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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Energy Bailout Showdown: Solar vs. Wind vs. Nuclear

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A hundred billion dollars here and a hundred billion there, and before long you're taking about some real money! The US Congress approved the $700 Billion bailout just a few months ago, and within days they doled out half the money. Now it seems congress has virtually no idea what the banks did with $350 Billion of taxpayer money. To make matters worse, they declared a financial emergency to justify these drastic measures, yet the stock market crashed anyway, leaving working class retirement funds and 401K accounts with half their pre-crash values.

All this made me wonder, "What would be the impact of spending that same $350 Billion on creating a secure, emissions free energy grid?" and "How much clean energy generation would $350 Billion buy?"

To answer these questions I started with a little Internet research. The four primary means of generating emissions free electricity are solar, wind, hydro, and nuclear. I decided to concentrate on those four. First off, experts agree that hydro-electric capacity in the USA is pretty much tapped out, so even if we had the money to spend we could not buy more hydro. Scratch hydro-electric off the list.

Next I researched current examples of each technology to obtain cost estimates. For solar energy I used the Clark County Nevada 18 MW project, the largest solar PV installation in the world, and data from the Energy Information Administration. For wind energy I used two projects; Cape Wind in MA and the London Array in the UK. For nuclear energy I used the proposed two-unit plant that Progress Energy is building in Florida. Here are the published cost estimates:

• Solar: $117 Million for 18 MW of rated capacity
  
• Wind: $1.2 Billion for 420 MW of rated capacity
  
• Nuclear: $14 Billion for 2210 MW of rated capacity
  

Next, I researched the capacity factors for each energy type because as we know, the wind does not blow and the sun does not shine all the time. A MW of "rated capacity" does not equal a MW of true power output. Nuclear plants don't run all the time either and must be shutdown periodically to replace fuel or for maintenance. For wind and solar I used best available estimates because both technologies are improving. For nuclear energy I used actual performance data. Here are the capacity factor results:

• Solar – 19%: Solar energy suppliers say capacity factors vary depending on location from 12% in the US upper Midwest to 19% in Arizona. I'll assume we use the best location for our investment and capacity factor will be 19%.
  
• Wind – 32% : Cape Wind project planners say today's CFs are 28%, but I used 32% because they promise performance will increase over time. I realize this is unproven, but we'll give them the benefit of the doubt.
  
• Nuclear – 90%: for the last several years the capacity factor for US nuclear plants have averaged about 90%. While new plants will likely have a "shake down" period with lower capacity factors, it's reasonable to assume over their entire lifetimes the new plants will perform at least as well as existing plants.
  

Finally, since I'm considering energy produced over the life of our investment, we need to consider how long each power facility will last.

• Solar – 20 years: I recently attended a Power Engineering workshop in which a representative from the Solar Energy Consortium (TSEC) spoke about the economics of solar installations. According to TSEC, solar panels last 18 to 20 years. For this calculation I'll use 20 years as the life expectancy.
  
• Wind – 30 years: According to Alliant Energy, one of the largest wind producers in the USA, wind turbines last for 20 to 30 years. I'll use 30 years for this calculation.
  
• Nuclear – 60 years: Today's nuclear plants are licensed for 40 years, and about half have received extensions to allow them to run for 60 years. It is reasonable to assume that new plants will also operate for 60 years.
  

Now it's time to crunch the numbers. I'll do this step by step. Remember, the goal of this exercise is to determine how much energy we can buy with an initial capital investment of $350 Billion. The final results will be expressed in Gigawatt-hours (thousands of Megawatt hours).

Step one: determine rated output for a $350 Billion investment.

• Solar: if $117 Million buys 18 MW, then $350 Billion will buy 53,846 MW (rated).
  
• Wind: if $1.2 Billion buys 420 MW, then $350 Billion will buy 122,500 MW (rated).
  
• Nuclear: if $14 Billion buys 2210 MW, then $350 Billion will buy 55,250 MW (rated)
  

Step two: determine average power produced considering the predicted capacity factors.

• Solar: 53,846 X 19% = 10,231 MW (average)
  
• Wind: 122,500 X 32% = 39,200 MW (average)
  
• Nuclear: 55,250 X 90% = 49,725 MW (average)
  

Step three: determine power produced over the expected life of the plant (there are 8,766 hours in a year and divide by 1000 to convert from Megawatts to Gigawatts).

• Solar: (10,231 MW X 8,766 hours/yr X 20 years ) / 1000 = 1,793,699 GW-hours
  
• Wind: (39,200 MW X 8,766 hours/yr X 30 years) / 1000 = 10,308,816 GW-hours
  
• Nuclear: (49,725 MW X 8,766 hours/yr X 60 years)/1000 = 26,153,361 GW-hours
  

Results

An investment of $350 Billion in nuclear energy would provide 2.5 times more energy than the same investment in wind energy, and 14.6 times more energy than an investment in solar. Another way of looking at the value of the various investments is this: $350 Billion invested in solar energy will provide the same amount of energy as $23 Billion invested in nuclear energy. Also, as a nation we could choose to invest $350 Billion in wind energy, or we could get the same benefit from just $140 Billion invested in nuclear energy. In these troubled economic times, where should we be investing our finite resources?

Just a few months ago I sat in the audience at a workshop and listened to someone in the solar energy business tell us "…and with 50% government subsidies the return on investment is 18 to 20 years." I could hardly believe my ears! Who do they think pays for those subsidies? I'll also point out solar modules last only 20 years. Even with the taxpayer footing half of the bill, the return on investment happens just as the solar panels wear out!

The story for wind is a little better, but it still does not make sense for large scale investment. We need an energy source that is reliable and steady, not one that is intermittent and unpredictable. The economic barriers are still significant for wind.

By the way, in this analysis I neglected to add the cost of rapid-start power plants that would need to be in place to pick up the load to keep the grid stable when the wind stops blowing. That would add significantly to the cost of wind energy. I did include the cost of used nuclear fuel disposal because those costs were included in the Progress Energy cost estimate.

In summary, I don't believe the average American family is willing to pay 2.5 times to 14 times more for their electricity just to support the wind and solar industries? For the millions of people struggling to keep homes warm and food on the table in these tough economic times that simply would not be a responsible choice for us to make. That does not mean we should stop investing in research and development that may someday make wind and solar energy more cost effective. That is important, but we should not confuse R&D with large scale economically viable energy production.

In the coming months we are going to hear a lot about how the new administration will use our tax dollars to stimulate the economy, improve energy security, and address climate change. I hope you'll keep this analysis in mind when you listen to proponents of the various industries try to make their case.

John Wheeler

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