Does nuclear power now make financial sense?

Making the case for nuclear
“Once the confidence level is there that these plants can be built on time and in budget, and they're going to be operated at the efficiency levels (owners) want — which is typically very high — that confidence level will spur more new construction,” said Peter Wells, general manager of marketing for GE's nuclear business, which is hoping to build new plants based on a design that has already been approved by the NRC. (MSNBC.com is a joint venture of Microsoft and NBC Universal, a unit of GE.)

Proponents of new plants point to several changes that they say will be advantageous in getting the next generation of plants off the drawing boards:

Standardized designs: The existing fleet of U.S. power plants was largely custom-built, a one-at-a-time process that all but insured delays in approval and construction, along with runaway costs. Today, with several standard designs already approved by the NRC, builders of nuclear power plants say they are much better able to manage costs and maintain quality control. Large, standardized components are expected to be built off-site and then delivered and assembled at the plant.

Improved safety features: New designs include “passive safety” features; for example, “gravity-fed” water supplies to cool a reactor core if it overheats, reducing the risk of pump failure. In some cases, nuclear proponents say, design simplifications have reduced both risk and cost.

Regulatory changes: One of the biggest sources of delay, high cost and financial risk in the heyday of nuclear plant building was a two-step review process that required separate federal permits for construction and operation of plants. With pre-approved designs, the NRC now reviews a combined construction and operating license application which, if approved, reduces the risk that a completed plant may face costly delays in getting an operating license.

But streamlined federal approvals won’t help utilities win — and maintain — the support of state regulatory commissions, which will also have to sign off on plans to build new plants. That presents a continuing risk that utilities or investors will have to factor into their calculations, said Nikas, the Standard & Poor's analyst.

“Say the utility commission changes over the course of the construction project,” he said. “What if the new commission is anti-nuclear for whatever reason? If it tries to scupper the utilities’ efforts to build the plant, that can wreak havoc because the utility has already committed to a very large capital spending budget.”

Carbon tax: The U.S. has been slow to adopt economic incentives to cut carbon emissions linked to global warming, but many power industry leaders expect Washington to levy some form of “carbon tax” in the life span — 40 years or more — of any new nuclear plant built in the next few years. Because nuclear plants emit virtually no carbon into the atmosphere, that would give them a huge economic advantage over plants that burn fossil fuels.

That financial edge could be $12 per megawatt less than the cost of electricity generated by plants that burn fossil fuels, according to Keuter, the Entergy official, adding that generating costs for new nuclear plants are expected to average $40 to $50 per megawatt. Though alternatives like solar- and wind-generated power offer opportunities to hedge future penalties and rising fossil fuel costs, even in the most optimistic projections those power sources won’t be able to meet the growing “baseload” power demand expected in the next several decades.

Federal incentives: To encourage new construction of nuclear plants, Congress is offering several important sweeteners to the first several companies that come forward with plans. These include guarantees on loans used to finance the projects, tax credits for the power they produce and insurance against losses that result from delays in the regulatory process.

Nukes for sale
But it’s far from clear that this new round of plants will ever be built. Even if all goes as proponents hope, the first plants won’t come online before 2014 and will cost an estimated $4 billion each. Before ground is broken for the first new plant, the power industry will have to convince state regulators and investors that the numbers add up. To do that, they face several important hurdles.

Most of these projects are expected to be financed by bonds. To help reassure investors that the bonds are a safe investment, Congress has provided loan guarantees for 80 percent of the financing for the first several projects to win NRC approval. But that critical guarantee has already hit a serious snag.

Typically, these projects would be financed with 80 percent debt and 20 percent cash or equity put up by the owner of the plant. But federal officials in charge of loan guarantees have interpreted the law to mean that those guarantees apply only to the debt portion of the financing package. Using that math, the loan guarantee — 80 percent of 80 percent — will only cover about two-thirds of the total cost. That could be more risk than Wall Street is ready to assume — especially for the projects that go first.

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