Friday, January 30, 2009

Nuclear Energy and the Obama Administration

Episode 62 of This Week in Nuclear

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It’s hard to get into any kind of discussion about energy these days without someone asking, “What will happen under the new administration?” or “Do you think we’ll start building new nuclear plants with President Obama in power?” Those are tough questions to answer. Probably the best way to predict the future under the Obama administration and congress is to look at the recent statements and past actions of the people who are in positions of authority or influence in the new government. You cannot focus just on President Obama and his White House team; you also have to look at congress and at the various committees that will create new energy and climate legislation. In this episode, I’ll try to provide my views on a few of the leaders who will guide the creation of new laws and policies that will influence the near term, and perhaps the long term future of nuclear energy in the USA.

I’ll start with the obvious. Senate Majority Leader Harry Reid of Nevada is a long time opponent of any legislation that might benefit the nuclear industry. His opposition goes well beyond a practical and fact-driven position to the verge of fanatical. Yucca Mountain, the designated long term geological storage facility, is in his state and he will do anything and everything to block or slow its progress. In fact, he’s already doing that with the power that congress has over the budget. He’s slashed the Yucca Mountain budget to the lowest amount in years which has the same effect as killing the project all together. The nuclear industry will get no help from Harry Reid.

Representative Nancy Polosi of California, the Speaker of the House, was once strongly anti-nuclear. Fortunately she has become more supportive of nuclear energy over the last two years or so because she realizes that any credible strategy to reduce greenhouse gas emissions has to include expanding nuclear energy. While she’s saying some of the right things, she has yet to demonstrate leadership through real action to support new nuclear construction, so the jury is still out on Nancy Polosi.

Rep. Henry Waxman, also from California, and the new Chairman of the House Committee on Energy and Commerce is a strong advocate for raising automobile mileage standards, reducing energy consumption through efficiency, and expanding wind and solar energy. Rep. Waxman is influential because new energy and climate legislation will originate in his committee. While I was unable to find a single instance in which Mr. Waxman demonstrated support for nuclear energy, in a reasonable and logical world his strong opinions on climate change would translate into support for new nuclear plants. Unfortunately Washington is not always reasonable or logical. Case in point: Mr. Waxman has appointed Rep. Edward Markey (MA) to draft his committee’s climate change laws. Markey is rabidly anti-nuclear and entrenched with people who hold the irrational fear that nuclear plants are bombs waiting to happen. He’s active in the Nuclear Policy Research Institute, an anti-nuclear advocacy group. Edward Markey will never sponsor legislation that would put nuclear energy on level playing field with other energy options.

Steven Chu, the new Secretary of Energy, comes across as philosophically neutral on nuclear power. On a number of occasions he has stated that nuclear energy has the “potential” to contribute to energy security and climate change, but he is concerned about costs and about nuclear waste storage. On the other hand, Sec. Chu is vocally supportive of efficiency efforts, wind and solar energy, and biofuels. I continue to believe that any fair and logical person, when presented with the facts on safety, cost, and performance will recognize the need to give nuclear energy a priority in our energy policy. I am cautiously optimistic that Sec. Chu will work in favor an objective and fact-driven assessment of the nation’s energy options, and if that is the case Nuclear Energy will get the support needed.

Carol Browner, the new White House Coordinator for Climate and Energy Policy is President Obama’s primary adviser on how to integrate our nation’s actions to meet the goals of energy security and greenhouse gas reduction. She has been around Washington for years. As the EPA Administrator under Bill Clinton, Browner revised water quality standards for Yucca Mountain in a way that many experts feel was unreasonable and was, in reality, a tactic to delay the project. She has also stated reservations about nuclear energy because of what she termed “the waste issue.” Carol Browner is comes from the Al Gore school of climate change, and Al Gore has consistently avoided acknowledging nuclear energy’s advantages as our largest source of CO2-free energy, Browner will probably do the same.

Secretary of State Hillary Clinton recently stated that energy security and supply is a mater of national security, and I could not agree more. In the past she has been a tough critic of nuclear power. She has been particularly opposed to Indian Point nuclear plant that is located only a few miles from her home in New York. In fact, she sponsored an addition to the Energy Policy Act of 2005 that singled out the plant for new emergency warning system requirements. I would not oppose new nuclear regulation if I believed it would have a positive impact on safety that was commensurate with the costs, but in this case the result was millions of dollars of added costs with virtually no increase in safety. Like Nancy Polici, Mrs. Clinton’s position on nuclear energy has moderated in the last two years, so I am optimistic that she will weigh the pros and cons with objectivity and will thus support nuclear energy’s expansion as a means to increase energy security and reduce reliance on imported oil.

During the campaign President Obama was repeatedly asked about his position on nuclear energy. His consistent response was nuclear should be “on the table” while he emphasized his concerns over cost and safe storage of used fuel. There’s a common theme here; except for Edward Markey who is an anti-nuclear extremist, the two main concerns shared by leaders in the new government nuclear power are the long term storage of used nuclear fuel and the cost of new construction. If you listened to episode 60 of This Week in Nuclear you’ll know that building wind capacity is at least 2.5 times more expensive than nuclear, and new solar plants would cost 14 times more than nuclear plants for the same amount of energy generated. As for the waste issue, it is a political one, not a technical one.

It remains to be seen if the new government will be able to look beyond the panacea of cheap, abundant wind and solar energy and instead make policy based on science, fact, and engineering realities. If they are able to be objective, they will reach logical conclusions that nuclear energy can create a secure, constant, emissions-free, and cost effective energy supply we need.

On the other hand, if congress and the new administration stick to their out-dated perceptions and bias, then we’ll embark on a different course. In that case, the USA will spend the next several years and hundreds of billions of dollars promoting wind and solar energy. That scenario will NOT provide the quantity of constant, clean energy we need. Just look at Germany; their experiment into wind energy has failed – their grid in unreliable, they are growing ever more dependent on Russian natural gas, and they are importing more coal than ever. In fact, the United States exports coal to Germany! A focus on wind and solar is equivalent to the status quo: burning coal and gas at ever increasing rates. The winners under that scenario will be manufacturers of wind turbines and solar panels, and of course the coal, oil and gas suppliers.

Clean, cost-effective, carbon-free nuclear energy – that’s the CHANGE we need!

John Wheeler

This Week in Nuclear Website

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Thursday, January 29, 2009

Investors Recognize the Value in US Nuclear Plants

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There have been a number of recent developments in the US nuclear industry that amount to a shaking out of the various technologies, vendors, and utilities who are likely to emerge as leaders in the race to build the first new nuclear plants in the USA. A good analogy is the multi-stage bicycle race, the Tour de France. Each stage of the race has a winner, but the winner of any one stage will not necessarily win the race. I’d say we’re still not quite at the half way point of the race, but each month it’s becoming more and more clear which projects are in the lead pack, which are trailing, and which are in the race simply because they think it’s cool to wear the colored jerseys.

GE ESBWR Reactor Dropped by Exelon, Entergy and Dominion

There are growing indications that one new design is not progressing at the pace needed to support new construction anytime soon. Work on the General Electric Environmental Safe Boiling Water Reactor (or ESBWR) has yet to reach the level of detail that would enable GE to make firm costs estimates. As a result, three large customers, Exelon, Entergy, and Dominion Resources, have all announced they are no longer considering the ESBWR for their new plant projects. This is unfortunate for a number of reasons; the ESBWR is, in my opinion, a move in the right direction. It is a simplified design with fewer components and passive safety features. It should end up costing less than other reactors of similar capacity because it would have fewer expensive pumps and valves. It’s also a setback for the companies that were supporting that design - Exelon’s Texas project, Entergy’s plans for new reactors in LA and MS, and Dominion’s plans in VA will all experience delays as they regroup to select a new reactor type and negotiate with new vendors. At this point, the only remaining project for an ESBWR is from DTE Energy for their Michigan Unit 3 project. I have to wonder about General Electric’s commitment to the effort, particularly when their potential reactor business is but a small fraction of their projected wind and gas turbine revenues. Their leadership may be making resource decisions that acknowledge one new nuclear plant could prevent the construction of several gas large turbines and hundreds of wind turbines.

Toshiba and Westinghouse Sign Contracts for New Reactors in the USA

A few projects appear to be moving full speed ahead. This past week newspapers began to report that Toshiba had signed a contract to supply NRG Energy with two 1400 MW Advanced Boiling Water Reactors (ABWRs). The deal, reportedly worth about $8.8 Billion, is for two new units at the South Texas Project where there are already two Westinghouse Pressurized Water Reactors (PWRs). If this comes to pass, it will be the first time a Japanese nuclear reactor company has built a reactor outside of Japan. Interestingly enough, while Toshiba builds boiling water reactors in Japan, they also own the AP-1000 pressurized water reactor technology because of their 2006 purchase of Westinghouse.

Early this month Progress Energy signed a deal with Westinghouse for two new Advanced Passive 1000 (AP-1000) reactors for their Levy project in Florida. That contract is for $7.65 Billion. On a side note, last week Toshiba announced they have formed a partnership with Indian heavy equipment manufacturer Larsen & Toubro to build components for AP-1000 reactors they plan to sell in India. The Indian government has stated they need to build 60,000 MW of new electricity generation by 2030, and a large share is expected to be nuclear.

The AP-1000 design seems to betting the most “takers”; Progress Energy, Southern Company, Duke, South Carolina Electric & Gas, and TVA have all filed applications with the NRC for a total of 12 AP-1000 reactors. Other companies including FPL have stated their intent to do the same. Areva’s Evolutionary Pressurized Reactor (or US-EPR) is in second place with four units on the drawing board for Constellation Energy, PPL, AmerenUE, and Unistar. Areva is the international business company for EDF, the French Electric company that operates their 59 nuclear reactors.

French Utility EDF Buys 50% of Constellation Energy’s Five Nuclear Plants

Those of you inside the nuclear industry have certainly been watching the fascinating high stakes financial dealing that has been going on between Constellation Energy, Warren Buffett’s MidAmerican Energy Holdings, and EDF. If anyone was questioning the value of existing nuclear plants in the USA, after they hear this story any doubts they had will be a thing of the past. Last fall, about the time the world’s financial markets took their downturn, it became apparent that Constellation Energy was in trouble. Their cash reserves were depleted, and their stock price had reached an unreasonably low level when compared to their assets and balance sheet. In September Warren Buffett came to the rescue with a $4.7 Billion cash offer to buy the company. Areva, the international business arm of the EDF, recognized an opportunity and in December they countered Warren Buffett’s offer. The EDF offer was $4.5 Billion for a 49.9 percent share in Constellation’s nuclear units. The Constellation Energy board of directors accepted EDF’s offer.

Constellation has five nuclear units located on three sites; two Calvert Cliffs units in Maryland, two Nine Mile units in New York, and the Ginna unit, also in New York. EDF’s deal included $1 Billion in cash which shored up Constellation’s balance sheet and provided much needed operating cash. EDF and Areva have been eager to get their foot in the door of the lucrative US nuclear market, and this deal provides that opportunity.

So, even with the current chaos in the world’s financial markets, EDF’s deal means the full market value of Constellation’s nuclear units is $9 Billion. I think EDF got a pretty good deal; it would cost upwards of $20 Billion to build 5,400 MW of new capacity, and several of those plants are big money makers because they are located in deregulated electricity markets where nuclear is the cheapest form of generation and the cost of expensive natural gas prices sets daily market prices.

Entergy is Waiting for the Right Time to Execute Nuclear Spin-off

The turmoil in the financial markets have definitely had an impact on some utility plans for expansion and growth. Entergy, for example, announced they are delaying the proposed spin-off of their six deregulated nuclear plants. They’ve made it clear the deal is still on, and they are waiting for the right time to make it happen. Here’s an interesting comparison: the plants Entergy plans to spin off into a new company called Enexus will have more capacity and more revenue opportunity than the Constellation units that the market tells us are worth at least $9 Billion. This indicates to me that once the spin off happens Enexus should have a market value of between $10 Billion and $12 Billion. It will be interesting to see how the Enexus stock performs as the only 100% nuclear generator in an American deregulated electricity market.

Exelon Attempts Hostile Take-over of NRG Energy

The final example of the value investors are seeing in existing nuclear plants is a deal that is still in the works. In October, Exelon made an unsolicited bid to purchase NRG energy for $ 6.2 Billion. When the NRG board of directors refused the deal, Exelon began an attempt at a hostile takeover. Exelon offered NRG shareholders a stock exchange deal of just under ½ a share of Exelon for each share of NRG. As of this week they claim to have received contracts for 46% of NRG. The offer will continue until late February.

My belief is that Exelon understands the huge value that emissions free generation will have in Texas under any kind of carbon cap and trade program. Texans has the highest per capita electricity consumption in the USA, and the highest per capita CO2 emissions. This is because they use mostly coal and natural gas to generate electricity. In a carbon constrained economy, emission free electricity will be very valuable (and very profitable). Exelon already has plans to expand into Texas, and they see the NRG acquisition as a way to accelerate the process.

Despite the financial turmoil and the tightening of the world’s credit markets, the future remains bright for the nuclear industry. Realization is growing across the country and particularly in the investment community, that nuclear energy is the only cost effective source of base load carbon-free electricity. Nuclear generation is the only source of electricity that can be expanded quickly enough and to the scale needed to meet CO2 reduction goals.

Wind and solar power need to be a part of the energy mix, in that we need to continue research and development to help them someday become competitively priced and scalable. Until then building new nuclear plants is the only realistic option. Conservation has a role to play, too. Unfortunately, I question how much conservation the USA can achieve without a massive relocation of population from rural areas to large cities and huge government spending to pay for retrofitting old homes, businesses, and factories. Perhaps that is something the new administration has in mind.

John Wheeler

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