Spooked by Scana failure, Duke calls its quits on Lee

  • end of the lineThe publicly traded utility (NYSE-DUK) is cancelling the planned construction of two Westinghouse AP1000 nuclear reactors at the Williams States Lee III project citing that firm’s as yet unresolved bankruptcy proceedings.
  • The decision follows a similar move to cancel the twin AP1000s planned for the Levy County site in Florida.
  • Four years ago Duke suspending licensing work on the 2nd & 3rd units at the Harris Nuclear reactor citing economic uncertainties. These units were also to have been Westinghouse AP1000s.
  • Overall, it appears it is the end of the line for any new reactor construction by the giant utility.

This week Duke Energy Corp. asked regulators in two states to cancel its planned nuclear plant in Gafney, SC. It cited as the reason the bankruptcy of reactor manufacturer Westinghouse Electric Co., low natural gas prices, and the lack of regulatory support from the federal government limiting CO2 emissions.

The decision by the Scana project to cancel work on the partially completed twin AP1000 reactors at the V C Summer site is probably the most significant factor. Duke’s investors would most likely be asking “what are you thinking” if it tried to proceed at this time with the Lee project.

“Duke Energy is seeking North Carolina Utilities Commission (NCUC) approval to cancel the development of the Lee Nuclear project because it cannot move forward as originally envisioned due to the recent Toshiba Westinghouse bankruptcy, expected additional costs and the increased availability of other clean energy sources like natural gas and solar to meet customer needs. Duke Energy will maintain the licenses to build new nuclear at this site in the future if it is in the best interest of our customers.”  Duke Press Release

While the planned construction costs of the Lee plant were pegged at “overnight costs” of $5,000/Kw, the experience at V C Summer showed that cost escalation would undoubtedly have pushed that number much higher.  One of the contributing factors is that Wesinghouse, as the EPC, never had a detailed project plan with confirmed cost estimates, before it broke ground.

Last June it was reported that the owners of the V C Summer project believed a detailed construction schedule by their builder was the basis for the timing and cost of building the two reactors. There was also the fact that Westinghouse was committed to building four AP1000s in China which was a significant confidence factor for the firm.

The utilities at V C Summer have since learned the detailed schedules and cost estimates didn’t exist, calling into question repeated assurances made to state regulators by Westinghouse that the new units could be built by 2020 and at a $14 billion price tag or over $6,300/Kw.  The gap in communications also raises questions about the diligence of these utilities in their oversight role of the EPC firm as well as that of the South Carolina Public Utility Commission.  Duke’s investors see just one thing at V C Summer – mind boggling mismanagement.

Westinghouse has since said as part of its bankruptcy proceedings that it will get out of the business of being an EPC and just serve as a components vendor for the future projects, assuming there are any in the U.S.

What remains unanswered is why a company with decades of nuclear related project management experience under its belt would abandon that body of knowledge on a “bet the company” project. It also raises the question of why Westinghouse signed a fixed price contract to built two first of a kind reactors at the V C Summer site.  In terms of 20/20 hindsight some observers have asked why Scana and Santee Cooper didn’t wait to break ground until after Westinghouse had completed the four reactors under construction in China and had absorbed the lessons learned from those experiences to apply to the projects in the U.S.  Both utilities could have built natural gas projects in the interim which they will surely do now to close the 2200 MW gap in generation capacity which will be left by the incomplete reactors.

lee nuclearDuke was always hesitant about Lee. The firm said some time ago that it would make up its mind about the Lee project once it saw how things turned out with the Scana project in South Carolina.  If the Lee reactors had been built they would have served customers in North & South Carolina.

Duke history and outlook with V C Summer and Lee

At one time Duke considered shelving the Lee project altogether and buying a $500M stake in the Scana project. Duke declined to respond to questions from the news media why it pulled out of the deal.  The firm has also said it will not entertain proposals to take over the now cancelled V C Summer project even to complete just one of the two planned reactors.

The bottom line is that Duke Energy is seeking approval from the North Carolina Utilities Commission (NCUC)  to cancel the development of the Lee Nuclear project because it cannot move forward as originally envisioned primarily due to the recent Toshiba Westinghouse bankruptcy but also due to the impact on its investors and customers of the now cancelled V C Summer project.

“Risks and uncertainties to initiating construction on the Lee Nuclear project have become too great and cancellation of the project is the best option for customers,” Duke said in a statement.

Duke faces an uphill battle to convince North Carolina regulators to approve payment to the firm of $353 million it spent on pre-construction costs and licensing for Lee. Almost all expenditures so far have been for site design and environmental reviews and licensing costs. The Lee project received an NRC combined construction and operating license from the NRC in December 2016.

If approved by the regulators, the costs would show up in utility bills over the next 12 years or at a rate of about $30 million/year. Duke wants to allocate an additional $173M in costs to South Carolina rate payers. So far the PUC there has not responded to that request. Coming on top of the expected costs that will hit ratepayers in South Carolina for the cancelled V C Sumner project, Duke’s rate case is likely to get a lot of attention.

With a market capitalization of $61 billion, the estimated $12 billion the two units could cost would be just over 20% of the total value of the giant utility. That’s pretty close to a “bet the company” decision which makes prudence a key factor in assessing the need for the project.

Apparently, stockholders like the fact that the utility is getting out of the business of building new or repairing existing reactors.  Duke’s stock closed Friday 8/25/17 at $87.23/share very near the 52-week high (L$72.34-H$87.75/share). Taking into account the cancellation of the Levy County and Harris projects, along with the latest decision to cancel Lee, and a decision not to repair the Crystal River reactor, Duke will have taken, approximately, 5,400 MW of nuclear power off the table for the foreseeable future.

In terms of return on capital, Duke sees the cheaper natural gas plants, which also have a much less stringent regulatory burden, as a path forward that will keep its stockholders happy. Duke Energy says it is building a $1.5-billion, 1,640 MW combined cycle natural gas-fired power plant on a Citrus County, Fla., site adjacent to its  damaged Crystal River nuclear facility. It is expected to be completed in 2018.

Status of Duke’s Nuclear Fleet

Duke has six nuclear plants that it operates in its multi-state service area. All were built in the 1970s and ‘80s. They represent about 40% of the electricity the utility provides to its customers. Duke acquired several nuclear reactors as part of the its merger with Progress Energy in 2012. Once of them is the crippled and now permanently closed Crystal River reactor which sustained damage to its containment structure during the replacement of a steam generator. Progress was later ordered by the Florida PUC to refund $288 million to its customers for the cost of replacement power.

Status of Other Planned New Reactors

The cancellation of Scana’s nuclear reactor project in South Carolina has scared the socks off other nuclear utilities in the U.S.  Unlike the Vogtle project, Scana did not apply for nor obtain loan guarantees. Ratepayer in South Carolina are going to be socked with the costs associated with the abandoned effort. The political costs for state legislators and the public utility commission in that state are incalculable but may be tallied up at the ballot box in the next election.

TVA – It should be noted that TVA is a close second in making these kinds of decisions with the abandonment of Bellefonte which represented 2,400 MW.  An effort by a real estate developer to pursue completion of these units is a long shot at best. On the other hand,  TVA completed Watts Bar II in June  2016 and recently received permission from the NRC to proceed with a planned uprate at Browns Ferry.

Earlier this month the NRC approved a plan by the Tennessee Valley Authority to increase the generating capacity at its Browns Ferry Nuclear Power Plant by 14.3 percent.

TVA requested the power upgrade at its Alabama nuclear plant, boosting the output by 155 MW for each of the three reactors at Browns Ferry. The $475 million equipment upgrade will begin during next spring’s refueling outage for Unit 3, during the fall 2018 refueling outage for Unit 1, and during the spring 2019 refueling outage for Unit 2.

“The real advantage of the Browns Ferry investment is that we are maximizing the capability of an existing generation asset that already produces our lowest-cost, most reliable form of carbon-free baseload power,” TVA said in a press statement.

Florida – NextEra Energy Inc. has said it’s decided to “pause” an expansion of its Turkey Point nuclear plant in Florida, but the company is still seeking approval to obtain and then maintain a federal license for two reactors there. The project plans to build two Westinghouse AP1000s. (2,300 MW)

Michigan – DTE received a license to build Fermi III, but has not announced plans to break ground. With flat demand for electricity, and record low prices for natural gas, the planning horizon for the reactor could exceed the shelf life of the NRC license which is 20 years. (1,500 MW)

Virginia – Plans for a third reactor at North Anna remain on hold while Dominion, which closed a perfectly good reactor in Wisconsin due to low natural gas costs, tries to figure out whether moving forward is a prudent action.  Like DTE Dominion has an NRC license for the new reactor but no plans to break ground. (1,500 MW)

Ohio – The Associated Press reports that Ohio governor John Kasich  is not backing bailout for state’s nuclear plants. Kasich said this week that he ins not supporting a proposed financial rescue that FirstEnergy Corp. maintains is needed to keep alive the state’s two nuclear plants.

He said it’s up to the utility to figure out how to keep its nuclear plants operating without a state-approved bailout. First Energy owns and operates the Davis-Besse plant located near Toledo and the Perry Plant located northeast of Cleveland. FirstEnergy wants Ohio lawmakers to sign off on an electricity rate increase for its customers to save  which produce 14 percent of the state’s electricity.

This week Kasich toured a new $800 million natural gas plant near Toledo that can produce enough electricity for 700,000 homes which is roughly equal to a new nuclear reactor.

“It’s bringing investment, competition and, most important, lower prices for consumers,” Kasich said at the plant’s opening.

Peter Rigney, who oversaw construction of the natural gas plant in suburban Toledo, told the AP that there are more gas plants like it on the drawing board in Ohio, if the state legislature does not approve financial help for FirstEnergy.

Ohio is a major supplier of natural gas to the nation as a result of the use of fracking technology to reach reserves that could not be tapped with conventional drilling.

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