Obstacles to Nuclear Construction in the United States

by Tony D'Altorio

Obstacles to Nuclear Construction in the United States

by Tony D'Altorio, Investment U Research

Tuesday, November 2, 2010

Electricite de France or EDF ADR (PINK: ECIFY) just got dumped by Constellation Energy (NYSE: CEG). And that could spell some big changes to its plans.

The French state-owned utility and its U.S. partner were going to build at least four nuclear plants in the U.S. And they were going to use EPR, created by another French firm Areva ADR (PINK: ARVCY), to do so.

A third-generation pressurized water reactor, EPR is the first of its kind to hit the markets. But it seems less exciting now than it did when EDF and CEG first joined forces in 2007.

Less exciting, at least, in the U.S. The natural gas glut and resulting low prices have seen to that, along with the cost of building EPRs has skyrocketed.

And now EDF has to find a new U.S. partner for its costly and complex project, which has already experienced repeated delays and cost overruns. Originally estimated at €3.5 billion, projections now sit at €5-6 billion.

EDF definitely made mistakes, such as allying with Constellation Energy to begin with. But its problems in the U.S. run much deeper than that, cost issues or natural gas prices.

Simply put, it is just extremely difficult to build nuclear power plants in the United States.

Once Upon a Nuclear Industry...

The U.S. nuclear industry cheered when Congress approved federal loan guarantees for nuclear reactor construction projects in 2005. Three decades after the 1979 Three Mile Island accident, nuclear power appeared ready to light up again.

In 2008, the U.S. Nuclear Regulatory Commission received 22 applications for reactors. And President Obama even proposed another $36 billion in federal loan guarantees for the industry in February of this year.

Yet last year, only one application was filed. And none at all this year...

Blame natural gas prices or the recession if you want. Analysts certainly expect U.S. 2010 power demand to fall below 2007 levels, which lessens any immediate need for reactors.

But those short-term effects don't matter much for reactors that operate at least 60 years. What really poses a problem is the fragmented U.S. electricity market.

Nuclear Construction Obstacles

In the U.S., regulatory frameworks in the electricity market differ widely. In some states, power companies can pass on any costs of generation to their consumers, subject to regulator approval, of course.

Southern Company (NYSE: SO) does just that for its Plant Vogtle project. This enables it to raise financing and start preliminary work at the site.

Additionally, so far, Southern has the only federal loan guarantee - for $8.3 billion - to build two Westinghouse AP1000 reactors. The total project is estimated at $14.5 billion.

Many other utilities, like Constellation, operate in competitive electricity markets though. So they have to justify the cost of any new projects to their customers... projects like new nuclear power plants.

And with natural gas prices so low, that power may have a competitive edge for a while. So nuclear power generation requires investors who take a 40-year view on the market.

But no American industry takes such a long-term view. So don't expect the U.S. private sector to finance new nuclear reactor projects without federal loan guarantees.

Yet the high commercial risks made the loan guarantee too expensive for Constellation. Thus why it won't proceed with the $10 billion Calvert Cliffs 3 project in Maryland.

It's hardly alone either. The industry jokes that the only companies that can get federal loan guarantees on good terms are the ones that don't actually need them.

The Nuclear Industry's Bottom Line

Overall, these companies do expect to build nuclear reactors; they just don't know when. Constellation's vice-president for corporate affairs and policy, James Connaughton, put it bluntly:

"There is no reasonable scenario by which we can meet the government's aims for energy security, air quality and cuts in greenhouse gas emissions without building in excess of 100 nuclear power plants [in the U.S.]. But the huge roadblocks in the way mean that we will end up doing what we know we must, but with needless delay and at much greater expense."

It would make sense for the U.S. government to make things easier for the utility industry in order to meet its own environmental goals. But this is the government we're talking about here, so common sense doesn't really factor in.

Yet until Washington does make sense, few nuclear power plants will be built in the United States.

Good investing,

Tony D'Altorio

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