East vs. West – US nuclear plant costs increase while Chinese costs drop

For some time we have seen the nuclear industry moving from west to east.  The nuclear renaissance is somewhat stalled in the west, while new build nuclear in the east, led by China, continues to accelerate to extraordinary levels.  There are numerous reasons for this shift from west to east.  New information released late last month on the cost of new build nuclear provides some very interesting insights.  First, the US Energy Information Administration (EIA) issued a report “Updated Capital Cost Estimates for Electricity Generation Plants“.  This is a new study on the cost of generating options to be used as inputs for their upcoming Annual Energy Outlook (AEO) 2011.  At about the same time, at the WNA China International Nuclear Symposium, the Chinese discussed the current costs of nuclear power in China.

What makes these almost simultaneous announcements interesting is the extent to which the costs in the two countries are diverging.   The US cost estimate for new nuclear is being revised upwards by close to 40% from 2010 to a value of $5,339/kW by the EIA, while China is stating that it expects its costs for plants under construction to come in at less than $2,000/kW and that subsequent units should be in the range of $1,600/kW [Ref: Nucleonics Week, Dec 2, 2010].  And to facilitate the comparison, both estimates are for the AP1000 design.  This would mean that an AP1000 in the US will cost about 3 times more than the same plant built in China.  Of course it’s easy to look at the different labour rates in the two countries expecting this is the simple explanation.  But there is more to it, so let’s examine these numbers in a bit more detail.

Starting with the US, the new EIA report is showing significantly increased costs for nuclear, from its previous assumption of $3,902 for the 2010 AEO to $5,339/kW for 2011, an increase of 37%.  This is in contrast to coal which also increases but only by 25% followed by gas that actually shows a 3% decrease in cost.  Renewables also fare better in that solar drops by 25% while onshore wind increases by about 21%.  The only option to increase faster than nuclear is offshore wind at 49% while the increase in coal with CCS is about the same as nuclear.  It is not clear what the EIA will assume for future units.  In their 2010 AEO, they assumed that the cost of nuclear would drop with time and experience.  In fact they assumed that by 2030 the cost of nuclear would drop by almost 30% in constant dollars.

This large increase in 2011 is a continuation of the recent trend.  In June of 2009, MIT issued its update to its study, The Future of Nuclear Power and they reported nuclear costs doubling since their first study in 2003.  Again, all other forms of generation also increased in cost, but nuclear increased the most.   So what we have is the estimated cost of nuclear in the US is increasing even though no new nuclear plants have been built.  So why is this happening?

One statement in the new EIA report gives us important clues.  The report says one reason for the larger increases for nuclear and advanced coal is “the fact that there are relatively few construction firms with the ability to complete complex engineering projects such as a new nuclear plant or advanced coal power plant.”  In essence this is related to recent experience in Europe with first of a kind (FOAK) nuclear plants where both costs and schedules have been exceeded.  This has been attributed to the long period of stagnation in the industry and the need to rebuild the supply chain.  Issues with the FOAK projects have clearly demonstrated the risks associated with new build nuclear and there has yet to be enough new projects in the west to demonstrate that lessons are being learned and future costs will once again drop although this is what is expected.  Concerns about being too optimistic in projecting new build nuclear costs are leading to a continuous increase as estimators focus on risk but have no new recent project data.  Utilities are quite rightly concerned about projecting costs that are too low, but are we now erring in being too conservative?

Now let’s contrast this to what is happening in the east.  China now has 12 units in operation and 25 units under construction.  If you read my blog you will see that I visited Daya Bay in October and what I saw makes the east-west comparison very clear.  What they have is a vigourous growing program implementing all the things we have all been talking about for years in the west.  They have standardized designs and are building numerous units.  This greatly reduces the risk and the costs.  A growing local content also allows the lower labour costs in China to flow through to all aspects of the project, from project management, to engineering, equipment manufacture and finally the construction labour.  But most of all, what they are building in China is confidence – confidence that they know what they are doing and that they can deliver – and with a huge number of young energetic  people who are gaining invaluable experience on real projects over a long period of time.  Is this sustainable?  Only time will tell as they are now facing the other side of the issue; how to continue to increase the number of knowledgeable people in the industry to meet the needs of this enormous program.  Of course, this is a much better problem to have than to have too little work and be trying to figure out how to replace an ever-aging work force.  This can be compared to the nuclear industry in the west 40 years ago, except this new crop of young people have the last 40 years of industry experience to accelerate their learning.  In stark contrast to the east, at a recent panel discussion, Duncan Hawthorne, CEO of Bruce Power noted he’d been impressed with some welding work at the Bruce and asked to speak to the tradesmen who had done it.  “The senior man was 70 years of age, and his apprentice was 64,” Hawthorne said [Ref: Toronto Star, “Nuclear refit a huge task…, Dec 10, 2010].

Earlier this year, we at MZConsulting did a study on new nuclear costs.  The results of a global survey on costs are summarized in the chart below.

Costs of Nuclear Plants by Region

This was based on information available earlier this year including a number of projects around the world.  What is interesting from this newer information from the US and China is that these already differing costs are continuing to diverge.  The costs in the USA are increasing to over $5,000/kW while the costs in China are decreasing to below $2,000/kW.

So what does this all mean?  Going back to my original comment that there is more to it than simple differences in labour costs, we can now see that an important difference is CONFIDENCE!  The booming Chinese program is seeing what we would expect – major improvements due to learning by doing and series production of standardized designs.  In the US, we see the opposite as costs continue to rise in an environment where securing commitments for new projects is moving very slowly.   It is interesting to note that watching the US political talk show “Meet the Press” this morning, New York Mayor Michael Bloomberg made a strong argument to support the fact that what is needed most to re-invigorate the US economy is confidence – so that the fires of US innovation can once again be stoked.

So what should we (the industry) be doing?  Well, in fact, contrary to the statement in the EIA report, there are engineering firms in the US with the ability to do these projects and they are gaining experience in building in the most dynamic market in the world, China.  The question then becomes, are we in the west ready to learn from the Asians?  We need to do what they have been doing for years but in reverse.  We need to take advantage of their experience – use their supply chain and make use of their experts to the maximum extent possible.  If we do, the price of nuclear power in the west will start to drop and continue to improve.  If we don’t, then we face the prospect of having to pay the price of relearning the lessons that have already been learned elsewhere.

Bottom line.  Nuclear power continues to be an economic option for electricity generation.  Now it is up to the industry in the west to ensure that lessons learned in Asia are applied quickly enough to ensure the competitiveness of planned projects and get the nuclear renaissance in the west back on track.

Note:  There is a lot more to be said on this issue.  I did not discuss the Koreans and their successes in the industry.  They have started to export nuclear power based on the same principle that they export other products; excellent product at a very good price.  We can also talk about how to better integrate and make use of Asian expertise.  Clearly a study looking at the different costs in both jurisdictions and gaining a detailed understanding of these differences would be of tremendous value as would recommendations on how to work together to take the best of both worlds to our mutual benefit.  But of course, this blog is intended to start a discussion, not replace the need for more detailed analysis and study.