2 April 2017

Westinghouse: Origins and Effects of the Downfall of a Nuclear Giant

On 29 March 2017, Westinghouse Electric Company, a subsidiary of Japanese company Toshiba and the largest historic builder of nuclear power plants in the world, filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York. The insolvency has resulted from a number of factors, most importantly, the massive cost increases and time delays at the two projects in Georgia and South Carolina. As Westinghouse’s website puts it somewhat more discreetly, the “company is seeking to undertake a strategic restructuring as a result of certain financial and construction challenges in its U.S. AP1000 power plant projects”. 

Contributing to the bankruptcy are also certain decisions that Westinghouse made, including, for example, its choice to purchase Chicago Bridge and Iron (CBI), which was working on the Vogtle reactors. Done as a part of attempts to resolve a complicated legal tangle, that purchase left Westinghouse with “no way to pass on the cost overruns” associated with the project.

Fundamentally, though, what led to this bankruptcy were two bets that Westinghouse and Toshiba made. The first bet was that there will be a growing and large market for nuclear power plants. When Toshiba acquired Westinghouse from British Nuclear Fuels Ltd. (BNFL) in February 2006, the press release confidently projected: “By 2020, the global market for nuclear power generation is expected to grow by 50 percent compared with today”. At that time, the President and CEO of Toshiba estimated that there would be 10 large (1 GW) nuclear reactors built each year till 2020 amounting to 130 GW of new reactor capacity. That estimate was off by at least an order of magnitude. Much of the hype around that time was over what many saw as a coming nuclear renaissance, including Westinghouse personnel.

The second bet that Westinghouse and Toshiba made was that the well-known problems of cost increases and lengthy construction periods could be solved using its AP1000 design. These problems have afflicted nuclear power plants around the world. Indeed one study of construction cost overruns showed that 175 out of the 180 nuclear projects examined exceeded the initial budget, on average by 117 percent, and took on average 64% more time than projected. Westinghouse promised to beat this trend because of their expectation that “plant costs and construction schedules benefit directly from the great simplifications provided by the design” and because of the adoption of “modular construction techniques". Based on these, Westinghouse estimated a “cost per kWh of about 3.0 to 3.5¢/kWh for a twin unit plant”. Westinghouse projected that the AP1000 reactor would have “an accelerated construction time period of approximately 36 months, from the pouring of first concrete to the loading of fuel”.All of these projections have gone spectacularly wrong in both China, with the Sanmen and Haiyang projects, and especially in the United States. The modular construction methods only had the effect of shifting some of the problems from the building site to the factory.

An important source of technical problems, although not the only one, has been the reactor coolant pumps (RCPs) that were supplied by US-manufacturer Curtiss-Wright Corporation. In January 2013, Nuclear Intelligence Weekly (NIW) reported that Curtiss-Wright found that a piece of a “blade within the pump had separated from the… casting” and it had to recall the RCPs that had already been shipped off. It took two years to make the necessary design changes and fixes. More recently, in February 2017, NIW reported that during pre-commissioning tests, the material that was in the shield blocks had “volumetrically expanded and extruded out of the shield blocks into the nozzle gallery” and there was “internal pressurization of the shield blocks,” according to a heavily redacted report on the issue presented by Westinghouse to the U.S. Nuclear Regulatory Commission and the company was forced to admit that it had “not properly considered” the possibility that the shielding material might expand in volume. The general impression one gets from these reports is that Westinghouse had rushed through with a half-baked design.

Chinese nuclear officials have expressed concern in the past about these problems. In 2013, for example, a former Vice-President of CNNC and Vice-Minister of Atomic Energy complained to South China Morning Post: “Our state leaders have put a high priority on [nuclear safety] but companies executing projects do not seem to have the same level of understanding”. The idea that Westinghouse might get any more contracts to build nuclear reactors in China seems doubtful, to say the least. As Lin Boqiang, director at the China Center for Energy Economics Research at Xiamen University told Bloomberg News: “The only way Westinghouse can win contracts in China is to demonstrate they can build reactors quicker and cheaper than anyone else in China’s market and win hearts with actions, not words. Westinghouse so far hasn’t demonstrated such abilities.”

It is still not clear what the Westinghouse bankruptcy means for the nuclear projects it is involved in, especially with Korea Electric Power Corporation (KEPCO), the only serious potential buyer, ruling out acquiring the company. China’s State Power Investment Corporation put out the optimistic statement: “The restructuring application by Westinghouse will not have a substantial impact on third generation reactor work such as the construction of the AP1000, the subsequent construction of a batch of CAP1000 reactors or the CAP1400 demonstration project”. Whether this statement really follows a careful assessment or if it is just based on the inherent ambiguity of what “substantial” means, remains to be seen. However, there is no doubt that overly optimistic assumptions, not to say unrealistic wishful thinking, has been part of the generic reasons for the company’s decline—just as in the case of its French counterpart AREVA.

The outcome for the U.S. AP1000 projects is more dire, and abandonment is an explicit option. In the case of the Vogtle project in Georgia, Stan Wise, chairman of the state’s Public Service Commission, pointed out that it is “possible…that Plant Vogtle just doesn’t get finished at all. It’s a real hit and a real blow to something that we felt like was going to be the very best possible energy choice for Georgia maybe even into the next century”. But he also went on to talking about the changes in the energy landscape since the Vogtle plan was initially approved, “with natural gas getting very cheap, and technologies like solar power and batteries improving” and declaring: “If I’d known any of this a decade ago we would have gone a different way”. 

SCANA chief executive Kevin Marsh, on the other hand, was more bullish: “Our commitment is still to try to finish these plants. That would be my preferred option. The least preferred option, I think realistically, is abandonment”. But he has also said that SCANA will evaluate various options during the coming 30 days, including:

Independent analysts have pointed out that not abandoning the project right away could result in “the chaos of bankruptcy and reorganization [leading] to a long period of project restructuring uncertainly and more spiraling costs”.

If either of those projects are abandoned, they would join the ranks of the forty nuclear new-build projects—including 12 Westinghouse reactors—that were abandoned in the United States between 1977 and 1989 at various stages of construction (see Global Nuclear Power Database for details). At the time, several utilities went bankrupt. The most spectacular among those bankruptcies occurred in August 1983. In what became known as “whoops”, the Washington Public Power Supply System “formally declared that it could not repay US$2.25 billion in bonds used to finance partial construction of two now abandoned nuclear power plants in Washington State” which led to “the largest municipal bond default in U.S. history”. Rate payers in the region are still paying for those projects.

In 2014, when Westinghouse lost its second bid to get funding from the U.S. Department of Energy’s Small Modular Reactor (SMR) commercialization program, Westinghouse “reprioritized” staff devoted to SMR “development and funneled their efforts to the AP1000". Now, with the AP1000 also proving a commercial and engineering bust, it might be time for Westinghouse to turn to plan B and focus on a profitable part of its business: decommissioning nuclear plants, of which Westinghouse CEO at that time Danny Roderick, had said: “We see this as a US$1 billion-per-year business for us”.