Is Wall Street Ready to Go Nuclear?
CEOs across the economy are feeling the squeeze of higher power prices, and these prices likely will rise even more if the U.S. government enacts a law to control domestic greenhouse gas emissions. However, high power prices and a push toward power sources that release fewer such emissions mean opportunity for one sector of the economy:nuclear power. But so far, despite perhaps the best environment ever in which to finance deals of all kinds, investment banks, private equity firms, shareholders and other sources of capital aren't interested. The risks of investing in new nuclear power projects, expected to cost as much as $5 billion each, outweigh the potential rewards.
Since 2000, industrial power prices are up 13 percent in real dollars, while commercial power prices are up 9 percent. Before 2000, both prices had fallen steadily since 1982, by 42 percent and 27 percent, respectively, according to the federal government's Energy Information Administration (EIA). Prices are up in part because the cost of natural gas, which increasingly fuels power plants, has skyrocketed over the period; independent power companies have also had to try to recoup the billions of dollars they spent in the early to mid-1990s building natural gas plants by passing the costs of construction on to their customers in deregulated markets.
Further, CEOs may be experiencing just the beginning of the power-price squeeze, because any serious effort to constrain carbon dioxide emissions through a cap and trade program, an increasingly popular idea in Congress and state capitals, will push prices even higher by forcing power-plant operators to reduce their dependence on traditional coalfired, but carbon-intensive, power plants, the cheapest kind to operate.
The EIA estimates that a program similar to the types of plans bipartisan members of Congress are considering to reduce the growth in emissions would force the price of power up 4 to 6 percent over what it otherwise would be by 2010, and by 11 to 13 percent by 2030. But those estimates hinge on another key assumption the EIA makes: that the nation's power producers will boost nuclear generation by 50 percent over today's levels by 2030-five times the growth expected without a cap.
Will that nuclear-construction renaissance happen? Although no company has opened a new nuclear power plant on American soil in 30 years, at first glance, there are good reasons to believe in a resurgence. Ten companies, including Constellation Energy, Duke Energy, EDF International, Entergy, Exelon, FPL, Progress Energy, SCANA, Southern Company, and the Tennessee Valley Authority, have teamed up with reactor manufacturers GE Energy and Westinghouse in a consortium called NuStart to support efforts to build and operate new nukes. More than a dozen companies, including NuStart members, have either filed or signaled their intent to file for new generation permits at sites from Louisiana to Maryland.
"I firmly believe that we will need 20 to 30 new [nuclear] plants by 2030 if we are to have any hope of addressing climate change and en suring our future energy security," said John Rowe, CEO of Exelon, in a speech delivered in May.
Tony Earley, CEO of DTE Energy, which owns Detroit Edison, said in a speech earlier this year, "When I [spoke on the topic] in 2002, my comments about nuclear energy were brief and pretty discouraging. I predicted that while most nuclear power plants would have their licenses renewed, no new nuclear power plants would be built in the U.S. to accommodate growing demand. Today, I'm here to tell you that I was dead wrong. ... DTE Energy has start ed work on preparing a license application for a new nuclear plant." Earley cautioned, however, that the company still hasn't decided whether it will actually build the project, but rather is just "preserving our option" by starting the still "long and complex" licensing process now.
Power companies are considering new nukes in part because federal regulations have changed for the better over the past few years. Today, companies can apply to the Nuclear Regulatory Commission (NRC) for a single license to build and operate a plant, an improvement over the old two-step process. Companies also can choose from standard designs approved by the agency.
Potential nuclear operators can apply for an optional "early site permit" from the NRC to address preliminary safety and environmental issues at a particular site. Such permits would be good for 10 to 20 years, allowing companies flexibility. Two potential projects- Exelon's Clinton in Illinois and Entergy's Grand Gulf in Mississippi- have won early site permits from the NRC after application periods lasted over three years. Two other projects continue to wait.
And the Energy Policy Act of 2005 offers incentives and subsidies. These include "standby' protection against the "potentially crippling impact of construction and operational delays beyond the control of the plants' sponsors" for 100 percent of delay costs for the first two new plants built and 50 percent of the cost for plants three through six. The Department of Energy is also offering an 80 percent loan guarantee for emissions-reducing projects, including nuclear projects that employ "new or significantly improved technologies compared to commercial technologies in service in the U.S. today." There is also a new eight-year tax incentive for new nuclear kilowatt production.
But skepticism abounds, particularly within the financing community. This skepticism could be a deal breaker because nuclear-power operators with small market caps do not have the resources to finance capital-intensive new nukes with equity or with corporate-level debt. In recent history, new construction in the power generation sector has been financed mostly with non-recourse debt, meaning that banks and bondholders, rather than shareholders, take the risk.
So far, Wall Street isn't biting. "The asymmetry of risk is just too large for Wall Street to finance these projects over time horizons that exceed political and economic cycles.... Utilities [are] willing to make this investment, but I don't see [the debt markets] stepping up and funding this program.... The markets aren't going to support it," said one veteran from Wall Street who attended a recent Manhattan Institute conference on nuclear power. While the financier characterized the 2005 subsidies as "helpful," he said that it's unlikely the sector will get off the ground without a far more comprehensive "federally based insurance scheme" that, in effect, would eliminate virtually every risk except, perhaps, commercial risk.
The skeptics note that first, there are still political risks. Nobody wants to be the first to invest in a new nuke. While streamlining the regulatory process for new plant siting and operating may work in theory, financiers want to see it work in real life before they make an investment. They're not quite sure, for example, how the loan guarantees will really work. Beyond Washington, state and local political risks loom, perhaps even larger than federal political risks. Several states, including Illinois, periodically "appear on the verge of passing legislation" to reregulate power rates to residential users and thus curtail the power industry's ability, in a deregulated environment, to pass capital costs through to end users, another conference attendee noted.
Second, there is fuel-supply risk. The nation barely has enough current sources of fuel to continue to supply the 104 plants already in operation. It's unlikely that banks will offer 20- or 30-year debt to a new nuke project without a corresponding secure supply of fuel.
Third, there's the risk of waste disposal. Despite the fact that the federal government identified Yucca Mountain in Nevada as a nuclear-waste site over two decades ago and rate payers have long funded work at the site, the earliest opening date at Yucca is still at least 10 years away, assuming no delays from litigation, permitting or technical glitches.
For these reasons, despite an exuberant global investment climate and forgiving discount rates on nearly all types of capital projects, "you [still] can't cash-flow a nuclear plant because the concept of risk over a period of time is too high.... If we're not seeing expansion of nuclear investment in this environment, with the political desire and the economic capital that are so available right now, then one has to wonder when we're ever going to see it," said one attendee at the Manhattan Institute conference.
This piece originally appeared in Chief Executive Magazine
This piece originally appeared in Chief Executive Magazine