Nuclear power plant in China.

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Gas Makes Nuclear Power Radioactive

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.
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This chart pretty much sums up the problem with nuclear power:

The top line -- enjoying a spike of 17 percent today, taking it back into positive territory for the year -- is the stock of Chicago Bridge & Iron. That other one, swan-diving to a drop of about 30 percent for the year so far, is the price of natural gas (both lines have been indexed to 100 for comparison). 

CB&I is having a good day on news that it is selling off its nuclear power plant construction business to Westinghouse Electric, majority-owned by Toshiba. The payment of $229 million, spread over time, is immaterial. What counts is this line in the press release announcing the deal: “At closing, WEC [Westinghouse] will assume, and indemnify CB&I for, previous, current and future liabilities associated with the AP1000 nuclear projects.”

In short, the radioactive element poisoning CB&I’s stock price -- a dispute over who pays for big cost overruns in two U.S. nuclear plant projects -- is gone. CB&I’s stock was trading at a discount of one-third or more to peers Fluor and Jacobs Engineering Group, based on forward P/E multiples, in part because of worries about big potential nuclear liabilities vaporizing its cash flow.

Nuclear plants are dogged by long planning, approval and construction times, due to the fact that they are, well, nuclear. When the newest U.S. reactor, coming online soon at a plant in Tennessee, was first granted a license to operate, Gerald Ford was sitting in the Oval Office. Such huge, complex capital projects risk cost overruns. And long lead times can leave backers exposed as they pour billions of dollars into a plant years before it generates a watt of electricity.

Thus the importance of that slumping gas price: It suppresses wholesale electricity prices in many parts of the country. It also comes as a surprise -- natural gas prices were in double digits a decade ago and are now flirting with $2 per million British thermal units. True, gas emits carbon, whereas nuclear plants do not. But gas plants can also be built much more quickly, are more flexible, cleaner than coal, and don’t emit the sort of waste that Homer Simpson really shouldn’t be handling.

It is no accident that the new nuclear plant due to be built in the U.K., in which China just took a stake, is getting built with the aid of government guarantees on loans and long-term power prices. That plant was first proposed in 2006 and will likely not enter service until 2025.

Now take a look at this other chart. It shows the geographic split of nuclear plants under construction worldwide, as listed on the World Nuclear Association’s website

More than four fifths of capacity being built is in China, Russia, India and South Korea, countries with a heavy degree of government intervention and, in Korea’s case, almost wholly dependent on imports of primary energy.

With gas prices down and likely to be depressed further worldwide by the growing glut in liquefied natural gas, pushing the button on new nukes will likely remain overwhelmingly reliant on the hand of government.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net