Power Engineering

Banking on Nuclear

By David Wagman, Chief Editor

New nuclear’s future may depend less on what happened at the Fukushima Daiichi nuclear power station in Japan than what is happening at two construction sites in Europe.

That’s because the key to building new nuclear is finance. And lenders will remain wary of the sector until it’s clear why the Flamanville Unit 4 reactor in France and the Olkiluoto Unit 3 reactor in Finland are so far behind schedule and over budget.

Problems at both nuclear construction sites predate March 11. They are fueling arguments by anti-nuclear advocates who point to what they say is the nuclear industry’s inability to build on budget and on schedule.

Steven Thomas of the University of Greenwich in the U.K. said last month at Nuclear Power Europe in Milan that the industry is not learning lessons and is failing to standardize designs.

“The real cost of the last plant is three times the cost of the first,” he said. “Nuclear has always struggled with its economics.”

The nuclear renaissance was failing before Fukushima, said Allan Baker, managing director, global head of power at Societe Generale, who spoke at the same conference. Costs had been rising, construction work had been delayed and cancellations had already been in the works prior to Japan’s March 11 earthquake and tsunami, which precipitated that country’s nuclear crisis. The Flamanville and Olkiluoto projects both were going “spectacularly wrong” and their difficulties “seal and accelerate” trends that were already happening, he said.

Baker wondered aloud whether Fukushima might be the final straw for light water reactor technology. “It’s not the cost per se, but the uncertainty of the cost.”

That sentiment was echoed closer to home by Robert Reymond, a senior executive with Burns & McDonnell, who took part in our Coal Executive Roundtable featured in this month’s issue. “Fukushima may have been the straw that broke the camel’s back on some of these projects that were delayed or canceled after the Fukushima event occurred,” he said. “But I think the hay bales that were already breaking the camel’s back were low gas prices, some cost overruns and pretty large schedule delays” on projects around the world.

The financial community’s response to such uncertainty is to require more equity and force project development sponsors to kick in more money, Baker said. A number of prominent lenders will not even consider lending money for a nuclear reactor. Bond and capital markets may be even more risk averse, particularly when it comes to commercial risk and variability uncertainty.

“It is difficult to mobilize capital for an industry that is, to be blunt, non-competitive” in terms of cost, Baker said.

Strong stuff, to be sure, but nuclear renaissance proponents have always faced a challenge convincing skeptics that projects could be built in around 36 months and with enough standardization to minimize or eliminate entirely cost escalations due to one-off modifications.

First generation nuclear reactors suffered from a lack of standardization and also because of retrofits and upgrades mandated by federal nuclear regulators both before and after the Three Mile Island accident. The latest generation of reactor design was intended to address many of those issues. Although there have been successes in Asia in bringing nuclear plants into service close to schedule, the long and storied woes involving Flamanville and Olkiluoto have not gone away.

Nuclear makes a strong case, particularly where worry runs high over greenhouse gas emissions. Alessandro Clericci, Italy’s chief representative on the World Energy Council, said at Power-Gen Europe that replacing the existing nuclear fleet with natural gas-fired combined cycle power plants would add 2 billion tons of CO2 to the atmosphere each year. European nations face self-imposed targets for reducing greenhouse gas emissions to levels that are as much as 95 percent below 1990 levels by 2050. For many policy makers, nuclear generation played a central role in efforts to achieve those goals. As a result, governments may be pressured to step in to help support new nuclear reactor construction as a matter of public policy to help achieve the environmental goals.

A second scenario sees pro-nuclear countries benefiting from decisions to move away from the technology in favor of other generating resources, including renewables and, increasingly, natural gas. Given the connected nature of Europe’s grid, nuclear-generated electricity produced outside Germany, for example, could still find its way into the country’s electric mix. The economic case for new nuclear may be strengthened by recent actions in Germany and Italy to shut existing reactors or scrap plans for new reactors entirely.

A resource-rich country like Russia also could benefit by moving forward with plans to develop perhaps 11 nuclear power plants and saving its natural gas resource for export. Likewise, some countries in the Middle East are considering building nuclear reactors to preserve their fossil-based resources for export.

Nuclear power can still put together a logical argument for the technology. But until uncertainty can be better controlled, the task of finding affordable finance for new units will be daunting.

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