nadal, from a country that actually operates a smaller nuclear
program than we do but a larger share of its electricity.

Christian Nadal
I agree with all the things that have already been said. I want to emphasize some points, I
will change my presentation because you said it very well. First, the need for revision in
(inaudible) comes not only from climate change, but also from the lack of resources
because today you have nearly two billion people without electricity around the world.
The World Bank doesn’t have a solution near for this problem. There is a huge lack of
energy and the other aspect is also the energy independence because the U.S. is not
improving its independence. The European Union is in a worse place because we are
depending more and more on Russian gas, oil, and so on.

(inaudible) and the energy policies is very important. The conclusion is now that all
resources must be used and the problem is not “if” but “how.” It’s the same for
renewables, which are part of the solution, a very small part but very useful, as nuclear is.
And then the problem is how to deal with and you mention the point (inaudible), it was
going to be my conclusion but I will say it before, we made 80% of our program within
ten years. It is really a problem of energy policy from governments and (inaudible). If the
will is there, it is possible. The French program was not subsidized. I know it is very
(inaudible) opinion but EDF was helped by the government for law enforcement, for
other practices, but not, even from the scientific point of view that the program has been
prepared by the government with the CEA and other the scientific parties, preparing,
selecting technologies, preparing designs, at the end was that we bought the
Westinghouse license, and not the French one, but there was a political preparation.

I would like to add something about the (inaudible) nuclear, the existing nuclear power
plants, you mentioned the contributions they give, 16% for electricity worldwide and 8%
of energy. It is a very important element. But what is important is not only the
contribution that it provides, it is also the learning curve that the industry, led by the U.S.
and in some cases by France, because the increase of existing capacities, and other
elements, are very very important. The industry is now very strong (inaudible), after
Three Mile Island and other incidents, and this is a very important phase now, generally
not well considered by many people, but I wanted to insist on that point.

You mentioned developments in the U.S. with regulating countries. I would say that in
the world the current situation is that the programs under development are in what we
may call regulated countries: Japan, Korea (the strongest program in the world now), and
a couple of other countries are, we could say regulated (inaudible). (laughs) And this is
very important because, Japan is a democracy, the (inaudible) is very active and
(inaudible) and they have a very strong program. It is managed by the (inaudible). The
companies are very strong, but the government is really looking closely to this process.

I want to speak a little bit of the situation in Europe. Sometimes Europe is regarded, if
you at France, as a very strong continent for nuclear energy. In other aspects it’s not
because after Three Mile Island, Europe went on with the nuclear program. But after
Chernobyl, Europe stopped in many places. Not really in France because in France the
program slowed because the needs were lower, but in fact we had over-capacity. But you
had Italy (?), which started immediately after each project, it had no facilities. (inaudible)
set a limit by 2010 and other countries like the Netherlands, Austria, and so on, and even
more recently, more significant, Belgium which is a 50% nuclear and Germany with 30%
generation with nuclear. And you have only France and Finland currently building
reactors.

We have some hopes about Europe because we know that Sweden will not stop,
(inaudible) all its capacities by 2010. On the contrary they are trying to reverse this
decision because nearly 50% of their generation and the whole region had experienced
some problems in its electricity supply in recent years (inaudible).

We still have hope about Germany. The government was (inaudible), at the CDU, at the
majority, they would have reversed the decision. But as they had to make an alliance,
they did not change the decision, but if the needs of our climate change, Germany is
relying on a very important coal capacity and they have already made a lot of
investments, but still the Kyoto Protocol and other requirements need further
improvements. And it’s very difficult because their (inaudible) are already very clean and
it’s difficult too make more and they have tried renewables but they have exhausted the
capacity of the renewables because they have developed very strong wing energy but it is
the limit, they have experienced the limit, of generation you can produce into the grid.
(inaudible), they have to build additional capacities, additional lines, power lines and so
on.

Then the situation in Europe, the main potential project would be in the UK. UK was a
net exporter of energy till 2004 but the North Sea oil and gas fields are progressively
exhausting and they are now a growing net importer. They have also to replace existing
capacities and they have already developed gas and they need nuclear capacities. Another
point is that their existing nuclear power plants are not running as well as the U.S. ones or
the French ones, and they would have to close them fairly soon. They have a need even
for replacement now. This is more or less the next important developments in Europe
from the UK.

When you have looked at all the difficulties the industry has to face, I would not be so
pessimistic about these countries because again the existing nuclear power plants have
run very well and this is very important for new capacities. Obviously you have the
problem of public acceptance. We have seen in Germany, the problem of renewables.
EDF has recently made its own IPO and the main development in EDF will be in
renewable energies. We are not against renewable energy. We have also gathered all our
capacities in this field in a holding (?) and it has also been successfully listed last year.

But we think that these resources have strong limitations. When it is very hot or very
cold, you have no wind. At night you have no solar energy. And it is really difficult to
manage the grid. You had some incidents managing the grid in the U.S. We had several
incidents managing the grid in Europe with a total blackout in Italy, a very large blackout
recently in part of France, Germany, and Belgium. (inaudible) need available energies
with a quick reaction. (inaudible) renewable energies are generally a nightmare. In
Germany they really believe that they could replace energies with renewables and
(inaudible) and the costs will be high. This is why they are now considering changing.

But after the infrastructure problem, I’m not being pessimistic about human resources
because even it is fair to say that the (inaudible) providing very skilled people, the
problem has been well-managed and you have even (inaudible) resources that are not
available in other countries. I think the program of hiring (inaudible) right now will deal
with this at least at the same place as other industries because for oil industry and gas
industry, the replacement of the baby boom generation and the lack of interest of young
people for engineering is the same and it will be the same for other energies. It’s not
(inaudible) for nuclear.

At the end we may consider that what is needed is stronger support. I don’t know whether
it is a financial support because capital costs are important. We know that it is difficult
for fairly small companies because the American utilities are fairly small and its difficult
for them to make a commitment on a decision for investment that represents sometimes
10% or 30% of their market value. The support could be from local regulators allowing
mergers and larger companies more likely to invest. About the (inaudible) and the
infrastructure of the industry, I repeat what I said before. We have built 80% of our 58
reactors within ten years and I know we could make some evaluations. I discussed that
with Bernard (inaudible). It’s not so expensive to build the plants for the (inaudible). It’s
only confidence in the investors because will the orders be there or not? But it’s not so
long and not too expensive, it’s less than $1 billion in investments for these capacities.
Yes it’s a lot compared to the figures you gave, for the needs in the industry it’s not a lot.
And it was done in France and it worked. And again it was not subsidized either.