June 1, 2011
The Cost-Effectiveness of Nuclear Power for Navy Surface Ships
May 12, 2011
In recent years, the Congress has shown interest in powering some of the Navy's future destroyers and amphibious warfare ships with nuclear rather than conventional (petroleum-based) fuel. In this study, the Congressional Budget Office estimated the difference in life-cycle costs (the total costs incurred for a ship, from acquisition through operations to disposal) between powering those new surface ships with nuclear reactors and equipping them with conventional engines.
The U.S. Navy plans to build a number of new surface ships in the coming decades, according to its most recent 30-year shipbuilding plan. All of the Navy's aircraft carriers (and submarines) are powered by nuclear reactors; its other surface combatants are powered by engines that use conventional petroleum-based fuels. The Navy could save money on fuel in the future by purchasing additional nuclear-powered ships rather than conventionally powered ships. Those savings in fuel costs, however, would be offset by the additional up-front costs required for the procurement of nuclear-powered ships.
To assess the relative costs of using nuclear versus conventional propulsion for ships other than carriers and submarines, the Congressional Budget Office (CBO) developed a hypothetical future fleet, based on the Navy's shipbuilding plan, of new destroyers and amphibious warfare ships that are candidates for nuclear propulsion systems. Specifically, CBO chose for its analysis the Navy's planned new version of the DDG-51 destroyer and its replacement, the DDG(X); the LH(X) amphibious assault ship; and the LSD(X) amphibious dock landing ship. CBO then estimated the life-cycle costs for each ship in that fleet—that is, the costs over the ship's entire 40-year service life, beginning with its acquisition and progressing through the annual expenditures over 40 years for its fuel, personnel, and other operations and support and, finally, its disposal. CBO compared lifecycle costs under two alternative versions of the fleet: Each version comprised the same number of ships of each class but differed in whether the ships were powered by conventional systems that used petroleum-based fuels or by nuclear reactors.
Estimates of the relative costs of using nuclear power versus conventional fuels for ships depend in large part on the projected path of oil prices, which determine how much the Navy must pay for fuel in the future. The initial costs for building and fueling a nuclear-powered ship are greater than those for building a conventionally powered ship. However, once the Navy has acquired a nuclear ship, it incurs no further costs for fuel. If oil prices rose substantially in the future, the estimated savings in fuel costs from using nuclear power over a ship's lifetime could offset the higher initial costs to procure the ship. In recent years, oil prices have shown considerable volatility; for example, the average price of all crude oil delivered to U.S. refiners peaked at about $130 per barrel in June and July 2008, then declined substantially, and has risen significantly again, to more than $100 per barrel in March of this year.
CBO regularly projects oil prices for 10-year periods as part of the macroeconomic forecast that underlies the baseline budget projections that the agency publishes each year. In its January 2011 macroeconomic projections, CBO estimated that oil prices would average $86 per barrel in 2011 and over the next decade would grow at an average rate of about 1 percentage point per year above the rate of general inflation, reaching $95 per barrel (in 2011 dollars) by 2021. After 2021, CBO assumes, the price will continue to grow at a rate of 1 percentage point above inflation, reaching $114 per barrel (in 2011 dollars) by 2040. If oil prices followed that trajectory, total life-cycle costs for a nuclear fleet would be 19 percent higher than those for a conventional fleet, in CBO's estimation. Specifically, total life-cycle costs would be 19 percent higher for a fleet of nuclear destroyers, 4 percent higher for a fleet of nuclear LH(X) amphibious assault ships, and 33 percent higher for a fleet of nuclear LSD(X) amphibious dock landing ships.
To determine how sensitive those findings are to the trajectory of oil prices, CBO also examined a case in which oil prices start from a value of $86 per barrel in 2011 and then rise at a rate higher than the real (inflation-adjusted) growth of 1 percent in CBO's baseline trajectory. That analysis suggested that a fleet of nuclear-powered destroyers would become cost-effective if the real annual rate of growth of oil prices exceeded 3.4 percent—which implies oil prices of $223 or more per barrel (in 2011 dollars) in 2040. Similarly, a fleet of nuclear LH(X) amphibious assault ships would become cost-effective if oil prices grew at a real annual rate of 1.7 percent, implying a price of $140 per barrel of oil in 2040—about the same price that was reached in 2008 but not sustained for any length of time. A fleet of nuclear LSD(X) amphibious dock landing ships would become cost-effective at a real annual growth rate of 4.7 percent, or a price in 2040 of $323 per barrel.
The amount of energy used by new surface ships—particularly those, such as destroyers, that require large amounts of energy for purposes other than propulsion—could also be substantially higher or lower than projected. Employing an approach similar to that used to assess sensitivity to oil prices, CBO estimated that providing destroyers with nuclear reactors would become cost-effective only if energy use more than doubled for the entire fleet of destroyers.
The use of nuclear power has potential advantages besides savings on the cost of fuel. For example, the Navy would be less vulnerable to disruptions in the supply of oil: The alternative nuclear fleet would use about 5 million barrels of oil less per year, reducing the Navy's current annual consumption of petroleum-based fuels for aircraft and ships by about 15 percent. The use of nuclear power also has some potential disadvantages, including the concerns about proliferating nuclear material that would arise if the Navy had more ships with highly enriched uranium deployed overseas. CBO, however, did not attempt to quantify those other advantages and disadvantages.
Linking the Readiness of the Armed Forces to DoD's Operation and Maintenance Spending
April 25, 2011
Spending for operation and maintenance (O&M) supports the military services' day-to-day activities, such as training military units, maintaining equipment, recruiting service members, operating military bases, and providing administrative services. DoD typically cites the readiness of military units to perform their missions in wartime as the primary justification for its O&M budget requests to the Congress. DoD, however, has not been able to clearly identify the relationship between the department's O&M spending and the readiness of military units. Nor has the Congressional Budget Office's (CBO's) analysis—which used historical data to attempt to establish statistical relationships between O&M spending and readiness for selected units—yielded a well-defined linkage. Those efforts were not fruitful, largely because the information needed to determine that linkage—effective measures of readiness and detailed data on spending—is not readily available or may not, in fact, exist.
Spending for operation and maintenance (O&M) supports the military services' day-to-day activities, such as the training of military units, maintenance of equipment, recruitment of service members, operations of military bases, and provision of administrative services. In 2010, appropriations for O&M (excluding funds for the Defense Health Program) totaled $157 billion and constituted some 29 percent of the Department of Defense's (DoD's) "base" budget.
DoD typically cites the readiness of military units to perform their missions in wartime as the primary justification for its O&M budget requests to the Congress. For example, budget materials that the Army submitted with its 2012 request for O&M funding state the following: "The budget provides resources to train and sustain the active component combat forces at readiness levels consistent with mission requirements. . . ." The Navy in part justified its 2012 O&M request with this statement: "Our top readiness priority is ensuring that forces are fully trained, ready to deploy, and fully supported while deployed. The budget reflects the best balance of resources to achieve this priority."
DoD broadly defines "readiness" as the ability of U.S. military forces to fight and meet the demands of the National Military Strategy (which describes the armed forces' role in achieving national security objectives). DoD assesses readiness on at least two levels—the unit level and the joint level. "Unit readiness" is the ability of units such as Army brigades, Marine Corps regiments, Navy ships, and Air Force squadrons to perform their designated missions. "Joint readiness" refers to a commander's ability to execute missions with units from more than one service.
DoD, however, has not been able to clearly identify the relationship between the department's O&M spending and the readiness of military units. Nor has the Congressional Budget Office's (CBO's) analysis—which used historical data to attempt to establish statistical relationships between O&M spending and readiness for selected units—yielded a well-defined linkage. (CBO's analysis focused only on unit readiness because of the role it plays in DoD's assessments of the services' need for O&M funding.) Those efforts were not fruitful, largely because the information needed to determine that linkage—effective measures of readiness and detailed data on spending—is not readily available or may not, in fact, exist. The military's current measures of readiness are not readily applicable to such analyses, and there are some concerns about the quality of its assessments of readiness.
Yet even if readiness were well measured, determining the relationship between readiness and O&M spending presents challenges. Some activities supported by O&M spending may be more directly related to a unit's current readiness than other such activities are; in addition, some spending from other types of appropriations may affect readiness. Also, spending intended to support units' readiness activities must be distinguished from spending for overseas contingency operations (for example, in Iraq and Afghanistan). If DoD is to determine how O&M spending affects units' readiness, it may have to conduct controlled experiments in which it methodically varies readiness-related spending for otherwise similar units.
Long-Term Implications of the 2011 Future Years Defense Program
February 11, 2011
In most years, the Department of Defense (DoD) provides a five- or six-year plan, called the Future Years Defense Program (FYDP), associated with the budget that it submits to the Congress. Because decisions made in the near term can have consequences for the defense budget well beyond that period, the Congressional Budget Office (CBO) has examined the programs and plans contained in DoD's FYDP and projected their budgetary impact in subsequent years. For this analysis, CBO used the FYDP provided to the Congress in April 2010, which covers fiscal years 2011 through 2015—the most recent plan available when this analysis was conducted. CBO's projections span 2011 through 2028.
In February 2010, DoD requested an appropriation of $707 billion for 2011. Of that amount, $548 billion was to fund the "base" programs that constitute the department's normal activities, such as the development and procurement of weapon systems and day-to-day operations of the military and civilian workforce. The remaining $159 billion was requested to pay for overseas contingency operationsthe wars in Afghanistan and Iraq and other military activities elsewhere. CBO focused its analysis on the base budget because it reflects DoD's future plans for manning, training, and equipping the military.
CBO has projected the costs of DoD's plans for its base budget (reflected in the FYDP, along with other long-term plans released by the department) by using factors that are consistent with the department's recent experience. CBOs analysis yields these conclusions:
- To execute its base-budget plans for the period covered by the FYDP, DoD would need about $187 billion (or 7 percent) more over those five years than if funding was held at the 2010 level of $537 billion. Over the 10 years from 2012 to 2021, DoD would need a total of $680 billion (or 13 percent) more than if funding was held at the 2010 level.
- From 2011 to 2015, DoD's base budget would grow at an average annual rate of 2.3 percent, after an adjustment for inflation. Beyond the FYDP period, from 2016 to 2028, average annual growth in the costs of DoD's base-budget plans would be 0.8 percent after an adjustment for inflation. At those rates, DoD's base budget would rise from $548 billion in 2011 to $601 billion in 2015 and to $665 billion in 2028.
- The primary cause of long-term growth in DoD's budget from 2011 through 2028 would be increasing costs for operation and support, which would account for nearly all of the increase. In particular, CBO projects that there would be significant increases in the costs for military and civilian compensation, military medical care, and various operation and maintenance activities.
- That large contribution of operation and support costs to budget growth is a change from earlier projections, in which sharp growth in anticipated requirements to replace and modernize weapon systems (the so-called bow wave) was the primary factor underlying budget growth beyond the years covered by the FYDP. In the current projections, acquisition costs would steadily grow from $189 billion in 2011 to a peak of $218 billion in 2017 (an increase of about 15 percent) before decreasing and leveling off—albeit with year-to-year variations—at an average of about $200 billion per year thereafter.
Comparison With Projections Incorporating DoD's Estimates
CBO compared its projection (labeled in this study "the CBO projection") with DoD's estimate of the costs of the FYDP (for the 20112015 period) and with "an extension of the FYDP" (for the 20162028 period). The latter is a projection based on DoD's estimates of costs, where they are available for years beyond 2015 (for some weapon systems, for instance), and on costs consistent with the broader U.S. economy, where estimates from the department are not available (for pay and medical costs, for instance).
CBO's projection of the total cost of the FYDP through 2015—at $2,874 billion—is $41 billion (or about 1 percent) higher than the department's estimate. Much of the difference derives from an assumption that recent trends in the costs of weapon systems, medical care, and other support activities persist.
By DoD's estimates, executing its plans for 2011 through 2015 would require real (inflation-adjusted) increases in spending of about 1.5 percent annually (excluding emergency and supplemental funding for overseas contingency operations). Over the five-year period, that growth rate would result in costs that were $146 billion (or 5 percent) greater than the amount of DoD's budget if it was held at the 2010 level.
By 2015, the end of the FYDP period, annual costs under the CBO projection would be about $18 billion (or 3 percent) higher than the estimate in the FYDP; at the end of 10 years, in 2021, annual costs under the CBO projection would be $34 billion (or 6 percent) higher than the extension of the FYDP; and similarly, by 2028, the end of the projection period, annual costs under the CBO projection would be about $37 billion (or 6 percent) more than the estimate for the extension of the FYDP.
The degree to which the plans laid out by DoD are executed in the future will depend on the amount of funding that will be provided in an era of increasing pressure on the federal budget as a whole and on the success of ongoing efforts to curb cost growth in areas such as medical care and advanced weapon systems. Indeed, Secretary of Defense Gates announced on January 5, 2011, that DoD will trim its plans by a total of $78 billion (or about 3 percent) from 2012 to 2016 in recognition of the fiscal environment. Because many details of those revisions to plans have not yet been released, an analysis of the possible effects if they were adopted is not possible and is not included in this study.