Saturday, June 20, 2009

Nuclear Energy Update

Background on Nuclear Energy:

Nuclear energy provides a significant portion of the world's base load power capacity, along with coal power, gas, and hydro-electricity. While "renewable" energy and conservation receive the lion's share of the media coverage, in fact they make up a minuscule proportion of our total generation.

In the United States, for various reasons, there has been little or no investment in new base-load energy capacity, other than natural gas, and our existing plants are continuing to age. Since the plants have a long lead-time, if no new plants are started soon, we will have retirements and no reasonably priced options to replace them, which will drive up the total cost of energy and make our economy less competitive.

There are two viewpoints that I see frequently on this topic:

1) "The Greens" who view nuclear plants as a possible solution for greenhouse emissions and less "dirty" than coal, and I will put most of the government and media dreamers in this category
2) "The Engineers" who talk about new plant designs and how efficient they are and how technology can help us resolve this situation, which seems plausible given that most of the technology behind nuclear and coal plants actually in operation today stems from the 60's and early 70's

One viewpoint that I don't see very often is what I will call "the bitter realist". I am definitely in this camp, based on decades of experience with the utility industry, focused primarily on the financing side, which also requires a fair dose of regulatory experience (since they are closely intertwined). You can see much more detailed posts (50 and counting) on the energy industry in the US here.

Recent Events in Nuclear Power:

One event that didn't receive the coverage that it deserved is the decision to abandon the Yucca Mountain storage plan in Nevada for spent nuclear fuel. Obama made this decision not to fund Yucca Mountain in the 2010 budget, although this has not been finalized. Over $9 billion has been spent on Yucca Mountain and work has proceeded on this effort since 1987. Utilities have been paying into a Federal fund to contribute to this storage site, and now each individual utility will need to determine how to store their own fuel on their own location indefinitely. There will also likely need to be some resolution to the amounts that the utilities have paid into the fund and whether these contributions will continue.

This plan was the signal monstrosity of the "greens / government" combined with the "engineers". The site was studied to death but even 2 seconds into it the "bitter realist" could have told you that there was no way that thousands of shipments of nuclear waste were going to be shipped all the way across the USA and dumped into Nevada; this process could be halted anywhere by 1) bitter fighting by the state of Nevada (note that Harry Reid is now a big power in the Democratically controlled Senate, and he is celebrating) 2) lawsuits or even protests along the tracks 3) any sort of snafu (which seems inevitable, considering the logistics) along the way, the same way that the Three Mile Island incident was used to be the death knell of nuclear power in the USA.

So, now effectively we have abandoned any type of central storage (don't believe the nonsense by the new energy secretary about a new plan; this one took 22 years to die and we haven't even started thinking of another one) and now each of the utilities effectively need to plan for their own spent storage on site, indefinitely. This will also be something that the protesters can use to try to slow down / stop any new construction (do you want radioactive fuel in your neighborhood FOREVER? - I can see the signs in my head, now).

Another problem is that utilities have to plan for decommissioning their existing sites and pay for it "as they go", unlike the Federal government, for example (which just issues debt and more debt). The cost of decommissioning is gigantic; you can only imagine the feast of lawyers and regulators that swoop to the site like seagulls at a garbage dump. The Nuclear Regulatory Commission recently cited 18 nuclear power plants to address these funding shortfalls - since they are not able to invest in risky securities, the current low interest rates will also mean that additional cash infusions will be required at some point in the future (although these policies mean that they didn't lose money in the recent crash, either).

US Government Selects Four Companies for Federal Loan Guarantees:

The US Government recently selected four companies for Federal loan guarantees for new nuclear plant construction. Per the WSJ article titled "US Chooses Four Utilities to Revive Nuclear Industry":
Seventeen companies applied for $122 billion of federal loan guarantees for 21 proposed reactors. In creating their short list, federal officials sought companies with strong development teams and plans that could be implemented quickly. They also wanted a mix of traditional utilities (Scana and Southern) and newer "merchant" generators (NRG, UniStar) that sell electricity at unregulated prices. Merchant operators have reaped big productivity gains in nuclear power in recent years. Foreign partners that might be able to contribute loans or equity were also considered a plus.
Hmmm.... when I saw this list I was pretty confused.

NRG is a "merchant generation company" that at one time came from Minnesota where I consulted for many years. Today, they are locked in a bitter takeover battle with Exelon, the Chicago based utility giant (who also bought up lots of East Coast generation assets in Philadelphia) where Exelon is attempting to buy them and they are refusing to sell, saying that the price is too low. Here is a link to an Exelon investor presentation where they present their case for NRG stockholders to vote for the merger, pointing out that NRG does not have access to low-cost financing and that NRG's existing fleet has a high carbon footprint, meaning that they will have to spend significant amounts to upgrade their systems under new potential rules.

Thus based on the fact that NRG is locked in a struggle with Exelon for control and it will be expensive to fund the rest of the site, it seems like a strange (wasted) choice for the US government.

Scana is a utility in South Carolina. All I have to say is that Scana's total equity market capitalization is only 3.81 billion. Thus they are severely under-capitalized to take on such a large project, since the cost overrun will likely be greater than their entire equity value. Scratch them from the list.

Unistar is a joint venture between Constellation Energy, a Baltimore utility that runs several nuclear reactors, and a French company that has extensive nuclear experience. Constellation recently had a near-death experience with their finances due to trading and were in line to be taken over by Warren Buffett - the French made a higher bid and Warren walked away with his breakup fee valued at 20 million shares or 10% of the total company, which he recently sold off. In any case, although Constellation survived, handing off 10% of your company essentially for nothing is not exactly a great start to being the champion of the revived nuclear industry. I would say that if Constellation weren't such a basket case this would be a good choice, because the French bring money and useful expertise to the process. As is, it is a so-so choice.

Southern Company is the one that makes the most sense, among this bunch, at least. They have a market cap of $23 billion and also linkages to other public entities in Georgia that can help fund new construction. They are a pretty big operator of nuclear plants, today.

Thus of the 4 I would say 1 1/2 have "some" shot at doing something.

What is more interesting is the companies / entities that weren't selected (I assume they applied, but don't know the exact details).

Exelon is the largest fleet operator in the US and a very logical choice, if you actually wanted to get something done. Entergy is too financially sophisticated to even THINK of throwing money down this rathole, the way the game is currently constructed (there aren't guarantees on the cost or if you can overcome public, legal and regulatory hurdles). And Duke, for whatever reason, is talking about building a new nuclear plant in Ohio without Federal guarantees. The Tennessee Valley Authority, whom I usually cite as an entity that might actually build one, wasn't selected, either.

Also - note that these Federal loans are only for a small part of the total construction cost. If they plan to build 7 plants and there is about $18 billion in guarantees, those guarantees won't even cover the OVERRUNS at those plants, given the likely way that construction and legal costs will spiral along the way.


The press releases get the hype but underneath there isn't much to the loan guarantees, since they did not go to the logical players who might get something done, for the most part.

Note the continuing backdrop of legislative heavy handedness (NRC decommissioning) and just plain ineptitude (Yucca Mountain) which is the kind of fact that would make any rational investor (or anyone considering financing debt) think twice or demand strong returns for their capital.

Note that I am a fan of nuclear power and believe that it is a great way to make our country more competitive, since done correctly, it is far cheaper to run in the long term, and reliable in all conditions.

As a "bitter realist", however, it isn't going to happen.

Cross posted at Chicago Boyz


UNRR said...

This post has been linked for the HOT5 Daily 6/21/2009, at The Unreligious Right

Carl from Chicago said...

Thanks for the note and an interesting site over there