Constellation back out of Calvert Cliffs

The nuclear renaissance in the United States may not be ending just yet, but it surely took a step backward this week. The demand for energy, a growing emphasis on decreasing carbon dioxide emissions and federal loan guarantees set off talks of a nuclear revival in the States just a few years ago. But the economic decline has driven down the demand for energy along with the price of competing energy sources, especially natural gas, with the threat of shale gas keeping that price down for a potentially long time.

In the midst of this, Baltimore-based Constellation Energy announced last week that they have pulled out of negotiations on a $7.5 billion federal loan guarantee to build a 1,600 MW reactor in Maryland with its partner Electricite de France (EDF), France’s government-backed utility and nuclear fleet operator.

In an Oct. 8 letter to Dan Poneman, deputy secretary of the U.S. Department of Energy, Constellation Energy Chief Operating Officer Michael Wallace said Constellation Energy does not see a “timely path to reaching a workable set of terms and conditions” to build a third unit at Calvert Cliffs in an “economically reasonable and statutorily justifiable manner.”

The statement also said that the high estimate of the credit subsidy would force Constellation and its partners to pay the U.S. Treasury 11.6 percent, or $880 million, in order to obtain the loan guarantee for Calvert Cliffs 3 (CC3).

“Such a sum would clearly destroy the project’s economics (or the economics for any nuclear project for that matter) and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be,” the statement read.

In February the first loan guarantee for a nuclear plant was awarded under the provisions of the Energy Policy Act of 2005. The award of $8.3 billion for two additional reactors at the Vogtle plant in Georgia is conditional until the plant receives the combine construction and operating license from the NRC, which is expected in 2011. Southern Co. can recover costs during construction under Georgia law since it is a regulated market with a state utility commission in place. In Maryland, power companies operate under a merchant market. Merchant markets do not have a utility commission and can only regain construction costs after the plant is commercially operable, leaving those companies with no guarantee that they will recover those investments.

“Merchant nuclear projects – unregulated projects in electricity markets – will only be built if project profits are high enough to justify the investment,” said Edward Kee with NERA Economic Consulting.

Several reports out say that UniStar Nuclear Energy, a Constellation Energy and EDF Inc. joint company, along with its partners have already spent more than $600 million on the project. Still, UniStar said it has not withdrawn its application for a federal loan guarantee and also said that no decision has been made regarding the future of CC3.

"There are a lot of people that are spending a lot of money right now waiting on these loan guarantees and that is how cost overruns happen and that is what drives the cost of the projects up when you sit in suspense," said Danny Roderick, GE Hitachi Nuclear Energy's senior vice president for new plant projects, during Power Engineering magazine's Nuclear Power Executive Roundtable being published in the November issue.

And while natural gas prices are low now, John Herron, president, CEO & chief nuclear officer of Entergy Nuclear who was also speaking at the Nuclear Power Executive Roundtable, said that natural gas is a good choice, but it is still putting out CO2.

“People should start comparing nuclear power accurately,” Herron said. “Let’s put the facts on the table, let them speak for themselves and I guarantee that clean nuclear energy will win out every time.”

The Beginning
In 2008, EDF paid $4.5 billion for a 49.9 percent share of Constellation’s nuclear share after energy trading losses hurt the company financially.

UniStar was developed with the idea of helping start the nuclear renaissance in the U.S. with a new fleet of nuclear power plants using the Areva EPR reactor design. But the summer of 2010 saw disagreement between EDF and Areva over the rising costs of the construction of an Areva reactor in Finland, reported The New York Times.

An e-mailed statement, Areva said that “the news that Constellation considers the terms of a proposed DOE loan guarantee 'unworkable' is cause for concern, but we remain hopeful that an agreement can still be reached to continue development of a U.S. EPR reactor in southern Maryland.”

Early last week, The Washington Post reported that Constellation Energy was in disagreement with EDF over a deal in the purchase agreement. The disagreement reportedly stemmed from a put option, agreed upon in 2008, which allows Constellation to sell gas and coal fired power stations to EDF for up to $2 billion. The put option was intended to offer Constellation additional financial backing, if needed. But now, the value of power plant assets has dropped as commodity prices have gone south and reports by Financial Times state that EDF does not believe Constellation can force them to purchase the plants under the original contract.

A report by IHS CERA in July found that construction costs for a variety of plants—ranging from wind to fossil to nuclear—rose for the first time since the first quarter of 2008. The report found that between the third quarter of 2009 and the first quarter of 2010, costs in North America rose 1 percent and in Europe 3 percent. IHS CERA’s construction cost index found that steel costs have risen 2 percent for North America and 6 percent for Europe. Electrical prices, driven by the rise of copper prices, posted the largest increases: 15 percent in North America and 22 percent in Europe.

“Both UniStar and NRG have been forced to scale back due to delays in receiving the conditional loan guarantees. The delay will clearly slow any efforts to spur any growth and any investment and any creation of jobs,” Mark Marano, Areva senior vice president of U.S. new build operations said during Power Engineering's Nuclear Power Executive Roundtable. “And the result sadly enough - we won’t be just talking about stimulating and adding jobs - the lack of action on loan guarantees could inherently cause the reverse reaction which is just the opposite of what its intent was.”

And EDF said the development of CC3 would generate 4,000 new jobs and bring significant financial investment to Maryland.

With Constellation now backing out of the project, EDF’s ambitions to help lead a nuclear renaissance in the U.S. have all but stopped completely. Constellation did say that the next steps in the loan guarantee process are for EDF to determine.

“This issue of the loan guarantees has to get solved soon. We have to understand what the government’s role is going to be in that,” said Roderick.

Despite the step back in current development, EDF said they remain committed to pursuing new nuclear in the U.S. and said Constellation knows that they were at the finish line with the DOE after making huge investments of time and resources on the federal loan guarantee process.

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