A Quick Nuclear Risk Follow Up To Arnold

Lynne Kiesling

On Friday Arnold Kling went public with a little email chat that he, Randall Parker and I were having about strategies for managing nuclear power plant risks. The Price-Anderson Act is a controversial piece of law that limits the liability of nuclear power companies, essentially acting as a federal insurance subsidy to the nuclear power industry (my statement of that is also likely to be controversial!).

I suggested a hypothesis: the rigid regulatory approach to nuclear risk, including Price-Anderson, stifles our ability to discover new and potentially more beneficial policy approaches. One such suggestion I made was the use of the reinsurance industry to refine the precision of the risk estimation and achieve more risk spreading.

Arnold is not persuaded, as you can see in his post; he thinks the risk is too discrete and too large. I think it’s an open question. Does the insurance industry prefer Price-Anderson because it increases the static demand for nuclear insurance? Or is there a potential value proposition in the insurance industry working nuclear risk into their portfolios, taking on the monitoring function to protect their financial interests, and in the process laying off risk?

I would also bet, to address Arnold’s specific question, that the insurance/re-insurance industry would have financial incentives and wherewithal to estimate the political risks and costs associated with a nuclear accident. We see it in financial markets all the time; those companies who do a better job of acting in accordance with good foresight about political and regulatory changes. Indeed, they may do better than either regulators or juries.

I agree with one of Arnold’s commenters: I’d like to know what Warren Buffet has to say about it!


6 thoughts on “A Quick Nuclear Risk Follow Up To Arnold

  1. Lynne,

    To expand the discussion, there are really two classes of risks involved with nuclear power plants: the risk of failure due to improper design, maintenance or operation; and, the risk of failure due to terrorist attack on the facility. I agree that the former should be privately insured risk. I believe that the latter should be government insured risk. It is the owners’ / operators’ responsibilty to assure that the plant is built, maintained and operated safely; and, these requirements are within their control. It is the government’s responsibility to assure that citizens and their property are safe from terrorist activity.

    I also believe that the government will almost certainly have an even greater role in any future nuclear powerplants built in the US (and its territorial waters). I do not believe that private capital will be available to construct nuclear power plants in an environment in which approvals can be delayed indefinitely, approved plant designs can be required to be changed after construction begins, construction can be halted for months or years and operating licenses can be denied because a previously approved evacuation plan is judged to no longer be adequate. The government will either dramatically revise the approval and licensing processes, or be required to build and license the plants and then sell them to owner / operators. (I do not favor this latter alternative, because the final step would more likely lead to the formation of another TVA-like entity.)

    One way to deal with most or all of these issues is to return to a 30 year old idea “floated” by Westinghouse and Tenneco. Westinghouse proposed to build “cookie cutter” nuclear plants on barges, which would then be towed to offshore locations and installed behind artificial breakwaters to protect them from wave action during storms. This approach would permit the design to be thoroughly “vetted” before the first plant was constructed. It would permit the NRC to assign inspectors to assure design compliance and construction quality. It would accelerate plant construction by approximating assembly line techniques. It would reduce plant cost by spreading design costs across multiple units and by reducing construction time and the capitalization of interest on CWIP.

    Installation of multiple plants behind massive breakwaters offshore would simplify evacuation planning. It would also simplify security from terrorist attack by allowing multiple plants to be co-located with both ABM and ASW installations manned by the US military. The co-location of multiple plants could also eliminate the need to shut nuclear plants down completely if the grid becomes unavailable. (This is done now as a safety precaution. However, the multiple plants could provide mutual assurance of power availability to operate safety systems, if required.)

    The offshore location would also solve the problem of cooling water availability in the event of drought, as well as offering the opportunity to recover thermal energy rejected by the process for use in desalinating sea water for human and agricultural uses. Very high temperature theral energy, or excess electricity, could also be used to produce hydrogen from the sea water for transportation applications.

    I bet Warren Buffet would be far more willing to become involved in insuring the private risk if the risk were better controlled and quantified. The above may not be THE way to accomplish this quantification and control, but it may be A way.

  2. Lynne,

    To expand the discussion, there are really two classes of risks involved with nuclear power plants: the risk of failure due to improper design, maintenance or operation; and, the risk of failure due to terrorist attack on the facility. I agree that the former should be privately insured risk. I believe that the latter should be government insured risk. It is the owners’ / operators’ responsibilty to assure that the plant is built, maintained and operated safely; and, these requirements are within their control. It is the government’s responsibility to assure that citizens and their property are safe from terrorist activity.

    I also believe that the government will almost certainly have an even greater role in any future nuclear powerplants built in the US (and its territorial waters). I do not believe that private capital will be available to construct nuclear power plants in an environment in which approvals can be delayed indefinitely, approved plant designs can be required to be changed after construction begins, construction can be halted for months or years and operating licenses can be denied because a previously approved evacuation plan is judged to no longer be adequate. The government will either dramatically revise the approval and licensing processes, or be required to build and license the plants and then sell them to owner / operators. (I do not favor this latter alternative, because the final step would more likely lead to the formation of another TVA-like entity.)

    One way to deal with most or all of these issues is to return to a 30 year old idea “floated” by Westinghouse and Tenneco. Westinghouse proposed to build “cookie cutter” nuclear plants on barges, which would then be towed to offshore locations and installed behind artificial breakwaters to protect them from wave action during storms. This approach would permit the design to be thoroughly “vetted” before the first plant was constructed. It would permit the NRC to assign inspectors to assure design compliance and construction quality. It would accelerate plant construction by approximating assembly line techniques. It would reduce plant cost by spreading design costs across multiple units and by reducing construction time and the capitalization of interest on CWIP.

    Installation of multiple plants behind massive breakwaters offshore would simplify evacuation planning. It would also simplify security from terrorist attack by allowing multiple plants to be co-located with both ABM and ASW installations manned by the US military. The co-location of multiple plants could also eliminate the need to shut nuclear plants down completely if the grid becomes unavailable. (This is done now as a safety precaution. However, the multiple plants could provide mutual assurance of power availability to operate safety systems, if required.)

    The offshore location would also solve the problem of cooling water availability in the event of drought, as well as offering the opportunity to recover thermal energy rejected by the process for use in desalinating sea water for human and agricultural uses. Very high temperature theral energy, or excess electricity, could also be used to produce hydrogen from the sea water for transportation applications.

    I bet Warren Buffet would be far more willing to become involved in insuring the private risk if the risk were better controlled and quantified. The above may not be THE way to accomplish this quantification and control, but it may be A way.

  3. In the 21st century, when power plants may be owned and operated by so-called merchant producers (MPs), I assume that a MP will separately incorporate and finance each power plant. In that event the financial liability of the MP will be limited to its investment in the plant. The equity owners do not need insurance because they can limit their risk by diversifying their investments. If insurance cannot be had at a reasonable price, they will demand a higher return to cover the additional risk, but, given that there have been very few nuclear accidents world-wide over the last 50 years, I doubt that it would exceed the premia demanded by investors in riskier business like pharmaceuticals.

    Operating from the assumption that a nuclear plant will cost about $1.5/Watt, a 2 Gigawatt Nuclear plant (think Indian point in New York) would cost about $3 billion. Since the equity would probably be about 10% of the total investment, the rest being bonds, the total equity investment would be about $300 million. Since these numbers are less than the P-A cap, it is not relevant, because the entire investment could be wiped out fairly easily. These numbers are not out of scale with other private equity investments and such a project should be doable, if, and its a very big if, the regulatory climate is temperate and the spent fuel problem can be solved. But these are political, not economic, questions.

    I should note that the original intention of P-A was not to subsidize the nuclear power industry, but to limit the risk to the rate paying public and hold down their rates. In the 1950s power plants were only owned by regulated utilities. Because of this, the people at financial risk from a nuclear mishap were the customers of the utilities who could have been forced to pay higher rates if there were an accident. The limit was set when dollars were a lot bigger than they are now and juries were less generous, it was a prudential trade off between potential accident victims and rate payers both of whom could be considered innocent segments of the general public.

  4. The first layer of Nuclear insurance (both liability and property) is handled by pools of insurers (American Nuclear Insurers and Nuclear Mutual Limited). PA provides a public cap (or more properly a limitation of liability and a no-fault tort environment as it is unlikely that the limitation would be breached in a no-fault legal world).

    Nuclear was a curious beast, even now not free of Cold War limitations. In the beginning only the US AEC could own nuclear fuel. It was leased to the Utilities. Today, only the US DOE can accept (and must take!) used nuclear fuel.

    Markets are now very comfortatle with the technology, but uncomfortable with the regulatory and legal risks involved.

    At the end of the day, regularizing waste disposal and a reformed tort environment is required (as well as a true competitive electricity market) for nuclear sucess

  5. The first layer of Nuclear insurance (both liability and property) is handled by pools of insurers (American Nuclear Insurers and Nuclear Mutual Limited). PA provides a public cap (or more properly a limitation of liability and a no-fault tort environment as it is unlikely that the limitation would be breached in a no-fault legal world).

    Nuclear was a curious beast, even now not free of Cold War limitations. In the beginning only the US AEC could own nuclear fuel. It was leased to the Utilities. Today, only the US DOE can accept (and must take!) used nuclear fuel.

    Markets are now very comfortatle with the technology, but uncomfortable with the regulatory and legal risks involved.

    At the end of the day, regularizing waste disposal and a reformed tort environment is required (as well as a true competitive electricity market) for nuclear sucess

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