Where finance and media intersect with reality

The Nuclear Renaissance Faces Many Hurdles Yet


This is a guest contribution from Ed Castorina, an attorney with over a decade of experience in the power generation field.

Bill Gates can have his opinion published by The New York Times any time he chooses (we would think). But, noblesse oblige, he does not abuse the privilege. Only a handful of Gates’ opinion pieces have appeared in the last decade. 

That fact alone made his guest essay on August 5 celebrating the imminent passage of the Inflation Reduction Act (“IRA”) of 2022 noteworthy. Gates wisely did not laud, or indeed even mention, any of the claimed inflation reduction benefits of the bill. Instead, the article, accompanied by a photo of a gleaming white wind turbine sited at (or photoshopped into) a presumably idled fossil fuel power plant, focused exclusively on the carbon reduction features of the bill.

The term “renewable,” as in solar, hydro, and wind, does not appear in the article. Instead, “clean energy” is the phrase of choice. This critical distinction hinges on the remarkably recent, and rather stealthy, acceptance, and perhaps even encouragement, of the nuclear option for electrical power generation.

The term “nuclear” is also absent from the Gates piece – possibly because the IRA had not yet fully cleared all legislative hurdles at the time of publication. There was no sense in needlessly triggering any anti-nuke sentiments, or even reminding certain Democratic senators that the bill they loyally supported included provisions at odds with their previously well-publicised opposition to nuclear power. 

And yet, the presence of substantial tax subsidies for nuclear power was not entirely covert.  As far back as January 2022, a NYT article noted (albeit well down into the text) that tax credits for “wind, solar, and nuclear power” were included in the progenitor of  the IRA. However, both prior to and subsequent to the bill’s passage, the canonisation, or at least beatification, of nuclear power to “green” status was hardly trumpeted

Tax Credits to Refriend the Nuclear Industry

The current US administration apparently has decided that the risks of alienating the anti-nuke faction of the green movement were outweighed by a need to preserve and develop additional carbon-free sources of electrical power.  Whether this calculation proves correct remains to be seen. It is entirely possible that both of the following downsides can occur-  a significant number of greens consider the administration as having betrayed core values and the tax incentives are insufficient to move the needle of decarbonisation through nuclear power.

The bill supports the nuclear power industry in three main ways: (i) production tax credits for legacy nuclear plants; (ii) both production and investment tax credits for “advanced” nuclear plants which come online after December 31, 2024; and (iii) facilitating tax credit monetisation to allow “tax equity” financing for nuclear projects. The first mechanism is designed to preserve existing nuclear capacity. The second two incentives establish, for perhaps the first time, an approximate tax subsidy equivalence between nuclear, and its traditionally more favoured cousins, wind or solar.

The context is meaningful. Tennessee’s Watts Bar – Unit 2 has the distinction of being the only new nuclear power plant to come online in the United States in the last 25 years. On the other side of the ledger, from 2013 through 2022, thirteen reactors were shut down, resulting in a total capacity elimination of 10,241 megawatts. For perspective, this is equivalent (when capacity utilisation is factored in) to roughly 10,000 wind turbines.

The relatively high operating costs of ageing nuclear plants, plus general antipathy to nuclear, have favoured new power generation through currently cheap natural gas or heavily subsidised solar or wind plants. To prevent, or at least slowdown, the retirement of existing nuclear plants, the 2022 IRA includes a nuclear power production tax credit of 0.3 cents per kilowatt hour. The credit amount bumps up to 1.5 cents if certain “prevailing wage” (read, “union wage”) standards are satisfied. The credit begins in 2024 and is supposed to last nine years. The amount of credit is also affected by changes in the current market conditions for electricity.

The introduction of a production tax credit for legacy nuclear plants is consistent with pronouncements of grave concerns about global warming. Equally plausible are political concerns about the loss of jobs and potential brown-outs. State and local officeholders have reason to fear the consequences of voters losing their air conditioning on a hot summer day.   Also, several states have already been granting subsidies for legacy plants. The federal tax credit may at least shift some of these financial burdens to the federal level.

Getting Into the Nitty Gritty

Free market purists in the US have advocated a direct tax on carbon production as the least bad alternative. Their theory is that the government should not be selecting particular technologies to achieve the goal of carbon reduction. Alas, the tax credit approach for new nuclear facilities parallels the structure used to promote the wind industry. The possibility of a direct tax on carbon production has been reduced even further, to the dismay of the free market purists.

The 2022 IRA provides both investment and production tax credits for advanced reactors which come online after December 31, 2024.  “Advanced” here means only that the reactor design was approved by the US Nuclear Regulatory Commission after December 31, 1993. The primary technologies targeted are so-called modular reactors, such as the pebble bed or sodium-cooled varieties. These designs supposedly are simpler, safer, and, usually, smaller. And the increased use of factory-built, pre-fabricated major elements, will, hopefully, avoid the stunning construction site delays and cost–overruns that have characterised legacy design reactor projects. 

The base amount of the production tax credit is, again, 0.3 cents per kilowatt hour. This amount can be increased to 1.5 cents per kwh, if prevailing wage and apprenticeship standards are met. The crucial investment tax credit is pegged at 6% but can increase to 30% based on prevailing wage standards. Apprenticeships are also a factor in increasing credit. Lawmakers apparently believe that on-the-job training is ok for advanced nuclear reactor construction.

Some commentators believe that the 2022 IRA provisions regarding monetisation of the refundable (i.e. convertible into cash) tax credits for zero-carbon projects are the most significant benefits to the nuclear industry. Under current tax law, a tax equity investor must satisfy certain traditional characteristics of a joint venture partner, including taking on true equity risks. While to some extent tolerable for solar and wind projects, these partnership features rendered tax equity participation in nuclear projects somewhat, shall we say, radioactive.

The 2022 IRA revisions greatly liberalise the trading of tax credits and may, for the first time, make tax equity investing a realistic project financing mechanism for nuclear facilities. 

An International Renaissance?

The timing for the nuclear-related provisions of the 2022 IRA was fortuitous.

In June, the EU Parliament backed rules to characterise nuclear investments as climate-friendly. Germany’s retirement of its nuclear fleet now looks like one of its worst post-WWII decisions, and has, with exquisite irony, been followed by re-starts of shuttered coal-fired plants and prospects of energy rationing. Meanwhile, neighboring France, with Europe’s largest percentage of nuclear generation, is exporting electricity and planning on additional nuclear plants. These developments, plus the need for Democrats to stick together on the 2022 IRA, all aligned to help the Washington nuclear lobby to largely achieve its most immediate goal: establishing tax parity between nuclear and renewables. Whether or not this triggers the oft-deferred nuclear renaissance is a different, and much more interesting, question.

There is no shortage of obstacles to the renaissance.  The concept of small nuclear “modules” (which admittedly could be chained together) has a “small is good” appeal, similar to that of small hydro projects and microbreweries. But “small” violates a principle of scale dating back to the days of Edison: cost per kilowatt hour is inversely proportional to generation capacity. It is not accidental that the median average rotor diameter of wind turbines has doubled in the last twenty years.

The Skills Gap Problem

Whether the United States even has the individual and organisational skill sets to support a major expansion in nuclear plant construction is an open question. Apart from the naval reactor program, nearly a generation has elapsed without sustained nuclear development. A crude analogy would be a nation restarting aircraft manufacturing after a suspension of thirty years. How many would volunteer to fly on the first plane to be assembled?

The variety of new designs, while touted as moving the industry past the 1970s, could itself be a problem. An alternative phrase for “advanced nuclear facility” is “unproven nuclear facility.” Multiple designs and smaller, but more numerous, sites, will test the oversight capabilities of the Nuclear Regulatory Commission, already criticised by some for “regulatory capture.”

NYT columnist Farhad Manjoo entitled his September 16 piece “Nuclear Power Still Doesn’t Make Much Sense.” Nuclear power’s long construction lead times and cost disadvantages, and advances in battery storage of electricity were among the factors cited. And this was after his flight to London for the World Nuclear Symposium.

But the major obstacles to the renaissance will remain the instinctive anti-nuclear and risk-averse attitudes of a significant portion of the public.

The EU Parliament’s tepid endorsement of nuclear power as “sustainable” immediately provoked accusations of greenwashing. California Governor (and 2024 Democratic presidential hopeful) Gavin Newsom’s consideration of federal funding to keep the Diabolo Canyon nuclear plant running beyond its scheduled 2025 shutdown was quickly characterised by state environmental activists as an “outrage.”

Senator Bernie Sanders’ past advocacy of a ban on new nuclear plants does not contain any carve out for molten chloride reactors, such as those under development by Bill Gates’ TerraPower venture.  Drivers who put “zero emissions” bumper stickers on their Teslas (and who apparently believe electricity comes from the wall outlet) are unlikely to carefully distinguish between a legacy pressurised water design and a new pebble bed reactor.

Meanwhile, analysis of environmentalism as a religion has become increasingly more common. The relationship between nuclear technology, and especially new nuclear technology, to carbon-related climate concerns could sharpen that analysis. Rejecting or even impeding a potentially huge source of carbon-free electricity highlights the anti-technology aspects of the green movement.

But who knows? The heavy Wall Street money may decide to go all in on tax equity financing, hopefully pump up their ESG scores and start characterising the anti-nuclear movement as extremist heretics consigning the planet to an early roasting.

Stranger things have happened recently in the space. 

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