Specialty Insurance

A Nuclear Dilemma

Funding shortfalls emerge in the decommissioning of unprofitable nuclear facilities.
By: | December 14, 2016 • 8 min read

By the end of 2016, Southern California Edison will select from among three teams of contractors vying for the $4.4 billion job of decommissioning its San Onofre 2 and 3 nuclear power reactors in San Clemente, Calif.

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Even before the lucrative contract is awarded, the jockeying for it marks a significant shift in risk management and planning for the entire nuclear industry: the emergence of a robust, competitive market to manage and execute the physical job as well as provide financing, insurance and risk management services.

The primary drivers of nuclear power plant decommissioning changed through the years, said Dan McGarvey, managing director of the U.S. power and utility practice at Marsh.

As of July, the NRC listed 19 reactors undergoing decommissioning. That number is expected to grow.

“The classic decommissioning was because of technologies that either ran their course or failed to live up to their potential. Others were driven by the untimely requirement to replace major components or effect expensive repairs,” he said.

In the future, the main driving forces are likely to be the dictates of energy markets, McGarvey said.

“Because of the unprecedented low cost of natural gas, some nuclear stations have been determined to be not economically viable.”

Whether utilities will be able to scrape together the funds to decommission plants is a question mark.

According to Arun Mani, a partner at Oliver Wyman, nuclear plants are facing a tough economic environment in large part because of low natural gas prices, which have pushed down wholesale power prices.

Rob Battenfield, senior vice president of downstream energy, JLT Specialty USA

Rob Battenfield, senior vice president of downstream energy, JLT Specialty USA

With an average operating cost of $35/MWh, nuclear plants are battling to stay afloat. In an environment of falling gas and power prices, nuclear power is often out of the money.

“When a nuclear plant closes,” said Mani, “especially if it is retired prematurely, it adds to a growing gap, the difference between funded and unfunded liabilities for decommissioning. Those estimated costs industrywide have risen by about 60 percent since 2008 and now stand at $88 billion, of which 31 percent, or $27 billion, is unfunded.”

“The underfunded or even unfunded costs of decommissioning worldwide is a huge issue,” said Rob Battenfield, senior vice president of downstream energy at JLT Specialty USA.

From the moment a utility is granted a license to operate by the Nuclear Regulatory Commission (NRC), it is required to accumulate a trust fund against the ultimate cost of decommissioning. Historically, those costs have run about $480 million for one reactor, and about $800 million for a two-unit complex.

There are many variables in the matrix of operating or closing a nuclear plant, of which the mandated and actual size of the trust fund are only two. And in essence the trust fund is something between a running start and a show of good faith.

“If a utility is supposed to have $300 million in the trust fund, and it has that or even a little more, but the actual cost of closing the facility is going to be $400 million, then the utility is on the hook for that full $400 million,” Battenfield said.

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The market fluctuations that vex individuals planning for retirement do the same to trust funds, only on a larger scale.

“If a utility was planning to retire a unit in 2010, but its trust fund lost 40 percent of its value in the economic crisis of 2009, that would seem to favor safe storage for a few decades and give the fund time to recover,” Battenfield said.

According to Oliver Wyman’s Mani, “as the number of plants being decommissioned increases and the costs balloon, there are increasing fears around a potential shortfall in planned nuclear decommissioning funds.”

As of July, the NRC listed 19 reactors undergoing decommissioning. That number is expected to grow.

“In the past couple of years, about 6,000 MW of nuclear capacity has been shuttered,” Mani said.

“In all, analysts expect as much as 11 percent of the nation’s nuclear fleet will face premature retirement over the next several years.”

Decommissioning is not usually a core utility competence, as many have not performed the operation before. As a result, there’s a competitive market among major global contractors with specialization in the process.

Several utilities have transferred or plan to transfer shuttered nuclear plants — facilities, liabilities, licenses and trust funds — to those contractors. One example that is nearing the end of the process is Zion 2, in Illinois.

For all the regulatory complexity, the insurance program is relatively simple.

“There is now a large contingent of experienced people who can decommission plants,” said Battenfield.

While some may pause at the idea of a company or consortium, however large and experienced, taking on a reactor decommissioning as a for-profit business, Battenfield is sanguine.

“Through the whole project the NRC does not go away. Their oversight is arduous and detailed,” he said.

Covering it All

For all the regulatory complexity, the insurance program is relatively simple. The property coverage through the Nuclear Energy Insurance Ltd. (NEIL) mutual is available, and coverage from American Nuclear Insurance (ANI) is sufficient to meet mandatory limits for third-party liability on any license holder.

Outside of those, any commercial coverage is handled the same as if a factory or refinery were to be sold.

“They start fresh with workers’ comp and other commercial lines,” said Battenfield.

“The new owners will have their own carriers that they probably would like to keep. The incumbent carriers from the utility will either try to get into the new program, or take that opportunity to get out.”

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Once the decision is made to take a facility out of service, the operator must make the business decision either for prompt or protracted decommissioning. Immediate decontamination and demolition is known as “decon,” and takes several years.

The longer option involves securing and idling the site and is called safe storage or “safestor.” The facility can be kept in safestor for up to 60 years.

“The first risk management issue is which option to select,” McGarvey said.

“Prompt decommissioning involves a significant outlay of capital, but if the trust fund is sufficient it may make the most sense just to be done with it.”

If there are multiple reactors with at least one still in operation, the logical option is most likely safe storage, McGarvey said, because continuing operations offer economy of scale due to the fixed costs involved in operating an active site. But even if there are no other reactors, there are elements of risk mitigation in pursuing the safe storage option.

“Radiation begins to decay immediately after shut down, and over what could be 20 or more years of safe storage,” said McGarvey.

The ultimate cost of decommissioning could be markedly reduced because the radiation risk of fuel and components is lessened. Also, technology may improve over time and reduce future costs.

Conversely, the potential downside of waiting many years to decommission are the ongoing costs of plant upkeep, and the chance that a future regulatory climate may require levels of cleanup beyond those required today.

McGarvey summarized the step-down of coverage.

Dan McGarvey, managing director of the U.S. power and utility practice, Marsh

Dan McGarvey, managing director of the U.S. power and utility practice, Marsh

The chances of a radiation release significantly decrease once the reactor is no longer operating. Most utilities take their property coverage from limits as high as $2.75 billion down to the legal minimum of $1.06 billion. When the fuel stored in the spent-fuel pools cools to below a stipulated threshold, the utility is given greater latitude in selecting an appropriate first-party coverage limit.

At that point first-party coverage presents challenges in view of the need to preserve selected items of vital equipment in a facility that is otherwise slated for demolition.

“NEIL is very flexible and works well with utilities as they proceed through the decommissioning process,” said McGarvey.

Once the reactor is shut down, every asset on the site is divided into four categories for property coverage: Essential equipment is kept at replacement cost, less important components may be at actual cash value or agreed salvage value, and some buildings may be left without insurance save for decontamination coverage.

On the liability side, the first layer of coverage for an operating reactor is commercial insurance for a mandated $375 million. The next $13 billion is a mandatory retrospective pooling mechanism called the Price-Anderson Secondary Financial Protection Program that can assess up to $126 million per reactor, per incident, from all U.S. operators.

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“Once the plant is permanently shut, a utility will want to get out of that club, but must petition regulators to do so,” McGarvey said.

Once the spent fuel is cooled below a certain level, the operator can further petition to reduce commercial liability limits from $375 million to $100 million.

The nuclear liability policy provided by ANI is a modified occurrence policy, which has a 10-year discovery period. As such, it’s recommended that the policy not be allowed to lapse for many years even when the reactor is fully decommissioned.

Overall, operators have to be very careful about stepping down their nuclear liability coverage.

“You start with $13 billion,” McGarvey said, “which not only responds for radiological site releases, but also follows every truckload of low-level radiological waste shipped from the site. Eventually over time you get down to just $100 million of commercial insurance as the operator’s sole protection against nuclear liability claims.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]