Sunday, February 14, 2010

Updates on Power and the Federal Government

While there has been talk of a nuclear "renaissance" in the media for years, it is mostly hype. Existing nuclear plants in the US are running at a high capacity factor and making money for their owners, but there has been little tangible investment in new nuclear plants in the US.

Loan Guarantees and Financing:

One giant barrier to building new nuclear plants in the US is financing. We haven't built a new nuclear plant in the US in decades so no one really knows what it will cost (and it depends on which design is chosen) but it is safe to assume that they will cost more than $8-10B each. Given that the entire market capitalization of most US electric utilities is smaller than this figure, as I discussed in this post in June of 2009, the idea that new nuclear plants would be built in large numbers was a pipe dream.

The Federal government (Department of Energy) was trying to assist by providing loan guarantees for these projects. I started reading through the Federal web site about what this really means and found this document which describes the arguments about 1) whether or not nuclear plants really qualified under this program because they aren't really new technologies 2) how much equity the companies should be required to contribute to the project 3) various other data points that summarize the state of nuclear energy in the US (as of 2007, but still mostly relevant because not much has happened since then). If you are interested in nuclear power I highly recommend that you take a few minutes to download and read this PDF because it is filled with facts and opinions from the various actors.

The original proposed Federal loan guarantees were too small relative to the tiny equity capital available from possible players and the large, looming overruns likely to hit these projects. The Federal government seems to agree because they raised the amount of guarantees per this article:
Budget for the coming year would add $36 billion in new federal loan guarantees on top of $18.5 billion already budgeted -- but not spent -- for a total of $54.5 billion. That's enough to help build six or seven new nuclear plants, which can cost $8 billion to $10 billion each.

When these items were discussed back in mid-2009 I noted that the only company listed as a potential candidate with financial strength to pull off one of these plants was Southern Company. Also as I noted, it was amazing to me that the "journalists" who wrote up that story couldn't do the rudimentary financial research that would have told them that same thing. In any case, today they announced that Southern Company was going to be the first company to receive a Federal loan guarantee for $14.5B for 2 units to be built near their existing plants at Vogtle.

Financial Impact on Electric Utilities:

It will be interesting to see the impact of this effort on Southern Company's financial statements and stock price over the years to come. It would seem to me that this would be a giant negative overhang because many negative things can occur (delays, lawsuits, spiraling costs, protests, etc...) and it seems unlikely that positive events will occur (on time construction, on budget, fast approvals, etc...). Even if it does come on line, it isn't necessarily going to be a giant money maker - this will depend on the market for energy a decade from now when these plants start generating electricity.

I noted also that NRG, which is building a plant two units in Texas, seemed rather thinly capitalized to take on such a giant effort (and potential strain on their stock price). The Cities of Austin and San Antonio also started to awaken to the difficulties of financing these plants, as well as their own prior history of cost overruns. NRG is now negotiating various options to wind down the effort or complete the site with other partners, and has an excellent power point presentation that they put on the investor relations section of their site which both lays out the opportunity for "first mover" status with nuclear generation and the risks. Should the other partners continue to frustrate the project, note what NRG says on the bottom of page 8 on their slide (they are using all caps, not me):
NRG WILL NOT EXPEND FUTURE SHAREHOLDER CAPITAL IN A PROJECT THAT IS NO LONGER FINANCEABLE NOR WILL IT EXPOSE NRG SHAREHOLDERS TO THE BURDEN OF FURTHER DEVELOPMENT COST RISK SHOULD CPS CONTINUE IN A POSITION WHERE THEY CAN FRUSTRATE THE PROJECT


No Solution for Nuclear Waste:

The Federal government has officially abandoned the Yucca Mountain site in Nevada as a long term storage option for spent nuclear fuel. If you want to see a sad story of missed deadlines, useless bureaucratic stumbling, billions of wasted tax dollars, and most importantly wasting decades on a solution that was bound to fail, go to the wikipedia page and read through your government at work.

Now storage will have to continue at every individual site indefinitely, which means over 100 sites will need to stumble through this morass in their own fashion. Perhaps we could have come up with some standards or best practices for solving this problem locally, but instead we wasted billions of dollars and decades of wrangling on a "mega" solution that was never going to work. Don't forget about this looming issue when you point to the illusory "renaissance".

Failure to Disburse "Stimulus" Funds:

About a year ago I noted in this post that there weren't "shovel ready" projects available for stimulus funding due to the near-impossibility of getting anything done in the US involving financing, legal issues and rights of way. As predicted, the Energy Department has not been able to spend their allotted stimulus money. According to this article:
Energy Secretary Steven Chu expressed frustration Thursday that most of the roughly $37 billion in stimulus money Congress gave his agency last year had yet to be spent, but said the agency could manage a new round of funding for clean-energy projects as part of an expected jobs bill. At a hearing of the Senate Committee on Energy and Natural Resources, Dr. Chu said his agency had handed out only a fraction of the authorized stimulus funds. According to the agency's Web site, only $2.1 billion has been spent.


Now that same department which was unable to run a $37B budget is going to get a lot more money as the Federal loan guarantees for nuclear power also come under their responsibility. This does not appear to bode well.

We still are struggling to figure out what to do about "clean coal" here in Illinois. This article describes the over $1B spent on 2 proposed projects in Illinois, and all the years of wrangling as this project has gone on since 2003 and is far from completion.

Summary:

Key recent updates would be summarized as follows:

- new drilling technologies are making natural gas in the US cheaper, which makes other types of investment (nuclear, coal) less financially feasible
- while many companies were potential investors in new nuclear plants, only one (Southern Company) was really feasible, and they seem to be first out of the gate (woe to their shareholders, however)
- NRG jumped out first with their Texas plant but it is looking like they are going to pull the plug on that under-capitalized effort
- the Federal government is continuing to be completely inept in their activities 1) unable to disburse stimulus funds, as predicted 2) no plan for waste after abandoning Yucca Mountain 3) can't figure out what to do about "clean coal" projects after spending over $1B in Illinois and 7 years to boot
- not covered here is cap and trade, which needs its own post to do it justice. It looks like the recent change in the senate will stop this in its tracks, but legal efforts to stop the EPA from implementing new draconian rules continues

If you are interested in energy policy and nuclear power I strongly recommend reading that PDF I linked to above from the department of energy site as well as the investor presentation from NRG related to their South Texas Project.

Cross posted at Chicago Boyz

3 comments:

Anonymous said...

you have not commented on the big story in Illinois utility bills - this is incredible.

http://www.chicagobusiness.com/cgi-bin/article.pl?articleId=32992

Carl from Chicago said...

Utilities typically add in the cost of uncollectible accounts and get reimbursed for it in some sort of manner.

This way will likely lead to higher rates overall, though, because the utility will have less incentive to collect on the accounts.

In general, massive efforts at utilities are done to disconnect and then reconnect low income customers every year. It is a major pain in the rear.

Carl from Chicago said...

If you are interested in more information on this topic go to the cross post at Chicago Boyz there is a long and interesting comment thread there.

One of the guys doing the commenting is an actual nuclear engineer at a site under construction in Texas so you are hearing it straight from the horse's mouth, so to speak.