Low-Cost Fuel Purchases

Fuel Purchase Saves Region Tens of Millions of Dollars 
 

Energy Northwest’s history of strategic fuel purchases for Columbia Generating Station has resulted in some of the lowest fuel costs in the nation for Northwest beneficiaries of nuclear power.   

On May 15, 2012, Energy Northwest announced to the region its most beneficial fuel purchase to date – an agreement between the Tennessee Valley Authority, the U.S. Enrichment Corporation and the Department of Energy to turn depleted uranium (also called uranium tails) into low cost enriched uranium product for further future processing into nuclear fuel.  

The fuel agreement is now showing tens of millions of dollars in current rate case savings, and it will generate tens of millions more through 2028. 

Low-Cost Opportunity 

In early 2012 the Energy Department invited the Bonneville Power Administration and Energy Northwest to participate in an agreement to enrich uranium tailings for use as fuel in Columbia Generating Station.   

The motivation for this federal initiative was a need by the Energy Department to supply the National Nuclear Security Administration with U.S.-origin uranium and enrichment for the production of tritium for national security purposes. The only enrichment production option for the NNSA was the one U.S. facility allowed under international treaty to supply such material – the Paducah Gaseous Diffusion Plant in Kentucky, owned by the Department of Energy, and under lease to the U.S. Enrichment Corporation. (USEC plans to replace the Paducah facility with a more efficient facility in Piketon, Ohio, under a program known as the American Centrifuge Project.) 

To obtain the material required by NNSA, DOE chose to approach Energy Northwest and the Tennessee Valley Authority with a fuel procurement option that would provide fuel for Energy Northwest while also providing fuel, for tritium production, to TVA.  

Low-Cost and Predictability 

After several months of negotiations between all parties, CEO Mark Reddemann recommended that the agency’s executive board award a contract for enrichment of services to the U.S. Enrichment Corporation not to exceed $706 million; enter an agreement with the Energy Department for a combined transaction value not to exceed $5 million; and contract for the sale to TVA of a portion of the uranium received from USEC for approximately $730 million. The fuel produced by the process, most of which would be sold to TVA, would be managed as two different commercial commodities – uranium hexafluoride at the natural enrichment level, and separative work units, or SWU, used to enrich the fuel from the natural enrichment level to that used in commercial reactors. 

Contracts were signed in May 2012, through which Energy Northwest purchased nine years’ worth of fuel for Columbia at a cost significantly lower than the then-current market price as well as future forecasted market prices.  

Within the year the Paducah facility had enriched the uranium for future use as fuel in Columbia Generation Station, and for supply to TVA. The cost of this fuel was well below other market options, and predictable through 2028. Beginning in 2015 the agency will start selling the larger portion of the enriched uranium to TVA. 

Adding Up Ratepayer Savings  

The actual cost of production, $687 million, was less then the $711 million budgeted by Energy Northwest. In December 2013, the fuel purchased by Energy Northwest was valued conservatively at $858 million for the agency ($622 million due from TVA for its portion, plus a retained fuel value of $236 million at then-current spot market prices).   

After deliveries are made to the Tennessee Valley Authority by Energy Northwest, and TVA contractual payments are received by Energy Northwest, the remaining uranium that will be used by Columbia Generating Station through 2028 will have been procured at a cost of about $65 million ($687 minus $622). The December 2013 spot market value of this retained fuel, which will be used in the Columbia reactor between 2019 and 2028, is $236 million. This means that ratepayers of the Northwest have an inventory of fuel procured at approximately 27.4 percent of the December 2013 spot market price.  

Furthermore, if Energy Northwest were to enter into contracts for delivery of this material at a future date, the current long term contracts would be at prices totaling approximately $340 million. This means that today rate payers of the Northwest have $171 million in savings compared to the spot market and $275 million compared to the long term market. In short, Northwest ratepayers received nine years of fuel well under market value – hence the tens of millions saved this rate case and hundreds through the life-cycle of the procured fuel. 

 
 Anatomy of a Fair Deal - Price and Predictability​​

Energy Northwest historically purchases the majority of its nuclear fuel under long-term contracts of varying lengths and quantities, based on current market conditions.

  

Uranium hexafluoride (UF6) is a compound used in the uranium enrichment process that produces fuel for nuclear reactors.

   

In the nuclear industry, long-term fuel supply contracts are typically signed two to three years before the first delivery – and deliveries typically span five to 10 years. Prices are locked at the time of contracting and generally escalate from year to year over the life of the contract. The escalation could be a fixed percentage or linked to the actual rate of inflation. 

Example

 

 Energy Northwest signs a long-term UF6 contract at a starting price of $147 per kilogram of uranium (Historical Term Price as of Dec. 31, 2013) – the $147/kg starting price is escalated at a fixed 3 percent per year. Assuming the first delivery is two years from the contract date, the initial price ($147/kg) would be escalated at 3 percent/year resulting in a price of $156/kg. For a delivery in 10 years, the price would be $192/kg.

 

By contrast, the 2012 uranium tails purchase provided Energy Northwest with UF6 at a fixed price of $48.23 per kilogram beginning in 2019 and staying constant at that price through 2028.

 

As can be seen in the graph below, UF6 prices are volatile, remaining well above $100 since 2006 and are projected to stay above that level. The uranium tails program acquired fuel at a discount relative to current and projected prices, and acquired it at a fixed price, with no escalation, significantly reducing future cost uncertainty. 

  

UF6-Prices.jpg
 

About Energy Resources International, Inc.
Energy Northwest is a client of Energy Resources International, Inc., which provides consulting and strategic advisory services on technology, market, business, policy and environmental issues related to electric power generation and delivery. 

In addition, ERI’s Nuclear Power Group produces a comprehensive multi-client report that analyzes nuclear fuel supply prices and markets on a periodic basis. 

Find out more about ERI’s nuclear fuel cycle services here.
 

Low-Cost and Low-Carbon 

Columbia’s electricity generation plays a key role in reducing regional carbon emissions. In 2013 Columbia prevented the emission of about 4.2 million metric tons of greenhouse gases.  

As a result of the enriched uranium processing in Paducah, Ky., Columbia’s carbon footprint will increase by five to 10 percent beginning in 2019. Despite the increase, Columbia will still provide among the lowest carbon output among all other energy resources for the electricity it generates. 

The electricity used for the uranium enrichment process in Paducah was purchased from the Tennessee Valley Authority under a TVA power contract. Using TVA's fuel mix (which includes coal, hydropower and nuclear) in the carbon calculation for the uranium fuel purchased under this transaction, Columbia's carbon footprint will range between 92 and 103 pounds per megawatt hours.   

For comparison purposes, according to a 2012 report from the Washington State Department of Community, Trade and Economic Development, CO2 emitting resources in our state had the following generation emission rates: 

 

Generation Emission Rates in Washington
Emission-Rates-2.jpg

These reported emissions are for generation only – for which Columbia is zero; they do not include the CO2 emissions associated with fuel procurement for petroleum, coal and natural gas.   

Columbia continues to make a significant contribution to decreasing CO2 emissions in Washington state and the Northwest. The 2012 uranium tails transaction allows Columbia to contribute low-carbon generation with low-cost and guaranteed fuel prices through 2028 – a win-win for Washington ratepayers and the environment.​​​​​​​​

C-Bullet.jpg Quick Facts

Type:
Boiling water reactor (nuclear)

Generating Capacity:

Approximately 1,170 megawatts (net)
 
Location:
10 miles north of Richland, Wash.

Site Size:
~1,089 acres

Projected Levelized
Cost of Power (2014-2043):
 
4.7 - 5.2 cents/kWh
Comparison Costs*: 
Natural Gas: 6 - 14 cents/kWh
Wind: 7 - 10 cents/kWh
Solar: 11 - 42 cents/kWh 
*Levelized costs according to the Energy Information Administration. Levelized cost represents the per kilowatt-hour cost (in real dollars) of building and operating a generating plant over an assumed financial life and duty cycle. Key inputs to calculating levelized costs include overnight capital costs, fuel costs, fixed and variable operations and maintenance costs, financing costs and an assumed utilization rate for each plant type.
 
Columbia-Fact-Sheet-Cover.jpg
Columbia Fact Sheet (PDF)

C-Bullet.jpg High-Cost Mistakes
and False Claims

 
A $440 to $545 Million Research Error
To support an anti-nuclear policy position, a 2013 report sponsored by Physicians for Social Responsibility claimed Energy Northwest incurred a total loss of more than $270 million through the 2012 uranium purchase. In January 2014, Energy Northwest supplied the group calculations to help them understand what regional power entities have already validated – Energy Northwest’s 2012 fuel procurement brings between $171 and $275 million in savings to the region.
 
Tapping the Wrong Carbon Source
The physicians’ group also miscalculated the slight increase in Columbia’s carbon footprint as a result of Paducah uranium enrichment. The group used the wrong energy mix – the Kentucky state generation mix dominated by coal-fired generation – instead of the energy mix that was provided by the Tennessee Valley Authority, which included significant contributions from coal, hydro and nuclear, along with lesser contributions from natural gas and clean energy resources.  
 
Hyping the Freon Factor
The Paducah facility used Freon, a far greater greenhouse gas pollutant than CO2, in systems used to cool the process stream. But the CO2 emissions from Freon at Paducah were a relatively minor contribution to overall CO2 emissions, the low quantities of which still maintain a very low-carbon footprint for Columbia.
 
Irrelevant Market Comparisons for Federal Procurement
The physicians’ group also wrongly asserted – perhaps unaware of limitations imposed by federal policy – that more cost-effective market options for obtaining enriched uranium were available to the federal government. However, since the federal government required the uranium for national security purposes, federal policy required that the government obtain the material from the nation’s only U.S.-owned (Department of Energy) plant that uses only U.S. technology – the Paducah facility in Kentucky.