Nuclear Power Is Heating Up Again

Interest in the energy source is on the rise across the country, and financial risks are lower. S&P sees no slowing of the trend

From Standard & Poor's RatingsDirect

Interest in adding new nuclear power plants to U.S. electric generation capacity has gained considerable momentum in the past year. The last nuclear plant was ordered more than 30 years ago, in 1973. But several factors have combined to generate a clear resurgence of interest in adding new nuclear capacity. Interest ranges across an array of political and industrial constituents, sparked in large measure by:

• Supportive federal and state legislation;

• Concern over the reliability and capacity of rail transportation infrastructure and carbon dioxide emissions related to coal, which fuels about 50% of the country's power generation;

• An increased dependence on natural gas (which fuels about 20%) and its volatile prices; and

• Appeal of operating economics.

Moreover, the country continues to need additional electric generating capacity simply to meet ever-increasing demand for power, which grows at a relatively steady 1.5% to 2% annual pace. Electric utility ratepayers are anxious to limit volatility in their electric bills, a direct consequence of a heavy dependence on natural gas as a fuel for generators.


  The passage last August of the 2005 Energy Policy Act, among many other things, sought to reduce the cost and riskiness associated with nuclear investments. The act included a 1.8 cent per kilowatt-hour tax credit for 6,000 megawatts of new nuclear capacity, as well as standby support to offset the financial effect of construction delays due to regulatory lag or litigation.

The act extended the Price-Anderson Act, which provides the framework for limiting operator liability associated with nuclear accidents, and it modified the tax treatment of certain nuclear decommissioning trusts, particularly those related to non-rate-based facilities.

While there is no national consensus on the willingness to increase nuclear capacity, certain regions appear much more receptive than others, specifically, the Southeast and Midwest. Others, most notably the Northeast and the West Coast, remain generally opposed to the idea, despite the clear need for more base-load electric generation resources.


  Recognizing this, several states have already taken steps to ease the permitting and construction process. Florida passed its own energy legislation that enables utilities to recover their nuclear-related preconstruction and licensing costs. It also excludes nuclear plants from the state's competitive bidding rules related to new capacity.

In South Dakota, the state legislature passed a bill that encourages research and development related to advanced design reactors and, and generally fosters consideration of the nuclear option for power generation. Several other states are considering similar bills.

Placing any plant into operation is a long-term proposition, with new facilities unlikely to enter service before 2015-2016, or about five years following receipt of all relevant permits. Recognizing the lead time necessary for approving and building a nuclear plant, several partnerships and consortia are moving forward with preparations to file applications with the Nuclear Regulatory Commission (NRC) for a combined construction and operating license (COL), in many cases for multiple units.


  The NRC has indicated that 16 utilities have noted serious interest in as many as 25 new facilities. For instance, Duke Energy (DUK) and Southern (SO) expect to submit COLs within the next year and a half for one or two 1,000 Mw units to be built in South Carolina.

Such a filing does not commit either company to actually constructing the facilities, which is a decision they could make in several years depending on the prevailing market and political and regulatory dynamics. Duke has estimated the total cost to put the two plants in service to be between $4 billion and $6 billion.

Perhaps the single greatest hurdle to licensing the next nuclear facility and funding it is public acceptance of the technology. There are two principal considerations in this regard: operational safety and waste disposal. On the operational front, nuclear plants have demonstrated a strong history since the mid-1990s of safety and operational performance.


  The performance of safety systems has achieved very high standards, and the absence of headline news and the reduction of forced outages have added to the relative comfort that the public has generally achieved with nuclear technology—until the threat of terrorism injected a whole new risk element into the equation. However, this last consideration does not appear to be deterring companies in the Southeast and Midwest.

Standard & Poor's Rating Services believes the waste issue will remain a very challenging political problem, but will not be sufficiently disruptive to prevent the licensing of new plants.

The legacy of the unpredictable and prolonged construction period of the last nuclear build cycle and the mixed operating performance of the industry until about 10 years ago remains fresh in many investors' minds. The sheer amount of capital necessary to bring a new plant on stream is daunting, so the design of capacity payment structures in 10 years will be a critical consideration. The price of natural gas 10 years from now is also a considerable uncertainty.


  At the same time, Standard & Poor's recognizes that the federal government is initiating numerous structural changes designed to prevent a repeat of the extremely negative and financially ruinous experience of the last nuclear construction cycle.

These include things such as standardizing reactor designs, providing tax breaks and loan guarantees, and creating a combined construction and operating license. This is occurring while the industry itself has demonstrated an ability to operate safely and efficiently in recent years. So, while it may be slow and steady, the return of the nuclear power option has considerable momentum that is not likely to wane.

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