Nuclear, Reactors

Bigger Players, New Players Bring Glimmer of Hope

Issue 3 and Volume 108.

By John C. Zink, Ph.D., P.E.,
Contributing Editor

Last December Finland placed an order for the first of the new European Pressurized Reactor power plants. The 600 MW plant is scheduled to be in commercial operation in early 2009 — a construction schedule of only five years. Also in December, Atomic Energy of Canada Ltd. announced a preliminary proposal to build eight new 700 MW nuclear units. These developments are in stark contrast with the grim status of the U.S. nuclear business. There is a glimmer of hope, however.

Although the Nuclear Regulatory Commission has streamlined its licensing process and has approved several advanced reactor designs, utilities are just beginning to show interest in exercising the new regulatory scheme. It is a big decision to commit the resources to build the first of a new plant design under an untested regulatory regime. In addition, both the U.S. electricity market and the state of major industry players add further uncertainty. The Administration’s Energy Bill, which has been bottled up in the Senate for months, contains provisions that could help break the impasse; but first the Bill must overcome its own impasse.

The 1990s boom in constructing gas-fired merchant plants came just as the economy was slowing and industrial production began to decline. In addition, the demand for natural gas to fuel these plants created a spike in gas prices, and gas price volatility continues today. These two factors created the current grim situation for many merchant plants: they are expensive to run because of the high fuel price; and their capacity is not needed now. Some merchant plant builders, such as Mirant, are in bankruptcy. Other major players, such as Duke Energy, have sufficient corporate resources to fall back on, but their earnings have suffered and their stock prices have tumbled. Many of the new gas-fired plants are now on the market, and those that have been sold were bought at steep discounts. According to The Wall Street Journal, plants currently on the market represent capacity of more than 40,000 MW. Even though this is not a lot of capacity in the huge U.S. electricity market, and even though the economy is now recovering nicely, these plants overhanging the market represent a serious obstacle to any commitments of new power plant investment money.

In addition to worrying about their investments in idle plants, utilities are still trying to establish their market niche in the wake of an uneven regulatory/deregulatory situation. Those companies that have opted to focus their efforts on generation are the natural candidates to build any future nuclear plants. However, some of these same companies are suffering from owning significant merchant plant assets, which are not included in their rate base. Even those companies that have escaped this dilemma are surely heeding the hard lessons of their neighbors. Ironically, it seems that the most financially successful utilities now are those which still function in pretty much the classic regulated utility regime. It is the more aggressive companies that have suffered.

There are two positive trends that might offset these negatives, however. One is the consolidation occurring in the U.S. nuclear industry. Most recently, Dominion Resources purchased the Kewaunee plant and Constellation Energy is negotiating to purchase the Ginna plant. Thus, two more single-unit plants without a company fleet depart from their orphan status and join the fleets of major nuclear operators. Such consolidation can only lend strength to the nuclear industry because of expected operational improvements, economies of scale and enhanced financial stability. One would expect these larger, experienced nuclear operators to be the main candidates for building future nuclear plants.

The second positive trend is the entry of several major financial houses into the power generation market. While these investment groups have limited their involvement to purchasing troubled merchant plants at pennies on the dollar, this development brings a new pile of investment capital into the industry’s orbit. This may be the opening gambit of a whole new restructuring milieu. Could this help bring the capital it will take for new nuclear investments?

I am convinced there need to be four or five new plant orders before the U.S. nuclear industry will get back on its feet. It is only after experience with several new plants that the licensing and construction process can be deemed adequately demonstrated for commercial purposes. It is only after experience with several new plants that there can be confidence in the construction cost and operating economics of new nuclear units. But first, investors need to see an end to the current overcapacity situation. Then, company financial and business structures need to stabilize. And finally, some of the stronger players in the industry need to have an incentive to go where nobody has gone for more than 30 years.

These things might happen, but they will still leave the U.S. way behind in the construction of the next generation of reactors.