Nuclear industry’s other big hurdle: finance

NRG put brakes on new plant; industry aims at loan guarantees

Apr 1, 2011

By Steve Gelsi

NEW YORK (MarketWatch) — While public outrage over radiation seeping from Japan’s damaged Fukushima Daiichi power plant is a huge setback for proponents of nuclear power, securing financing for new reactors poses perhaps an even bigger challenge in the United States.

After a long hiatus, the U.S. nuclear power industry in recent years was finally making headway toward building the next generation of reactors.

Among the group of big electric power producers stepping up to the plate, Constellation Energy Group CEG zeroed in on nuclear with a plan to build a third reactor at its Calvert Cliffs complex in Maryland.

The effort ground to a halt late last year, when Constellation CEG said problems raising a U.S. loan guarantee, a surplus of cheap natural gas for power generation, and uncertainty over pending U.S. rules to reduce greenhouse gas emissions had derailed the project.

Baltimore-based Constellation instead opted to sell its 50% share in the project to Electricite de France , leaving the giant French power company its sole owner.

Fast-forward about six months, and few of the forces that scuttled Constellation’s plans have gone away. Add to that the fact that the Fukushima Daiichi nuclear power station is still leaking radiation three weeks after Japan’s monster March 11 earthquake and tsunami, and the likelihood of finding financing for these billion-dollar projects grows even dimmer.

Just last week, New Jersey-based NRG Energy NRG said it would suspend near-term efforts to begin construction of its South Texas Project nuclear plant. NRG said it would continue efforts to secure an operating license for the project, however.

"Nuclear plants are too large to be financed in the capital markets," NRG Energy CEO David Crane said in a prepared statement to MarketWatch. "Without the federal loan guaranty, our project is dead on arrival."

Loan guarantees amount to a contractual pledge between the government, private creditors and a borrower that Uncle Sam will cover the borrower’s debt obligation in the event of a default. This gives borrowers access to capital markets at the same low interest rates available to the government.

At the same time, companies granted loan guarantees by the Department of Energy for nuclear energy projects pay a premium to participate in the program, called a credit subsidy cost, and have to cover all administrative costs. As with any commercial or bank loan, all loans issued under the program must be repaid in full.

NRG’s decision was also shaped by events in Japan, since the South Texas Project included a $125 million equity investment commitment from Tokyo Electric Power Co., TKECY with an option to invest $30 million more for a total stake of 20%, said NRG spokesman David Knox.

But Tepco also owns the stricken Fukushima Daiichi plant north of Tokyo. Efforts to bring the plant under control and line up enough power to serve its millions of customers now cast doubt over its continued participation in the South Texas Project.

"We won’t ask Tepco what is happening with everything they’re going through," Knox said. "When the time is right we’ll figure out the path forward."

In another blow to the NRG project, CPS Energy, a San Antonio, Texas-based utility, said it would suspend discussions with NRG regarding a power purchase agreement for nuclear power from the proposed plant, though holding the door open to future talks.

U.S. nuclear power plant construction list shortens

Less than a year ago, the U.S. nuclear power industry was counting on four new federal permits for plants approaching construction, paving the way toward the expansion of a fleet of 104 reactors that provide about 20% of the country’s electricity.

With NRG Energy and Constellation Energy now backing out of their construction plans, only two sites with a total of four reactors are still active: Southern Co.’s SO Vogtle Units 3 and 4 in Georgia, and Scana Corp.’s SCG V.C. Summer Units 2 and 3 in South Carolina.

The two projects are likely to receive construction licenses by the end of 2011 or early 2012, according to a March 23 update from the Nuclear Energy Institute, an industry group.

On the financing side, Southern Co. secured a $3.4 billion federal loan guarantee for its project while Scana Corp. has said it doesn’t need a federal loan guarantee to move ahead.

Including the two front-runner nuclear plant projects from Southern Co. and Scana Corp., a total of 18 applicants — power companies and other operating entities — have applied for plant operating licenses from the Nuclear Regulatory Commission. See list of applicants for nuclear power plants.

James Dobson, an electric power equity analyst with Wunderlich Securities, said these nuclear power plant proposals face stiff financing challenges whether they are for regulated utilities selling power to rate payers, or for merchant power producers looking to put electricity on the grid through open market sales to utilities and big industrial customers.

On the regulated side of the business, utilities typically provide debt investors a greater measure of security since they offer the possibility of recovering plant construction costs by convincing state regulators to pass those costs down to consumers in the form of higher rates.

But with the cost of a plant reaching $6 billion or more, and its income stream years away, the payoff for investors is not terribly appealing, Dobson said.

Safety concerns and regulatory scrutiny resulting from the Fukushima accident merely add to a murky financing mix, he said.

"On the regulated side, bond investors … are worried about the regulatory picture as well as the cost of capital," Dobson said. "One feeds into the other. Companies are saying they need U.S. government involvement to push this along. On the financing side, bond investors are saying, ‘These things seem like a lot of risk and why do I want to be the guy standing behind this?’"

Dobson said regulated utilities may need federal loan guarantees to move ahead but at least one project, Scana Corp.’s V.C. Summer plant, is managing without them, partly because of statewide legislation supporting the project while placing some of the risk on rate payers.

As for unregulated power producers, Dobson said, "I don’t think a merchant plant can be built without loan guarantees."

Despite the hurdles, nuclear remains an economically viable source of electricity, once the plants manage to get built, he said.

"The variable costs of nuclear are low but fixed costs are very high," Dobson said. "Certainly, financing risks borne by equity and debt holders … those same debt holders will be staring at safety standards."

Meanwhile, other types of power such as wind, natural gas and solar, cost less and take less time to build, offering investors quicker returns, he said.

U.S. loan guarantee shortfalls

While President Barack Obama just this week reiterated his support for nuclear power, some in the industry said the government’s loan guarantee program doesn’t provide enough support under its current structure.

Constellation Energy spokeswoman Maureen Brown said the company told the Department of Energy that the program contains a "significant problem" in calculations on credit cost.

Based on the requirements set forth by the government, the Department of Energy offered Constellation an 11.6% credit cost, which would have added $880 million to the cost of its Calvert Cliffs project, Brown said.

The company concluded that such a huge sum would "clearly destroy the project’s economics," Brown said

A hearing was held last fall in Congress on the methodology used to assign credit costs to nuclear plant loan guarantees, but no major changes have been announced by the government. Nor has any federal loan guarantee been announced since Southern Co.’s award more than a year ago.

As the Nuclear Regulatory Commission continues a review of U.S. plants, nuclear power operators have stepped up efforts to promote the improved design and safety of their proposed plants.

But even before these plants move from the planning phase to reality in the U.S., major power producers find themselves facing a shortage of easy financing options to help cover the costly construction bill for America’s next generation of nuclear reactors.

Meanwhile, power generators are turning elsewhere to meet the nation’s growing energy needs.

According to the Energy Information Administration, the U.S. added 23,144 megawatts of non-nuclear power generating capacity in 2009, the equivalent of about 23 atomic reactors.

The figure includes 11,000 MW of natural gas generation, nearly 10,000 MW of wind energy and 880 MW from solar panels in 2009 alone.

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