Nuclear Power's Missing Fuel

Why Wall Street is skeptical of backing a new round of proposed nuke plants

Nuclear power is hot. Sixteen utilities have expressed intentions to build up to 25 new reactors across the U.S. Just last month, NRG Energy Inc. (NRG ) in Princeton, N.J., unveiled plans to invest $5.2 billion in two new reactors at an existing atomic plant near Houston.

It's a nuclear renaissance, right? Not yet. While smart money is placing multibillion-dollar bets on ethanol, wind power, and solar, it's not throwing buckets of cash at nukes. "The real obstacle isn't the Sierra Club but the 28-year-old analysts on Wall Street," says Bob Simon, Democratic staff director of the Senate Energy and Natural Resources Committee.

Regulators could balk if proposed designs don't meet construction and safety standards. But memories of the delays, titanic cost overruns, and bankruptcies that ended America's love affair with nuclear power in the mid-20th century are the most daunting obstacle. "Investors remain wary of construction risks," says Paul T. Ho, a director at Credit Suisse First Boston's (CSR ) energy group.

That's why, five or so years from now, when the first construction and operating licenses are likely to be granted, only the most creditworthy diversified players, such as Duke Energy (DUK )and Southern Co. (SO ), would be likely to dip a toe in these waters, explains Denise Furey, senior director of global power with Fitch Ratings. With their scale, such companies could finance these projects for a decade or so using some combination of debt and equity. But that's a far cry from a new nuclear age.

Historically, utilities did an "abysmal" job controlling building schedules and costs, says David A. Schlissel, an economist at Synapse Energy Economics Inc. in Cambridge, Mass. Between 1975 and 1989, the average period required to complete a plant soared from 5 years to 12. The bill for a group of 75 first-generation plants totaled $224.1 billion (in current dollars), 219% more than estimated, according to a 1986 Energy Dept. study. In time, many utilities collapsed under these debts even as customers' bills soared.

Power companies say they can bring costs down, thanks to new, standardized plant designs and a streamlined, one-step licensing process. "People forget that the construction problems happened 30 years ago. There's been great progress since then," says NRG CEO David Crane. The company plans to use reactors from General Electric Co. (GE ) and Hitachi Ltd. (HIT ) that have been installed in Japan. This time around, the industry is aiming to build new plants for $1,500 to $2,000 per kilowatt of capacity, compared with a peak, inflation-adjusted cost of about $4,000 in the 1970s.

Trouble is, the cheapest plants built recently, all outside the U.S., have cost more than $2,000 per kilowatt. And the advanced designs now on U.S. drawing boards have never been built here. "A first-of-its-kind facility always costs more," says John Kennedy, a director at Standard & Poor's (MHP ). "Nukes ought to be part of the [energy] mix," says Southern CEO David M. Ratcliffe, but nobody wants to be first to build. "Everyone would actually like to be No.10," he says.

Last year's Energy Act dangled $13 billion worth of extra treats before the nuclear industry, according to Public Citizen, a consumer-interest group. These are focused on the first six plants and range from some $2 billion set aside to cover construction overruns due to legal challenges to a production tax credit worth up to $5.7 billion. Yet all that still may not "provide a sufficient incentive to pursue new construction," says Kennedy.

Energy Secretary Samuel W. Bodman offers couched assurances on nukes. "I'm convinced we'll get the first six reactors, with construction starting by 2010," he says. "But we don't need six reactors. We need 16, or 26." Until licenses for those first few plants are granted a few years from now, financiers and many utilities may just wait to see how the game changes. "Wall Street is very shortsighted," Furey says. Or maybe it just can't forget what it has already seen.

By Adam Aston, with John Carey in Washington and Mark Morrison in Austin, Tex.

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