Industry More Optimistic About New Nuclear Plants

By Jenny Weil, Managing Editor, Platts Inside NRC

Concern over carbon emissions igniting renewed interest, but hurdles remain.

CONSTRUCTION OF NUCLEAR PLANTS IN the United States is becoming more likely, but obstacles remain that could delay or limit the number of new reactors—or even abort a nuclear revival.

Industry executives point to a number of factors shaping the debate over nuclear plants in the United States, where the last nuclear unit joined the generating fleet in 1996 after a construction effort lasting decades.

Concern about carbon emissions from fossil plants—principally coal-fired units—is partially pushing the industry to eye nuclear generation, which currently supplies about 20% of the U.S. electricity supply. The obvious alternative to coal and nuclear—natural gas—is hobbled by forecasts of significant price volatility. Renewable generation—especially wind—is growing rapidly but is thought to lack the resource potential to be a major player.

But positive forces for U.S. nuclear generation are at play. Newly crafted federal incentives are catching the industry's interest, and growing public recognition of the need for energy diversity and security are convincing previously reticent operators and financial investors to openly consider new U.S. nuclear plant construction.

Ranking of companies cited in article among top 250 global energy companies Source: www.top250.platts.com

New nuclear generation "is an absolutely environmentally necessary source of baseload generation," Constellation Generation Group President Michael Wallace recently told a London energy conference. "The economics are in balance. There's inevitability to nuclear. The question is not whether, but how. We must be proactive to shape the how and shorten the when."

But Wallace quickly added, "It's important to note: Nobody has ordered a plant, but licensing is proceeding."

Financing and Licensing Challenges

There are still high hurdles to clear. The industry must overcome financing and licensing challenges that in the past included exorbitant cost overruns for nuclear plants built two decades ago, lengthy legal challenges from opponents, and the shutdown of Shoreham in 1989, just two months after receiving an operating license.

But talk of a nuclear renaissance has changed over the past year from broad strategic blueprints to site footprints. There are a number of potential U.S. nuclear projects.

The Southern Company, whose operating fleet consists of 70% coal-fired plants and whose self-professed risk aversion has kept it from being an outspoken nuclear proponent, plans an early site permit application in July, according to Louis Long, vice president of technical support for Southern Nuclear Operating Co., who spoke at a recent Platts nuclear energy conference in Washington, D.C. Southern Nuclear expects to file a combined construction permit-operating license application in early 2008, he said.

Progress Energy has the most ambitious new plans for nuclear plants—up to four new units in its service territories in the Carolinas and Florida. The company selected the Harris-1 site in North Carolina for the possible addition of two units. Soon, it expects to select a Florida site for potential new plant construction, said Bill Johnson, the company's president and chief operating officer. Progress Energy says it will consider existing sites that it owns or are owned by another company, as well as greenfield sites.

Most of the proposed new plant projects are clustered in the Southeastern United States, where most utilities remain regulated. Yet that region accounts for only about 30% of the country's population, noted John Reed, chairman and CEO of Concentric Energy Advisors. "What is the generating solution for the other 70% of the U.S.?" he asked.

The Waste Disposal Issue

Several other questions loom large. As it plans for building new plants, the industry must build a "strong political base." Reed said it is important to build bipartisan support not only at the federal level but also at the state level. And with waste disposal a major public concern, the industry must plan ways to dispose of low-level radioactive waste and high-level waste, he said. Uranium prices, long thought to be stable, are steadily rising. After a recent increase to $40/lb, Reed questioned whether, and when, the price could hit $60/lb.

There are also financial risks. Lenders remember well the huge construction cost overruns of the 1980s and are not eager for another round. Industry estimates of a new plant's cost are between $1.5 billion and $3 billion, varying significantly by capacity, financing, and other factors.

And since the U.S. industry has not built a reactor in more than two decades and has never used the new designs now available, "Cost overruns are highly probable," said John Kennedy, director of the utilities, energy and project finance group at Standard & Poor's (S&P). Some advanced designs have never been built. Without that experience, there is uncertainty about costs, he said. (S&P, like Platts, is a division of The McGraw-Hill Companies.)

"Lenders are not willing to bear overruns," said Hugh Babowal, a vice president in the investment banking division of Goldman Sachs.

More Willing Lenders

However, lenders are open now to nuclear project finance, said Bob Percopo, senior vice president of insurer AIG. Not long ago, lenders of power projects would not consider nuclear, he said. But Percopo recently asked eight investment specialists whether they would consider financing a new nuclear plant now. "Six said yes," he said, while one said no, and the eighth said it would consider a proposal but didn't want to be the first one to finance a nuclear project. Percopo termed the response "a significant difference" from previous years and urged the nuclear industry to work aggressively with the U.S. Department of Energy to put financing incentives authorized in last year's energy bill in place before the current administration ends.

S&P's Kennedy has also seen a significant shift. "There has been a noticeable calming of investors' fears" recently, partly because of the federal government's new incentives, such as production tax credits. "Operating, regulatory, and environmental" factors make nuclear "more risky than other types of generation," he said. Because nuclear plants are considered to have higher business risks, the industry must demonstrate stronger performance.

To build a new nuclear unit requires equipment, and the supply of that equipment may pose a problem, particularly for large forgings, suggested Richard Meserve, Covington & Burling senior counsel and chairman of the Nuclear Regulatory Commission from 1999 to 2003. Currently there is only one source for plant equipment, Japan Steel Works, he said. Other experts warn of shortages in personnel, from engineers through craft labor.

Companies will have to start placing equipment orders about four years before starting construction in order to bring a new plant on line by 2015, said Regis Matzie, senior vice president and chief technology officer for Westinghouse Electric Co.

In order for nuclear power to continue to provide 20% of U.S. electric power needs, new plant construction must start by 2015, suggested Stephen Conant, an energy analyst for Energy Security Analysis Inc. "But we don't expect the first new plant to begin operation until 2014 at the earliest.

"The current fleet cannot stay on-line forever," he said. "We will begin seeing shutdown of the existing plants beginning in 2029 and possibly earlier."