Does nuclear power now make financial sense?

Congress to the rescue?
Though the current interpretation of the rules could throw cold water on efforts to raise money, many in the industry expect Congress to clarify the rules to provide more generous guarantees.

“You had a lot of people who voted for the (Energy Policy Act of 2005) that have a pet project at home that they thought they were arranging a loan guarantee for,” said Tezak, the energy industry analyst. “But it has the potential to be a deal breaker.”

Another question is how those bond investors will be paid off once a new project is approved. Under the old system of utility regulation, still in place in some states, state public utility commissions review all construction plans in advance to make sure they made economic sense. If they approve the plans, the utility is allowed pass along the construction costs to consumers in the form of higher rates, all but assuring a profit that can be used to pay back investors.

But in states operating under so-called “deregulated” energy markets, owners of generating plants compete with each other to sell electricity on the open market. That increases the risk to bond investors that the profits from those market-based power rates may not cover the cost of repaying those bonds, plus interest. That’s why the first proposals for nuclear plants will most likely come in Southern states, where utility commissions still allow companies to recapture their construction and development costs from ratepayers.

“It's much easier to allocate that risk to consumers under regulation than under competition,” said Ken Malloy, a former Federal Energy Regulatory Commission staff member who now heads the Center for the Advancement of Energy Markets, a nonprofit group that advocates the deregulation of electricity.

Industry looks to nuclear-friendly states
That also means proposals for new nuclear plants will be confined to a relatively small number of nuclear-friendly states.

“I can’t imagine a place like Vermont would allow a new nuclear plant to come online, or a place like Washington or Oregon,” said Standard & Poor's Nikas.

Wade Payne / AP The Watts Bar Nuclear Plant, shown in this file photo, is the last U.S. commercial plant to go online. It began generating electricity for the Tennessee Valley Authority in 1996 after 23 years of construction delays that inflated its cost to $7 billion.

Utilities also face the ongoing problem of what to do with spent nuclear fuel. A federal proposal to build a single repository at Yucca Mountain in Nevada has been stalled for over a decade, with no resolution in sight. For now, nuclear plant owners say on-site storage of spent fuel is safe and won't prevent new projects from moving ahead. But left unresolved, the continued accumulation of spent fuel will raise the long-term cost of building a new nuclear plant. And it will add uncertainty to regulators' estimates of the cost of the ultimate decommissioning of the plant, which must be factored into the total cost of the project.

Given the ongoing public concern about nuclear plant safety, the first round of proposals will likely consist of additional reactors at existing power stations. Though many of the 103 operating nuclear power plants in the U.S. were designed to house up to four reactors, most sites operate with just one or two. So a proposal to add another reactor to an existing plant would likely face less local opposition than a new “green field” site.

Utilities hoping to build new nuclear plants are in the early stages of the lengthy application process. After applying to the NRC for a combined construction and operating license, a utility must persuade a state regulatory commission to add the cost of building the plant to its customers' electric rates. Only then can the utility begin to work on financing the development and construction of the plant. In order to meet deadlines for production tax credits and other federal incentives, those NRC applications are expected to be filed sometime late this year or early 2008. If all goes according to schedule, the first new plant would begin producing power in 2014 or 2015.

Many questions remain
But even with a simplified federal regulatory process, generous government incentives, better construction management, higher fossil fuel costs and the future threat of a carbon tax, the dawning of a new age of nuclear power won’t become reality unless and until utilities sign the construction contracts and commit the capital to build them.

Companies like GE, which already does a solid business building nuclear plants in other countries, have gotten suppliers lined up and laid out plans to ramp up if U.S. utilities decide to move ahead. But that’s not the same as having a signed contract, said Wells, the GE executive.

“We’re constantly monitoring what customers are doing as opposed to saying — and that’s a big difference,” he said. “The reality is that if we get to a point where we don’t see the right actions taking place, we’ll have to sit back and reconsider our position. So 2007 will be an important year because the utilities that wish to hit the 2015 commercial operation date will need to start making big decisions.”

If a utility company does make it past the hurdles of getting regulatory approvals and lining up financing, investors still won’t be fully persuaded that these projects can be built on time and on budget until the first few plants are completed successfully. Without a solid track record for the first movers, the so-called nuclear renaissance could be over before it even begins.

“On the very first one, we’ll be just as nervous as people who were looking at these plants for the first time,” said Nikas.

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