Does nuclear power now make financial sense?

John W. Schoen Senior producer • Profile • E-mail

On Sept. 16, 1954, in a speech to a group of science writers, Adm. Lewis L. Strauss, then head of the agency now known as the Nuclear Regulatory Commission, made a bold prediction. The potential for peaceful uses of nuclear energy was so great, he said, that electricity produced by nuclear power plants would one day be “too cheap to meter.”

Over the coming decades, the economics of nuclear power turned out to be more problematic. Even before operational catastrophes at Three Mile Island in Pennsylvania and the Chernobyl nuclear power station in the Ukraine, the industry was reeling from a series of financial catastrophes that brought widespread project cancellations and effectively ended construction of new plants in the U.S.

Now, nearly three decades after the last new plant was approved, proponents of nuclear power say the economics of atom-splitting energy have dramatically improved. In fact, they argue, financial forces have become a driving force behind a new enthusiasm for nuclear energy as the power industry scrambles to meet growing demand for electricity with an aging fleet of generating stations.

But the industry still needs to raise tens of billions of dollars before the proposed round of new plants can be built. That means persuading Wall Street investors to put up the money and state utility regulators to bless the higher rates needed to pay for these multi-billion-dollar projects.

Despite billions of dollars in federal incentives to jump-start construction of a half dozen new nuclear plants, any new wave of nuclear construction will have to satisfy those two groups if it’s ever going to get off the ground, said Dimitri Nikas, a utility industry analyst at Standard & Poor’s, one of the bond rating agencies that will be advising investors on the credit risk involved in financing these projects.

“The biggest battle will be with utilities getting enough certainty that they will be able to recover their investment and regulators ... getting certainty that this is indeed the lowest cost and the most appropriate way to address increasing power demand, the greenhouse gas risk and costs that will continue to increase," he said.

Financial short-circuit
The economics of building nuclear power plants began to short-circuit in the 1970s, after a building boom that lasted more than a decade. Part of the problem was the widespread use of so-called “cost-plus” contracts, in which the companies building plants were not held to a fixed price, according to Dan Keuter, head of nuclear business development for Entergy, which has applied for a site permit to build a new nuclear unit.

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“You had multiple subcontractors working on cost plus basis,” he said. “So they were actually motivated not to get it done early. ... And (they) were definitely not motivated to do it within budget because the more they spent, the more they got."

Most plants were designed one at a time from the ground up; in some cases, engineers and designers were still working on plans as construction was under way, said Keuter. Changing regulatory requirements created further delays.

As a result, construction schedules began to double and triple, costs skyrocketed and projects in the pipeline were canceled. For those projects that continued, rising carrying costs as interest rates hit double-digits added to already huge cost overruns. By the end of the decade, the nuclear power industry was buried under a pile of debt.

Though memories of that financial meltdown linger, the energy industry today is giving a fresh look to the economics of nuclear power. And with rising fossil fuel costs, a more favorable regulatory process and generous government incentives for new plants, many in Congress and the power industry like what they see.

Existing plants become more profitable
Owners of existing plants also have seen their profits rise, thanks to sharply higher output and fewer shutdowns for maintenance or safety problems. The average nuclear plant is now online and producing electricity 90 percent of the time, up from an average of 55 percent in 1980. Since fuel represents a fraction of the cost of operating a nuclear plant, the soaring cost of fossil fuel — especially natural gas — has further tipped the scale in favor of nuclear.

And it turns out nuclear plants have a longer life span than many originally assumed. Plant licenses were originally granted for 40 years, based on the standard accounting payback schedule used for conventional power plants when the first commercial reactors were built in the late 1950s. Now, as those original 40-year licenses expire, nuclear plant owners today are applying for — and getting — 20-year extensions from the Nuclear Regulatory Commission.

“We’ve gone from the assumption that this was all going to have to be decommissioned to the assumption that that everybody is going to get a license extension. That’s huge,” said Christine Tezak, an energy industry analyst at Stanford Group in Washington, D.C. “This (nuclear) capacity was supposed to go out of the national portfolio and now everyone saying. ‘We’re not going unplug what we have.’”

The industry’s hope is that these improved economics, on top of government incentives approved in the past few years, will lay the groundwork for construction of a handful of new plants that will demonstrate the economic viability of new plants — and trigger a second coming of nuclear power in the United States.

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