Updates on Power and the Federal Government

While there has been talk of a nuclear “renaissance” in the media for years, it is mostly hype. Existing nuclear plants in the US are running at a high capacity factor and making money for their owners, but there has been little tangible investment in new nuclear plants in the US.

Loan Guarantees and Financing:

One giant barrier to building new nuclear plants in the US is financing. We haven’t built a new nuclear plant in the US in decades so no one really knows what it will cost (and it depends on which design is chosen) but it is safe to assume that they will cost more than $8-10B each. Given that the entire market capitalization of most US electric utilities is smaller than this figure, as I discussed in this post in June of 2009, the idea that new nuclear plants would be built in large numbers was a pipe dream.

The Federal government (Department of Energy) was trying to assist by providing loan guarantees for these projects. I started reading through the Federal web site about what this really means and found this document which describes the arguments about 1) whether or not nuclear plants really qualified under this program because they aren’t really new technologies 2) how much equity the companies should be required to contribute to the project 3) various other data points that summarize the state of nuclear energy in the US (as of 2007, but still mostly relevant because not much has happened since then). If you are interested in nuclear power I highly recommend that you take a few minutes to download and read this PDF because it is filled with facts and opinions from the various actors.

The original proposed Federal loan guarantees were too small relative to the tiny equity capital available from possible players and the large, looming overruns likely to hit these projects. The Federal government seems to agree because they raised the amount of guarantees per this article:

Budget for the coming year would add $36 billion in new federal loan guarantees on top of $18.5 billion already budgeted — but not spent — for a total of $54.5 billion. That’s enough to help build six or seven new nuclear plants, which can cost $8 billion to $10 billion each.

When these items were discussed back in mid-2009 I noted that the only company listed as a potential candidate with financial strength to pull off one of these plants was Southern Company. Also as I noted, it was amazing to me that the “journalists” who wrote up that story couldn’t do the rudimentary financial research that would have told them that same thing. In any case, today they announced that Southern Company was going to be the first company to receive a Federal loan guarantee for $14.5B for 2 units to be built near their existing plants at Vogtle.

Financial Impact on Electric Utilities:

It will be interesting to see the impact of this effort on Southern Company’s financial statements and stock price over the years to come. It would seem to me that this would be a giant negative overhang because many negative things can occur (delays, lawsuits, spiraling costs, protests, etc…) and it seems unlikely that positive events will occur (on time construction, on budget, fast approvals, etc…). Even if it does come on line, it isn’t necessarily going to be a giant money maker – this will depend on the market for energy a decade from now when these plants start generating electricity.

I noted also that NRG, which is building a plant two units in Texas, seemed rather thinly capitalized to take on such a giant effort (and potential strain on their stock price). The Cities of Austin and San Antonio also started to awaken to the difficulties of financing these plants, as well as their own prior history of cost overruns. NRG is now negotiating various options to wind down the effort or complete the site with other partners, and has an excellent power point presentation that they put on the investor relations section of their site which both lays out the opportunity for “first mover” status with nuclear generation and the risks. Should the other partners continue to frustrate the project, note what NRG says on the bottom of page 8 on their slide (they are using all caps, not me):


No Solution for Nuclear Waste:

The Federal government has officially abandoned the Yucca Mountain site in Nevada as a long term storage option for spent nuclear fuel. If you want to see a sad story of missed deadlines, useless bureaucratic stumbling, billions of wasted tax dollars, and most importantly wasting decades on a solution that was bound to fail, go to the wikipedia page and read through your government at work.

Now storage will have to continue at every individual site indefinitely, which means over 100 sites will need to stumble through this morass in their own fashion. Perhaps we could have come up with some standards or best practices for solving this problem locally, but instead we wasted billions of dollars and decades of wrangling on a “mega” solution that was never going to work. Don’t forget about this looming issue when you point to the illusory “renaissance”.

Failure to Disburse “Stimulus” Funds:

About a year ago I noted in this post that there weren’t “shovel ready” projects available for stimulus funding due to the near-impossibility of getting anything done in the US involving financing, legal issues and rights of way. As predicted, the Energy Department has not been able to spend their allotted stimulus money. According to this article:

Energy Secretary Steven Chu expressed frustration Thursday that most of the roughly $37 billion in stimulus money Congress gave his agency last year had yet to be spent, but said the agency could manage a new round of funding for clean-energy projects as part of an expected jobs bill. At a hearing of the Senate Committee on Energy and Natural Resources, Dr. Chu said his agency had handed out only a fraction of the authorized stimulus funds. According to the agency’s Web site, only $2.1 billion has been spent.

Now that same department which was unable to run a $37B budget is going to get a lot more money as the Federal loan guarantees for nuclear power also come under their responsibility. This does not appear to bode well.

We still are struggling to figure out what to do about “clean coal” here in Illinois. This article describes the over $1B spent on 2 proposed projects in Illinois, and all the years of wrangling as this project has gone on since 2003 and is far from completion.


Key recent updates would be summarized as follows:

– new drilling technologies are making natural gas in the US cheaper, which makes other types of investment (nuclear, coal) less financially feasible
– while many companies were potential investors in new nuclear plants, only one (Southern Company) was really feasible, and they seem to be first out of the gate (woe to their shareholders, however)
– NRG jumped out first with their Texas plant but it is looking like they are going to pull the plug on that under-capitalized effort
– the Federal government is continuing to be completely inept in their activities 1) unable to disburse stimulus funds, as predicted 2) no plan for waste after abandoning Yucca Mountain 3) can’t figure out what to do about “clean coal” projects after spending over $1B in Illinois and 7 years to boot
– not covered here is cap and trade, which needs its own post to do it justice. It looks like the recent change in the senate will stop this in its tracks, but legal efforts to stop the EPA from implementing new draconian rules continues

If you are interested in energy policy and nuclear power I strongly recommend reading that PDF I linked to above from the department of energy site as well as the investor presentation from NRG related to their South Texas Project.

Cross posted at LITGM

23 thoughts on “Updates on Power and the Federal Government”

  1. This is certainly discouraging.

    So an investor-owned utility builds one of these things with the loan guarantees, but there is not real idea how much one of these things is going to cost and when it will get approval to operate, and somebody takes it “on the chin” — investors, rate payers, tax payers. And then the usual suspects will be dancing around about “yet more government subsidy for nuclear when solar and wind are ‘underfunded'”.

    Freeman Dyson wrote an essay titled something like “quick is beautiful.” His point is that nuclear may be zero CO2 (depending on how you account for the large amount of concrete in the containment building), it may be low operating cost and low fuel cost, but it is certainly not “quick” — hence any growth in electrical power has been taking place with advanced-cycle or combined-cycle natural gas-fired gas turbines.

    Part of the “not quick” aspect to nuclear power is how “citizen advocates” are “empowered” to put up legal roadblocks (Thank you very much, Ralph Nader). Is there any thinking on the regulatory side of what can change if we are serious of new nuclear power?

  2. Your info on $, is very enlighting, the other point I keep asking is technical. Does the US have the engineering and manufacturing skills remaining to build a nuclear plant or will we have to import these skills? Remember we have not built a nuclear plant in – what 30 years? A lifetime in engineering and manufacturing. Note, I work(ed) in the oil and gas industry, in the Rockies today many of the people on the rigs speak spanish as a first language and often an only language and it is not because these are low paying jobs that “Americans will not do,” it’s because there are no Americans to fill the positions. (Note the demand for people is way down in this economy, in the drilling industry there are many unemployed, so only the best currently have a job – regardless of ethnic background)

  3. To Carl From Chicago,

    Would you have an estimate for the fraction of $8-10B per plant that is extenal regulatory cost, and what fraction is land, materials, and labor to actually build a nuclear plant? Say, some French design that has already been built?

    Also, what is the operating cost/megawatt for nuclear and coal, again if possible, separated from regulatory costs?

  4. Interesting questions on costs.

    I don’t have a benchmark for the new nuclear reactor costs. There are 5 designs and it depends on which one is chosen. I will try to research this at some point. If you read that PDF I linked to in the post from 2007 department of energy research there is a lot of relevant info.

    As far as “separate from regulatory cost”, from my perspective the whole issue is moot. We simply aren’t building ANY new nuclear or coal plants anywhere in the US, except for a few stragglers, far less than what is coming off line due to age. Thus there isn’t much point in comparing costs. In the future there are really a few options:

    1) how long can you keep the old nuclear plants running? Ideally you’d want to run them forever, because once you shut them down you not only lose the low incremental (busbar) cost power, you have to pay to decom them and remember due to lack of storage at Yucca you just created a permanent nuclear site that has to be maintained

    2) how long can you keep the coal plants running economically? The EPA keeps attacking coal plants with more and more burdens for scrubbers and other control equipment. At some point you just stop throwing money at them and to hell with the grid and reliability

    3) what does it cost to build a new gas peaking plant? Just build those. Sure you are hostage to the price of gas but it seems to be going lower and you can actually site one of those plants (although this will be a bit harder after the New England explosion)

    4) or more likely, do nothing except a smattering of near-useless politically correct wind and solar projects. If the grid falls over, who cares, it did in California and that still wasn’t enough to wake them up for the need for new generation

    5) continue to dream about new transmission – even if you managed (by a miracle) to get something built, it better be right next to existing transmission lines (ever wonder why the 2 nuclear projects under way, the NRG project in Texas and the proposed Southern company project are at the same sites with existing nuclear reactors, built 20-25 years ago), or you can’t use it anyways

    Basically the cost of NEW plants is irrelevant because, except for a few “trophy” projects, nothing is happening. The regulatory cost is infinite because of a broken regulatory method and also insane legal costs and unknown barriers from NIMBY’s, you can’t do anything.

    No one is doing anything significant. We aren’t even going to get to a “net zero” replacement level on the 102 nuclear plants, much less the coal plants which will fall away faster.

  5. The “waste” issue is a canard. The so called waste is fuel rods that need to be reprocessed. They contain 95% of their original energy value, but due to a variety of issues, they must be removed form the reactor. They can be reprocessed and used as fuel. The French and the Japanese do this.

    Jimmy Carter, among the many disastrous decisions he made during his reign of error, decided that the US should not reprocess. He was afraid that somebody would divert the materials into bomb manufacture. So he forked the effort to build a reprocessing facility in upstate New York.

    Incidentally, proliferation is also a non-issue as well.

  6. I should go to bed, but.

    One way of solving the quick problem is to use smaller units manufactured offsite. E.G. Babcox and Wilcox, proposes self contained reactors producing 100 — 250 MWe. The site would be prepared, the reactor could then manufactured in a factory and brought in by train or barge. Once at the site the reactor could be hooked up to the system and started up quickly.

    This approach would limit some of the tremendous construction period interest that has burdened nuclear power.

    Of course you still need to deal with my first comment.

  7. Addressing Robert Schwartz’s “radioactive waste is a canard” statement:

    While you are correct in asserting that fuel rods can be usefully reprocessed, materials other than fuel rods that are exposed to radiation are made radioactive and must be stored on-site or placed in a remote storage location. To my knowledge, the only off-site storage is the Shippingsport, PA reactor components which are now stored at the Hanford reservation in Washington state. This is also the place where the reactors of all retired nuclear subs reactor sections are buried.

    When I was out at Hanford many years ago, I was listening to discussions about how we could copy France’s methods for waste storage particularly glassification of liquid waste. Does anyone know of the status of such efforts?

    Adressing the finance issues:

    If Japan and France can finance reactors, can we copy their methods of financing them with suitable modifications for US financial markets?

  8. The problems of financing reactors is directly tied to the massive uncertainty of such projects caused solely by leftists hysterics. Investors have no idea when the plant will be finished or even if it will be finished.

    Imagine trying to build a house when anyone in the state and possibly the entire nation could file suit and stop construction at random intervals or even terminate the project completely. Now, imagine going to the bank to get a mortgage for the house when you can’t tell the bank how long it will take to complete the project, whether the final house will look anything like the initial plans or if the house will ever be finished at all.

  9. First, let’s understand the nature of the loan guarantees. I’m a nuclear engineer who has been involved with the South Texas Project’s new reactor plans since near the beginning.

    The loan guarantees do not guarantee against technical risk. They only cover subsequent GOVERNMENT actions. In the last batch, investors lost billions due to capricous government actions either to delay or prevent startup. Once the NRC issues a “combined operating license” (COL) per 10CFR52, the guarantee is to kick in so that no county government or state agency (or feds) can block construction and completion. When a number is given on the amount of loan guarantees, that is NOT the money that has to be spent. It is merely the exposure of default. Each applicant for a guarantee has to pay an upfront fee like an insurance premium to the government based on the expected risk of default. Basically, the federal government is acting as an insurance company, collecting premiums and covering specific risks.

    THAT’S ALL WE NEED! Get government and politics out of the way and we can build and run new nuclear power plants in the country.

    As to South Texas Project units 3 and 4, I think there is some skulldrudgery going on with the San Antonio City Council – encouraged by either anti-nuclear folks or Exelon. The latter tried to buy NRG on the cheap but was rebuffed after proposing a competing plant (Victoria) near STP site. The court issue now is how much extortion money San Antonio can extract to cut back on their investment so far. During the hostile takeover attempt, it was clear that NRG had a stronger balance sheet than did Exelon, the nation’s largest operator of nukes. As San Antonio withdraws, Tokyo Electric Power Company (TEPCO) is eager to step in with a minority ownership stake. Note that TEPCO already owns and operates a pair of ABWRs in Japan.

    The technical and commercial base for nuclear power has intensely globalized over the last few decades. Multinational companies have entered joint ventures to share design and procurement expertise and for financing. The stickler remains local politics.

    As to lack of investment, I would note that Florida Power and Light has already sunk $750 million into its Levy County nuclear project, according to its Florida Public Service Commission filings. NRG and San Antonio have almost that much sunk too.

    As to Secretary Chu and the Department of Energy, the White House put in their own guy to run the loan guarantee programs, both nuclear and “clean.” So Chu is NOT calling the shots within his own department – the word comes down from Obama. Remember that when you hear him whining to Congress.

  10. I am a cab driver in Knoxville, TN who regularlly drives passengers to Oak Ridge, TN. I met 2 members of the Nuclear Regularitory commission last year. They told me that there 17 out of 23 new plants in the pipline and the reason they were in town was to look at 4 different designs for nuclear plants.

    I was also watching C-Span one day and there was a hearing about energy production and the person representing the nuclear power industry said that there are going to be 13 new plants starting construction in 2011.

  11. A few comments:

    – In general the fact that Exelon wouldn’t over pay for NRG doesn’t mean that NRG has a stronger balance sheet. Likely Exelon will wait their time and see how cap and trade and other items play out and make an offer later if NRG falters. But Exelon won’t overpay and dilute their existing shareholders. Of course this could all change if management at either company turns over because there likely are a lot of synergies if you take out the management “noise”
    – The entire point of this thread, and all my threads, is that the idea that the nation will be awash in nuclear power plants being built is completely nuts. The guys from the government probably think so, because everyone is filing permits and documents for their share of guarantees, SHOULD THEY DECIDE TO GO FORWARD, but as NRG’s experience is showing, it is no cake walk to get even ONE of these built. Utilities probably view these permits as an “option” to build.
    – I do hope that the US makes some headway and builds even 1-2 of these next generation nukes. God bless anyone on the front lines to make this happen
    – But there isn’t money nor financing to do more than a couple of them, and NRG’s presentation to analysts shows how this can be a big negative overhang on a stock. It isn’t so much the debt, which can be raised, but the EQUITY component that is difficult – if you raise $7B in debt and put up $2B in equity capital (a lot for utilities in the US), even a 25% cost over run essentially wipes out your equity investment and enrages shareholders
    – The real issue is the broken regulatory and financial model that the US runs for power generation. We decoupled the generation side from transmission and distribution. The distribution guys need power, and the power guys have the risk. But the power guys make big $ off their existing assets if there is scarcity, since they are competing against themselves. The reason that Georgia can build something is that they retained their “vertically” integrated model. Georgia always had a unique regulatory structure. As you are finding in Texas the way they “de regulated” (in quotes because just regulated differently) is also making generators skittish about big investments. Ultimately why should they care if the distribution side is strangled?

  12. I looked at the utility SCANA’s web site. They are also building a nuclear reactor. They have an excellent nuclear presentation.

    Rather than speak in general terms I am going to link to a lot of the analyst presentations in a future post and then people can investigate these items on their own.

    It is a lot easier nowadays to get financial and business information because these companies have to keep their investors informed so they put up cost estimates, regulatory impact, and everything else.

  13. Carl,

    I agree about how deregulation changed the risk/reward issues for builders of new generation. In fact I did an article about it in 2003 here:


    Since then a few things have changed but the market structure and its problems remain. For nuclear a very bad consequence was the required rate of return on equity, as you point out. If a regulated utility needed 10% for given market conditions, an independent power producer would need 15%. For a highly capital intensive but low O&M cost technology, this was a competitive disadvantage for nuclear.

    I would also share the news about the first announced load guarantee (disclaimer – my employer will supply the reactors)


    While this is nice to see, it points out a danger. It turns every potential nuclear power plant builder into a sweet-lipped suckup to any politician with some pull on who gets the guarantees and when. That’s what’s scary about Exelon – it has deep connections with Obama personally, through Bill Ayers and through Chicago politics. While they do a good job technically, within the industry they are known for being hardasses commercially.

    As to the NRG balance sheet strength, that was a major point in their proxy battle. They made the claim to their shareholders that NRG’s credit rating and debit/equity ratios were superior to Exelon’s and that swapping NRG stock for Exelon stock would dilute the NRG stockholders interest to the advantage of the Exelon stockholder. Apparently, the NRG stockholders agreed and the hostile takeover failed.

  14. Carl: “The real issue is the broken regulatory and financial model that the US runs for power generation. We decoupled the generation side from transmission and distribution. The distribution guys need power, and the power guys have the risk. … Ultimately why should they care if the distribution side is strangled?”

    It strikes me that the risk can be mitigated or transferred by long term contracts, such as “take or pay”, between generators and distributors. IIRC, one of the pushes for the separation between generation and distribution was that nuclear was not being well managed by the run-of-mine local integrated utility, and that having nuclear plants run by specialists like Exelon resulted in safer more efficient operation. As it happened that was true, as is evidenced by the increased out put of the limited number of nuclear generators over the past 30 years.

  15. Lots of Nuclear news in today’s (18-Feb-2010) WSJ:

    “NRG, Texas Utility End Project Dispute” by Cassandra Sweet:

    “A nuclear-power venture owned by NRG Energy Inc., Toshiba Corp. and a Texas utility resolved a legal dispute Wednesday that allows one of the first new U.S. nuclear-power projects in decades to proceed. The agreement, between the joint venture, Nuclear Innovation North America, and San Antonio municipal utility CPS Energy, reduces the utility’s stake in the south Texas nuclear power project to 7.6%, from 50%, with the joint venture retaining 92.4%, according to CPS and NRG. The agreement ends a $32 billion lawsuit that CPS filed in December to reduce its participation in the project, and allows development of the plant to proceed, the companies said.

    * * *

    The agreement also resolves ownership issues that might have held up an application the companies filed for federal loan guarantees, said NRG spokesman Dave Knox. If the companies get the federal loan guarantees, NINA, which is 88%-owned by NRG and 12%-owned by Toshiba, has agreed to pay CPS $80 million and donate $10 million over four years to its residential customer assistance program. CPS said its remaining stake in the project is worth about $1 billion. The agreement requires CPS to help with the project’s loan guarantee application, but excuses the utility from spending more money on the project. The utility has said it has spent about $370 million on the project’s engineering and permitting.

    * * *

    “The project, estimated to cost between $9 billion and $12 billion, would add two new nuclear power units to an existing nuclear reactor, expanding the facility by 2,700 megawatts, enough power for more than 2 million homes.

    * * *

    “The two sides agreed before the dispute to each sell a 10% stake in the project, but uncertainty around CPS’s involvement has stymied these efforts. Tokyo Electric Power Co. said last month it’s considering purchasing a stake in the project and remains interested.”

  16. More from today’s WSJ.

    Above I mentioned that “One way of solving the quick problem is to use smaller units manufactured offsite.”

    There is a front page article on that precise subject:

    “Small Reactors Generate Big Hopes” by Rebecca Smith:

    “A new type of nuclear reactor—smaller than a rail car and one tenth the cost of a big plant—is emerging as a contender to reshape the nation’s resurgent nuclear power industry.

    Three big utilities, Tennessee Valley Authority, First Energy Corp. and Oglethorpe Power Corp., on Wednesday signed an agreement with McDermott International Inc.’s Babcock & Wilcox subsidiary, committing to get the new reactor approved for commercial use in the U.S.”

  17. The news on the agreement between NRG and CPS is good to hear.

    So CPS gets a stake it values at $1 billion for a net investment of $290 million. Plus it get $40 million for goodies for “residential customer assistance program” which I read as vote buying for the city council.

    Of course, CPS had right of first refusal for any STP site generation additions, including water rights.

    Having Tokyo Electric Power (TEPCO) as a co-owner is very valuable to the project since they experienced operators of ABWRs and have much technical and operational information.

  18. Thanks for the updates. I have been busy lately and saw the WSJ article on the smaller nukes that can be built in factories and taken by rail car, very interesting. That might remove a lot of the construction risk and their scale is smaller so utilities with smaller market capitalization could afford them (assuming that they already have nuclear plants, since you still need to secure and store the waste onsite, and one little nuclear reactor or even a few wouldn’t be economical).

    Glad to see the Texas project continue but I will need to research the financial status of the players more. While the city of San Antonio had issues at least they had the theoretical capacity to finance a lot of the deal (and Austin, but they are gone too). You remove the immediate problem but then you create another potential issue.

  19. “That might remove a lot of the construction risk and their scale is smaller so utilities with smaller market capitalization could afford them (assuming that they already have nuclear plants, since you still need to secure and store the waste onsite, and one little nuclear reactor or even a few wouldn’t be economical).”

    The online version of the WSJ article omits the graphic from the dead-tree version. The graphic shows the spent fuel being stored inside the reactor containment structure. Very tidy. It also shows multiple small reactors on one site. That would allow security and storage problems to be shared costs. I would guess that there are plenty of brownfield sites and abandoned strip mines that could be turned into reactor parks.

    I talked to the Governor of Ohio about the idea because it would be a good fit for the counties along the Ohio River which have such sites, plenty of water, a desperate need for an economic base, and a location close to the junction of major interconnects. he was quite receptive as he comes from one of those counties.

    It should also be pointed out that Babcox is not an amateur. They build the reactors for the USN’s ships.

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