Tuesday, October 07, 2008

Nuclear Power - Demolishing the Myth

In the media and in political circles there are debates on how electricity should be generated - while renewables are popular conceptually they don't provide base load (reliable) power, and are responsible for a minuscule portion of our total electricity generation in the United States. In this fantasy "debate", nuclear power has apparently had a mythical renaissance as public opinion among some greens notes that it emits little of the emissions that supposedly cause global warming.

Presidential candidates and others make pronouncements on nuclear power, such as John McCain's call to build 45 nuclear reactors by 2030. Obama isn't calling for a specific number of
nuclear plants, but doesn't dismiss plans outright.


All of these discussions, and phony debates, ignore a critical element - nuclear plants don't get built because politicians or activists want them (or even because we are running out of power) - nuclear plants get built:

1) when the regulatory climate in a particular state allows for recovery and financing of these costs
2) when individual utilities are financially strong enough to incur the debt and raise the cash to see through the 10+ year process from site selection through actually powering up the reactor and delivering power into the grid

Let's tackle #2 first. The estimates for building a nuclear plant are between $5B and $12B. Note that this doesn't take into account the "time value" of money - you need to get this money up front now and pay interest on it for all the years until the plant starts earning its keep - and this will substantially increase the cost. I don't have specific information but when I was in the industry I was told that on the plants built in the 70's maybe 20-40% of the total cost was "capitalized interest", or the interest on the construction debt while the plant was being built. It is true that the 70's were a time of high inflation, but we are seeing rising prices (and scarce availiabity) of key construction materials today, too. Let's say that for discussion purposes this $5B to $12B becomes $7B - $15B in costs in nominal (not real dollars, but nominal dollars are the ones that you have to pay out).

OK, so now you need $7B to $15B to build a plant. How are you going to raise that money, and how big do you have to be in order to do this? Going to yahoo finance under electric and diversified (electric & gas) utilities (which is pretty cool because you can quickly sort by market cap, and see debt / equity or leverage ratios) here are the possible candidates that have market values > $7B:

$20B - $30B
Southern Company
Dominion Resources, Inc.
Duke Energy Corp.

$10B - $20B
FPL Group Inc.
Firstenergy Corp.
Entergy Corp.
American Electric Power Co. In
PPL Corporation
Edison International
Progress Energy Inc.

$5B - $10B
Xcel Energy Inc.
DTE Energy Co.
Edenor SA
The AES Corporation
Allegheny Energy Inc.

Diversified Companies:
Exelon - $37B

$10B - $20B
Public Service Enterprise Group
PG & E Corp.
Consolidated Edison Inc.

$5B - $10B
Ameren Corporation
Wisconsin Energy Corp.

To really build one of these without stretching yourself too far (remember, these giant companies need cash for transmission, distribution, and other generation projects, as well), you'd probably need a market cap > $20B. Another element to note is that these companies are ALREADY burdened with debt; thanks to the yahoo analysis tool, you can see that almost every company has a debt to equity ratio > 1, and many are closer to 2. This means that if you have a $20B market cap, you have $20B - $40B in debt BEFORE you even think about financing a nuclear plant.

So who can do this without breaking the bank? You are down to the "big four"

Exelon (Illinois, Pennsylvania, large nuclear operator)
Southern Company (Alabama, Georgia, Mississippi, Florida)
Dominion Resources (Virginia, North Carolina)
Duke Energy (Indiana, Ohio, Carolinas, elsewhere)

Now you need to combine the financial heft (above) with #1 - do their regulatory environments support building nuclear power plants and passing on to consumers the monstrous costs of construction?

You can pretty much cross off Exelon right there - they operate primarily in Illinois, which is sadly enough, about the least functionally sound state in the union. Pennsylvania isn't much better.

The south is better placed to support generation; they haven't dismantled their regulatory systems to the same extent as they did up north (preserving their cost advantage vs. the rest of the United States). On this score Southern Company has a decent shot, although Georgia has some strange state-run institutions. Duke and Dominion also would have options to do this, but for various local reasons they are less likely to champion nuclear.

The states that historically were most favorable to this type of regulatory environment were Florida, except that their utilities are smaller and it would be a big stretch for them to raise that much cash. Texas utilities are now on their knees based on deregulation, the fact that TXU went private (they'd laugh in your face if you mentioned nuclear; they want to make money TODAY), and they are also paying for hurricane damage. Wisconsin and some other states also have good regulatory regiemes, but they'd have to really stretch to finance a new plant.


Government entities of various stripes exist in the US. The Tennessee Valley Authority, or TVA, would be counted on to build a nuclear plant if anyone would. Don't ask why the generation for the state of Tennessee is essentially run by the Federal government, but it is the case, and they have turned around their plants and would be game for more investing of your Federal tax dollars. There are other potential candidates but they are all less likely than TVA, and I wouldn't bet on any of them raising the money and pulling it off, espcecially since most of the available funding of the US Treasury is likely to be stuck propping up our moribund financial sector for some time now.


In conclusion, very few utilities have the financial heft to fund even ONE nuclear plant, and if all the cards broke in an optimistic fashion, we wouldn't even be able to bring enough capacity online to offset the nuclear capacity that is going out of service because it is reaching end of life. These companies would essentially have to bet everything to pull off the construction, unless state and Federal entities under-wrote the costs, which is getting less and less likely by the day.

Many of the regulatory environments that are most favorable to this type of future investment have small(ish) utilities that would be hard pressed to come up with this investment, and it would burden them to the edge of extinction.

Once again - I am a big proponent of nuclear power - but people have to be realistic about the high, high hurdles that these plans face. They simply are not realistic.

Cross posted at Chicago Boyz


Snakeye said...

Hot Carl,
it's good to see that someone else is on-board with nuclear energy...

Anonymous said...

Go Navy.


johnnyj said...

I heard that the "N" power creates some fine drinking water...Ooooh...

I don't know for sure; ask my great great great grandchildren.

Go Green dude, go green.

You'll be cool.

Gerry from Valpo said...

Go Nukulur!