Areva's High-End Bet on Nuclear Power

(The 8th paragraph corrects the opening date of the Calvert Cliffs reactor.)

Anne Lauvergeon, chief executive of the French nuclear giant Areva, is getting close to the payoff on a colossal, decade-long bet. In 2001, when she engineered the three-way merger that turned Areva into a one-stop shop selling nuclear technology to the world, many found the idea far-fetched. The U.S. hadn't ordered a nuclear plant since the 1979 Three Mile Island accident. And after Chernobyl in 1986, business dried up just about everywhere outside pro-nuclear France. There are 436 reactors operating in the world today, just 20 more than in 1990. Where would her customers come from?

Undeterred by the nuclear drought, Lauvergeon put Areva's engineers to work on a bold new technology called the Evolutionary Pressurized Reactor. The EPR is super-powerful, fuel-efficient, and loaded with safety features such as a reinforced concrete shell designed, post-September 11, to withstand a direct hit by a jumbo jet. Now the 50-year-old CEO is rolling out the EPR just as the nuclear industry awakens from its slumber. Worldwide, hundreds of reactors are being planned and 53 are being built, three of them EPRs. On Feb. 16, President Obama awarded the first of an expected $54 billion in federal loan guarantees to help U.S. utilities build a new generation of nuclear plants.

At lunch in Areva's executive dining room overlooking the Paris Opera, Lauvergeon predicts the EPR will grab one-third of the global market for new reactors over the next 20 years. That, along with the $11.5 billion company's other holdings—from African uranium mines to factories that turn out everything from fuel pellets to mammoth reactor vessels—will seal Areva's place as the industry's No. 1 player, she insists. "I was always convinced that nuclear had a future," she says between bites of broiled monkfish with chanterelles.

And yet, Lauvergeon may be asked to leave the table before Areva can cash in on its bet. Despite repeated public denials by the government of President Nicolas Sarkozy, French media outlets have reported that she may soon be replaced. Sarkozy has asked former Electricité de France chief François Roussely for a broad review of Areva and the rest of France's nuclear sector, with a report due in April. Meanwhile, trouble is brewing on several fronts. Areva's prototype EPR, under construction in Finland, is three years behind schedule; its cost has gone from $4.1 billion to $7.2 billion. Because Areva agreed to a fixed-price contract, it must eat those overruns, which has sapped profits. Adding to its woes, a contract to supply four reactors to Abu Dhabi slipped through Areva's fingers in December. Korea's KEPCO won the deal with a bid of $20 billion—$10 billion below Areva's. The powerful heads of EDF and French oil group Total, which teamed with Areva in Abu Dhabi, have questioned whether she erred in risking her company's future on a top-of-the-line reactor and not developing a lower-cost option. "You need to have a product line that corresponds to countries' needs," says EDF boss Henri Proglio. Lauvergeon counters that Areva's customers deserve the best available technology.

Lauvergeon's difficulties underscore the biggest challenge now facing nuclear power: its price tag. Even as fears about energy independence and global warming have led many policymakers and environmentalists to give nuclear a second look, construction costs for reactors have risen twice as fast over the past decade as those for conventional power plants, according to IHS Cambridge Energy Research Associates. Building a nuclear plant has become a "bet-the-farm risk," ratings agency Moody's (MCO) says in a report warning that utilities embarking on such projects could face a rating downgrade. Although a government loan guarantee might ease financing concerns, "it doesn't address the big risk"—that regulators won't let utilities jack up rates enough to offset the cost, says Jim Hempstead, a Moody's analyst who oversaw the report.

Why does Lauvergeon remain bullish on nukes? She's certain the technology will have a place in the energy mix even as solar, wind, and other alternatives take off. And Areva has a head start on its chief rivals, Westinghouse Electric and a partnership between General Electric (GE) and Hitachi. Both have new reactors with advanced safety features. But they haven't yet built any, while Areva can benefit from lessons learned on EPRs under construction in Finland, France, and China.

For a close-up look at the EPR, visit the Normandy village of Flamanville, where Electricité de France is building one. At the foot of a windswept cliff overlooking the English Channel, workers in fluorescent yellow vests pour concrete into molds bristling with reinforcing rods for a circular wall that will encase the new reactor. The containment structure will include enough steel to build half an Eiffel Tower and about twice the concrete of existing nuclear plants.

Such souped-up safety features were key in convincing Baltimore-based Constellation Energy Group (CEG) to go with an EPR for an expansion of its Calvert Cliffs plant in southern Maryland. The company is in advanced talks to obtain federal loan guarantees, with an eye toward opening the facility by 2017. Despite the cost, some $10 billion, "once that investment is made, we'll have a highly reliable plant," says Michael J. Wallace, Constellation's chief operating officer.

Lauvergeon has used keen political and marketing instincts to keep Areva's U.S. growth on track. Fluent in English, she regularly meets with U.S. industry groups and politicians in states where Areva operates. Last July she joined then-Virginia Governor Tim Kaine to break ground on a joint-venture factory, with Northrop Grumman (NOC), to supply components for U.S. plants built by Areva and others. To garner support for the EPR among potential subcontractors, Lauvergeon organized "supplier days" last year in Maryland and Ohio. And last summer she invited high school students from Idaho—home to a planned Areva uranium enrichment plant—to visit similar facilities in France. Compared with its rivals, "Areva is more attuned to the public relations side of things," says Adrian Heymer of the Nuclear Energy Institute, a trade group in Washington.

Still, the U.S. is likely to see less than 10% of the industry's growth over the next decade. China and India, which account for nearly half of the reactors now under construction, are a tougher sell. China has ordered two EPRs, but it also plans to buy four reactors from Westinghouse. And both Areva and Westinghouse have only minority stakes in joint ventures with Chinese partners, which will probably lower profits in China. Like the Chinese, the Indians are eager to develop their own reactor designs, limiting opportunities there, too. In other emerging markets, Areva faces a big challenge from Korea's KEPCO and Russia's Rosatom, which have sold reactors far more cheaply than Areva.

Lauvergeon is ready for the fight. Trained as a physicist at the elite Ecole des Mines de Paris, she worked at the French atomic energy agency in the 1980s before joining the staff of former President François Mitterrand, where she scouted international trips. She then became a partner at Lazard Frères (LAZ) in New York. In 1999, then-President Jacques Chirac tapped her to run Cogema, a state-owned nuclear fuel business. While most countries had halted nuclear construction, France built dozens of reactors during the 1980s and 1990s.

Dismayed by what she calls the French industry's "bunker mentality," she persuaded Chirac to fuse the state's nuclear holdings into a single company, with the government retaining a majority stake. Her plan put Areva in prime position to capitalize on the renaissance, says Roger W. Gale, a veteran U.S. nuclear consultant. Customers are drawn to Areva because, unlike rivals GE and Westinghouse, "nuclear is the only thing they do," Gale says. "They live and breathe it."

Even so, Lauvergeon is hedging her bets. In February she bought Ausra, a California solar startup, and she has added wind and biomass to Areva's portfolio. Renewables today account for only about $1 billion of Areva's $58 billion order backlog, but Lauvergeon says the company someday could get more than a third of its revenues from such activities. More important, at least for now, Areva controls 40% of the profitable market for nuclear fuel and does a brisk business selling generators, replacement parts, and management services to utilities worldwide. "Even if there were zero construction" of reactors, she says, "we would live very well."

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