Our Nuclear Future - Financial Risk and Externalities II

Hanford Facility, Washington

In my last article on the nuclear issue, "Our Nuclear Future, Financial Risk and Externalities",

I discussed Rating Agency Capital Models in the context of nuclear risks such as those posed at Fukushima, Chernobyl and Three Mile Island.

The issue of managing the risks associated with both military and commercial nuclear applications is a vital one, that should interest all of us and speaks to the very concept of externalities and how to manage them in a global world.  In this article I focus on commercial applications.

The Fukushima disaster was impacted by inadequate safeguards.  The tsunami risk was not adequately taken into account in planning where to place the back up generators which could restore power in the event of an interruption of power.  The back up generators were placed at point too near the sea wall protection that left them exposed to the tidal wave action of the large tsunami that hit off Fukushima on March 11, 2011, when an 8.9 magnitude earthquake was experienced.

How do we deal with the risk management issues concerning the financing, construction and operation of nuclear plants, and with the issue of managing nuclear waste from both military and civilian applications?  These issues concern low probability, high risk events, issues that fall outside of the scope of normal everyday events.

The federal government offers nuclear power plants some degree of protection from liability.  These limits on liability, which exist in order to encourage the construction and operation of nuclear plants for power generation purposes, do not do as thorough a job of mitigating risk as they should.  This is because an external party, the federal government, is responsible for the oversight.  In the case of Fukushima, where plants are constructed and operated across national boundaries, the issues become more complex.

The Fukushima Daiichi nuclear power plant was constructed and operated in Japan, by Fukushima General Electric (GE), Boise, and Tokyo Electric Power Company (TEPCO).  The components of the nuclear plant were provided by contractors such as GE,which provided six GE nuclear reactors. Other contractors were also involved. Multi-national resources were employed.  Liability issues are very difficult to ascertain.  It is very probable that the loss of the ability of the generators to provide power after interruption in service due to the tsunami materially impacted the fate of the nuclear material in those reactors and magnified the effect of the event.

Management of these issues across national boundaries presents a serious issue.  How do you price for risk when governments put caps on liabilities?  It is easier for companies to price for risk when the risk is limited!  The incentive for commercial entities to manage risk is reduced when they do not have to absorb the risk of extreme events in either pricing of their products, mitigation of that risk, or the application of design elements to manage that risk. The risk is shifted to the governments.

When all else fails, due to the failure to put in place elements that will mitigate extreme risk, governments have to step in.  At this point, governments must ascertain their own issues of financial accountability and debate among themselves.  This issue is currently unfolding as nuclear radiation emerges from the Fukushima disaster and manifests itself in the ocean, carried by currents, and in the air, as was the case with the Chernobyl event.

Clearly, there must be a better match between potential liabilities and mitigation of risk.  The problem occurs when it becomes financially unfeasible for companies to price for the risk of very low probability, high risk externalities.  The government(s) must retain the capability to regulate.  History has shown that government regulation is difficult in the face of corporate profits.  This was shown in the history of seeking to regulate the ASARCO smelter.

Nuclear power plants do not arise ex nihilo. They must be financed, built, insured.  How do you finance nuclear power plants?  They can be built with government financing and the government can assume all the risk.  In a commercial enterprise, across national boundaries, private parties can finance nuclear power plants if they have sufficient funds and can insure the risk of loss, either by commercial carriers, government support or by self insuring.

There are many financial instruments that may be available to finance nuclear power plants.  In addition, nuclear power plants require real estate.   A component of a nuclear power plant can conceivably be moved from one site to another, yet the ground below stays, and is subject to the risk of contamination.

It is instructive to look back at the history of Nuclear Power Plant generation in the Northwest.  The situation with Washington Public Power Supply System Bonds is instructive (WPPSS).  An article from HistoryLink.org discusses this history of one of the largest bond defaults in history.  Five WPPSS power plants were envisioned, and WPPSS power plant 2, the Columbia Generating Station, survives.  The facility is now called Energy Northwest, and produces 12% of the power generated by the Bonneville Power Administration.

A great portion of the Northwest's power supply is generated by hydroelectric sources such as those operating along the Columbia River.

The discussion of financing nuclear power plants rests with a projection of bond default experience over time (default matrices), and how bond ratings emerge through Rating Agency models such as Standard and Poor's, Moody's and A.M. Best.

Clearly, the issue of using bonds to finance nuclear power plants is a critical one, in more than one way.  WPPSS financing has provided an example of the risk of building nuclear plants, financing them, and having companies such as insurers and banks assume the risk of financing them.

Financial institutions take risks when they purchase company bonds.  The construction and operational risks (there are separate bonds for construction and operation) are borne by those that purchase the bonds.  Riskier enterprises are assigned a risk premium that is reflected in the interest rate offered on the bond.  The riskier the enterprise, the higher the interest rate, and the longer it takes the enterprise to retire the bond.  This is basic economics.

Given the history of WPPSS, it is difficult to construct a model for financing nuclear power plant construction.  History has shown that even rating bonds for more ordinary applications, is fraught with risk.  The financial events of 2008 have demonstrated to us how the domino effects of  certain companies being taken down can bring a financial system to the brink.  It is clear that certain financial institutions were allowed fail, while others were bailed out by the government.  Insurer AIG, for example, was bailed out, while Washington Mutual was allowed to fail.  This is a very interesting aspect to investigate, since Chase was left purchasing and holding the assets that Washington Mutual had accumulated over time.

The 2008 financial collapse is another blog article, however it is instructional in how bond defaults can bring down a financial system. Suffice it to say that mortgage backed securities, collateralized mortgage obligations, credit default swaps (CDS's) and collateralized debt obligations (CDO's) played a large role in this collapse. These issues reflected the financial arbitrage reflected in Rating Agency and regulatory agency capital analysis of financial institutions.  The actions that the government took, in deciding which institutions to rescue and which institutions to allow to fail, helped determine the path that would be taken.

Rating Agencies played a large role in the events that unfolded.  I have discussed Rating Agencies in previous articles.

Clearly, nuclear financing issues present complexities beyond those presented by other issues financed by our market system.  There are limits to liability that impact the nuclear arena.  We are left, then, with a cooperative issue impacting the ways in which governmental regulatory agencies can interject themselves into the system and regulate in a manner to mitigate low probability high impact risk.

This takes us again back to the past, and the issues attendant in regulating ASARCO Smelter Emissions and the problems that this issue presented.

These are the issues we face in these times of global warming and climate change, as we consider the risks and benefits of financing nuclear power plants.  Alternative energy sources are discussed in my article "Global Warming and Climate Change - Polar Pioneer" .

We must consider the issues of regulatory government as it is juxtaposed with issues concerning market operations, in dealing with situations that involve low probability, high risk events.  It is clear that unfettered market operations may bring about market collapse through the interrelationships that exist within the structure of markets. It is also clear that government regulation that is not strong enough may not be able to counter the impact of market forces that overrun it, especially considering the profits that can be developed in certain markets.  Furthermore, it is clear that government forces may act in a manner contradictory to public interest by choosing winners and loser, perhaps steered by an array of  predefined values of certain groups.

Can we trust government?  We must have checks and balances.  Do we want government to only have one option, or to offer choices?  I'm in favor of choices, as choices facilitate change, which is needed. Market research has shown that people can tolerate only so many choices; this has been in areas such as bottled peaches, cereal, etc.  Would we ever want our choices in cereals and bottled peaches to govern our choices in power generation and other key areas?  No, however the analogy is instructive.

We need a government strong enough to regulate; the problem in regulation, however, has shown that it is difficult for regulatory agencies to keep up with the profits that can be made from activities under investigation.  This is certainly true in the financial arena where new instruments, especially those employing financial arbitrage, arise in order to present profit opportunities that defy regulation.

Constitutional issues such as due process and informed consent are bell weather issues in our financial and social system.  The Justice Department has a long storied history in regulating monopoly.  These are all important issues as we consider regulation of markets, intrusion of regulators/law enforcement into markets, and imposition of systems which defy Constitutional rights.

These issues all reflect ongoing issues of climate change and global warming and the effect of the environment on certain populations.

Our Constitutional rights are now under attack and must be defended, especially as regards issues of due process and informed consent.  I have made a thorough examination of the social processes existing in our society today and find material flaws in social systems.

Social systems and the justice system as they currently exist need serious reforms to enforce the Constitutional rights that we hold so dear to us, as do imposed belief systems.

marilyndunstan.blogspot.com

Our Nuclear Future - Financial Risk and Externalities
Our Nuclear Future - Hanford and Spent Nuclear Fuel
Global Warming and Climate Change - "Polar Pioneer" and Arctic Drilling

Externalities

Chernobyl 25th anniversary 
Energy Choices and Risk
Global Warming and Climate Change-Polar Pioneer
Processing Risk and Uncertainty
Log in the Surf - 8.9 Japan Earthquake (9.0 updated)

History Link.org
Washington Public Power Supply System

Our Nuclear Future - Hanford and Spent Nuclear Fuel

Hanford Site, Washington

This nation depends on nuclear energy for a great deal of it's power generation.  Indeed, as we see the Polar Pioneer take off for marginal Chukchi Sea, we note the difficulties faced by our declining resources and the issue of Peak Oil.

How can a world which depends on energy to operate gain power generation resources when there are so many demands, both by developed countries who have already built up a large demand for resources, and by developing nations, in areas such as Africa and Asia, where demands for energy resources will increase with industrialization and commercialization.

I have already discussed some of the issues posed by the Polar Pioneer in my recent blog article. It is clear that there are many risks in oil drilling as we seek to drill at greater and greater depths, in locations where the risk is greater, such as the Chukchi Sea between Alaska and Russia, and engage in practices such as fracking which present their own risks.

My previous blog article, "Energy Choices and Risk", following the Fukushima Disaster on 3/11/2011, discusses some of the emerging risks. Hydroelectric power is a major source of energy which meets much of the energy generation needs in the Pacific Northwest.  Climate change and global warming impact the generation of hydroelectric power and water resources.  Declining glaciers and mountain snow impact climate change and global warming through a positive feedback mechanism as the lower snow pack decreases the albedo through lower reflectivity in the mountain snow pack.

Alternative energy choices are increasingly being considered.  These include biofuels, wind power and solar power.  Can these alternative energy sources meet the bulk of our needs for energy consumption? They can help mitigate the demand for energy but cannot completely fill it. Would filling the planet's surface with wind generators disturb our meteorological balance?  Would over use of solar panels mean that solar energy is diverted into household appliances rather than photosynthesis? To what extent can we generate energy without disturbing other entities within our environment, beyond a de minimus impact?  We do not know the answers to many of these questions.

 I have discussed issues of low probability, high impact risks in conjunction with Three Mile Island, Chernobyl and Fukushima in my blog article "Energy Choices and Risk".

While large scale accidents see significant press coverage (and they should), those who have studied, researched or worked in the nuclear industry have compelling stories about how exposures have impacted their lives in many ways.  Many others, through occupational exposures not directly related to the nuclear industry may also have been impacted in many ways and to various degrees.

However, occupational exposure is not the whole story; many others, in various walks of life, have been exposed to radiation or other environmental risk in a number of ways.  These individuals may include family members of those having occupational exposure, those living in down wind areas, those transiting through areas with exposure, and those who may be handling product that might have some radiological contamination, and many more. It is clear that those with non-occupational exposures must be cared for just as those with occupational exposures are cared for. The impact of radiation on the populace is an externality issue.

Radiation released into the atmosphere is carried downwind; radiation released into water is carried with the currents.  Radiation released into materials is carried with those materials. Radiation will follow its decay path, which varies with the radionuclide.  One may consider bananas, which are high in potassium, and carry the naturally radioactive element Potassium 40 at low levels.  Every time we carry bananas from the store to our home we carry some (low level) amount of radioactivity with us.  Believe it or not, radiation from bananas is expressed as a "banana equivalent dose", about 0.1 micro-sievert, at least on Wikipedia.

The impact of exposure to radiation is a serious one involving physiological and psychological issues.

Dr Yuri Yablokov's work, "Consequences of the Catastophe for People and the Environment" is an extensive body of work by the Russian Scientist who reported to Mikhail Gorbachev. Dr Yablokov has provided probably the most complete body of work relating to the impact of Chernobyl on people and on the environment.

The Marshall Islands is but one example of an area where nuclear testing has impacted residents. Sixty years later there are still impacts as indicated by this article in The Guardian.

Nevada and New Mexico have a history of atomic testing where test sites and downwind areas have been impacted..  My article on the site of the first atomic test, the initial Trinity nuclear test in New Mexico, discusses these issues.

There are a garden variety of risks along a risk spectrum surrounding the use of nuclear energy.  Risk studies for the Indian Point Reactor at Buchanan, New York, consider a variety of factors: This study takes into account information from the Chernobyl and Fukushima events.

Wikipedia lists some incidents at Indian Point Reactor. To what degree have radiation incidents at Indian Point impacted the surrounding industries and the neighboring communities?  To what extent was a gypsum plant just south of the Indian Point Reactor exposed by incidents at Indian Point?  This is a matter for further investigation.  Gypsum is used in many applications, including in wallboard. Could radioactivity could have traveled from a point of origin in Buchanan, New York, via trucks, trains, vessels or aircraft to residential and commercials interiors: bedroom, kitchen and bathroom walls all over the world?  Can we know the answer to these questions? Certainly we would need to answer these questions in assessing future risks where industrial and other activities are carried about in areas contiguous to nuclear facilities.

According to the Indian Point Report: "Also note that these calculations were performed for a hypothetical accident at only one of Indian Point’s two operating reactors, and the accident scenarios did not involve radiation release from the spent fuel pools, unlike for Fukushima, which was a multi-unit accident with damage to spent nuclear fuel storage. " states one section of the document.

A continuing issue is the handling of spent nuclear fuel.  This is an increasing issue as the amount of spent nuclear fuel, especially that containing plutonium, increases.

A March 18, 2011, article in the Seattle Times discusses the use of MOX plutonium fuel at Hanford.

Nuclear waste may be stored, for example at Tank Farms, for example, at Hanford Tank Farms, or in Dry Cask Storage or at deep geological repositories such as the Carlsbad Waste Isolation Storage Plant in New Mexico.  Yucca Mountain was designated as a deep geological depository for the storage of high level nuclear waste and spent nuclear fuel.

Nuclear waste can be processed in various ways, for example via vitrification at the Vitrification Plant at Hanford and potentially transported elsewhere for long term storage.  The storage and processing of spent nuclear fuel has thus been the subject of extensive debate.  Many of these storage methods involve keeping the isotopes in their original processed state, so that many long lived isotopes are stored in what is an accumulating storage of spent nuclear fuel.

Nuclear fuel can also be processed in a reactor.  This processing allows for isotopes with higher levels of radioactivity, to be processed down their decay chain, reducing the level of radioactivity while producing power, and thus reducing the level of radioactivity in the spent fuel that has to be stored.  This methodology, which is referred to in the March 18, 2011 article in the Seattle Times, has its own risks.  Risks include the risk of nuclear accident while reprocessing the fuel, escape of containment and risks involved in transporting the nuclear spent fuel from the sites at which it is being processed to the sites where it is reprocessed (Hanford Power Plant).

These risks include many of the same issues discussed above regarding the Indian Point plant. There are longer terms risks as well, which involve how to use the potential energy stored in the radionuclide's decay chain; whether it should be used immediately to generate power or whether it should be put back in the ground to be available for later use, or whether there is some planetary need relating to global warming and climate change that should dictate its usage.  That is a matter of continuing discussion.  There is a considerable continuum of risk involved in studying this issue of nuclear waste.

Dr Yablokov's work on Chernobyl illustrates this risk in a very powerful way.  Many areas could potentially be impacted, including the Palouse of Washington, the Seattle Area, and the Washington and Oregon Coasts.

I heard Dr Yablokov speak on "Chernobyl 25 Years Later: Lessons Learned" on March 28, 2011 at the University of Washington, at Kane Hall about his experiences dealing with that nuclear disaster. It was quite an experience.

Nuclear power plants also pose financial risk.  I address this issue in my blog post,
Energy Choices and Risk.  This issue is a matter of continuing investigation as we look towards issues of financial risk management, and the cost of externalities as imposed on society and individuals.


marilyndunstan.photoshelter.com

Hanford 
Palouse
Seattle
Washington Coast
Oregon Coast

Hanford - Use of Plutonium Fuel
Indian Point Energy Plant
Marshall Islands Nuclear Testing Legacy
Consequences of the Catastrophe for People and the Environment - Dr Yablokov
Seattle Times - Plutonium Fuel Could be Used at Hanford Power Plant

Wikipedia:
Indian Point Energy Center
Radiation
Hydraulic Fracturing
Banana Equivalent Dose
Carlsbad Waste Isolation Storage Plant
Yucca Mountain Nuclear Waste Depository

marilyndunstan.blogspot.com
Externalities
Chernobyl 25th anniversary 
Energy Choices and Risk
Global Warming and Climate Change-Polar Pioneer
Processing Risk and Uncertainty
Log in the Surf - 8.9 Japan Earthquake (9.0 updated)

Nuclear Regulatory Commission - Dry Cask Storage

Energy Choices and Risk

Japan’s March 11, 2011 Tohoku 9.0 earthquake, ensuing tsunami and nuclear incident at Fukushima Daiichi Nuclear Plant have reminded us all that nuclear plants are subject to risk. This should be no surprise, as all sources of energy are subject to some degree of risk. In fact, just about everything in life has some degree of risk attached to it. However, nuclear plants, with their added radioactivity risk, present a considerable challenge in managing the lower probability, higher impact events.

We face global, environmental challenges in managing climate change issues. These climate change issues affect both micro-climates and have a planet-wide impact. In order to meet these considerable challenges, nuclear energy must be a part of the solution along with other energy options. We must seek to understand and mitigate risks facing nuclear plants as we go forward to solve the larger planet-wide problem which affects us all.

It has been almost 25 years since the April 26, 1986 nuclear incident at Chernobyl, in the Ukraine. That incident was ranked at “7” on the International Event Scale. The Three Mile Island Accident, beginning on March 28, 1979 ranked as a “5”. That incident, occurring exactly 32 years ago, took place at the Three Mile Island Plant in Middletown, Pennsylvania. The Fukushima Nuclear Accidents have so far been ranked as high as a “5”, and the situation has not yet been resolved .

In the midst of the efforts to bring the Fukushima Reactors under control, there have been calls to reexamine the safety of nuclear power plants. The International Atomic Energy Agency (IAEA) called for a meeting before the summer to discuss an assessment of the Fukushima accident, lessons to be learned, strengthened safety measures and strengthened responses to future incidents.

As the Japanese workers worked on the reactor, rating agencies Moody’s Japan K.K. and Standard and Poors downgraded Tokyo Electric Power Company (Tepco’s) long term debt. Moody’s indicated that it saw risk in GE’s nuclear business, although it did not downgrade GE, which contributes 1% of GE’s annual $100 billion revenue. GE was the designer of the Fukushima nuclear power plants., and the supplier of reactors 1,2 and 6.

At the same time, ongoing issues regarding the storage of the nation’s nuclear waste are unfolding. This waste includes waste from commercial nuclear plants and military/defense waste products. The waste is stored in a variety of locations, ranging from storage on site to storage at the Hanford Site, in Washington State, where two-thirds of the nation’s high-level radioactive waste is stored. The storage issues are complex, involving the removal of the nation’s only designated nuclear waste repository from consideration, and related litigation by states (Washington and South Carolina) and regulators (National Association of Regulatory Utility Commissioners).

We should develop an energy strategy that optimizes the risk profiles of the various types of power generation (including nuclear). This strategy should be science-based, above politics, in the interest of the nation (and world) as a whole, reflecting our responsibilities to the environment both in theory and in practice, and appropriately reflecting risks in pricing decisions.