Update On Nuclear Power – Constellation Drops Out

Back when the US government selected 4 companies who might lead the nuclear power “renaissance” in 2009 I wrote this article and noted that of the four:

Southern Company was a good candidate since they have nuclear experience and a substantial market capitalization
SCANA (South Carolina)is a relatively small company, but since South Carolina has the “traditional” regulatory structure where companies can pass the cost of construction on to customers, this might work, although it would put the company at extreme risk of foundering if costs rise
NRG is a smaller independent power company that was unlikely to be able to finance such a large venture and unwilling to take the financial pounding that will likely ensue as the projects face difficulties
Constellation Energy (Baltimore) was a wounded company and unlikely to succeed, even with a partner in the vast French nuclear company EDF

I said that of the four companies, 1 1/2 (Southern plus SCANA, on a shoestring) might be able to pull it off.  I also said that it boded ill for this false “renaissance” that Exelon, the largest nuclear operator in the USA and one of the largest in terms of market capitalization, was bowing out of this effort, likely because they ran the numbers and risks and decided that it was foolhardy.

In this post I noted that NRG had a falling out with their nuclear effort, and according to this recent presentation, they have reduced their spend to a maximum of $1.5M a month, which is literally a pittance in a multi-billion dollar effort, dumping the rest of the work onto their partners and Toshiba.  Effectively naming NRG was a joke in the first place, as I pointed out in my original post, and now they are abandoning the giant capital efforts of nuclear plant construction and moving onto other areas to earn profits.

Today the other shoe dropped – as summarized in this excellent Bloomberg article titled “Constellation Drops Maryland Nuclear Plant Loan, Denting EDF’s U.S. Plans“:

Constellation Energy Group Inc. pulled out of negotiations on a U.S. loan guarantee to build a nuclear reactor in Maryland with Electricite de France SA, potentially damaging the French utility’s U.S. expansion plans and the companies’ partnership.The cost of a $7.5 billion U.S. government loan guarantee that the companies’ joint venture, UniStar Nuclear Energy, would need to build the Calvert Cliffs 3 reactor is too high and creates too much risk for Constellation, the Baltimore-based utility said in a statement today.

So now Constellation has dropped out, I am batting a thousand so far, since at $1.5M / month NRG has also effectively abandoned the effort.

As far as the 1/2 company, I have been following SCANA’s efforts through their web site, which contains extremely useful information.  Since the rate-payers are on the hook for this effort (SCANA has “traditional” rate regulation), SCANA publishes detailed information on a regular basis so that the regulators can measure progress.  This document is a Q2 2010 update on their 2 units under construction and is excellent reading if you wish to learn more about nuclear plant construction.  Some relevant facts:

– at a stock price of about $40 / share, SCANA has a market value a bit above $5B
– the estimated cost of building two nuclear units as of their most recent estimates is about $6B
– scheduled completion dates for Units 2 & 3 are April 1, 2016 and January 1, 2019
– SCANA is planning on spending approximately $500M on these two units in 2010

It will be a high-wire act to see if SCANA can pull this effort off with their small market capitalization relative the potential risks on this construction effort.  Delays in the schedule or cost over-runs will pose a significant risk to their liquidity and South Carolina is a relatively small state if they need to rely on support.  That is why I still give SCANA a 1/2 as far as the 4 companies listed above – they have a shot and are certainly making the most of it but they are a LONG way from the finish line and any significant deviation will dent their capitalization significantly.  For example when the company has $5B sunk into the project, if the date is delayed the company will not only have to keep financing that $5B in debt but they will have to purchase replacement power to make up for the nuclear power that isn’t yet on line, dealing them a double blow.

Southern is still moving forward with their construction and of the 4 they, and Exelon, were the only 2 companies in the US with the level of experience, commitment and financial capacity to pull this off, if they chose to do so.  I will update you on Southern’s construction efforts in a future post.

But it amazes me that what I, a non-journalist who is several years removed from direct experience with the industry, could call immediately when the government named these companies and how I have been completely correct so far.  The nuclear renaissance is about to be buried, with only Southern soldiering on and South Carolina holding their breath (if they are smart) to bet that SCANA can pull this off or they will be stuck holding an immense debt and be short of power, to boot.  Given the 100% rate of overruns in nuclear plants and dates being missed by years (if not decades), SCANA’s high wire act is going to be tough to pull off, but I wish them luck.

Cross posted at LITGM

17 thoughts on “Update On Nuclear Power – Constellation Drops Out”

  1. It’s politics, plain and simple. That, and an imploding economy that is killing demand growth.

    Did anyone really think that Obama, Pelosi, and Reid would allow the US government to build new nukes? I did cherish the hope that the bureaucracy would move forward with Bush Administration programs and momentum. Unfortunately, The Democrats turned the loan guarantee program into another example of crony capitalism. Money is flowing to some really stupid “green projects.” If a nuke company can not get a federal loan guarantee, most of us understand that we HAVE to have such a guarantee to proceed. It has become more like protection money.

    Exelon would have liked to make some big plays in nuclear, as in taking over NRG and their South Texas Project plans, but realized, I think, that their buddies in office might not have the tenure needed to carry through.

    However, times change – Reid will be out, Pelosi may keep her seat but not her gavel, and Obama will be boxed in by the new Congress. If one listens to most of the Republican candidates and many of the Democrats, the new Congress will insist on new nukes.

    As an insider on the STP 3 & 4 project, we are cutting our burn rate as you noted, but only for NRG’s contribution. The Japanese partners are still actively placing hardware orders and continuing with design and licensing work. I’m busier than ever! We have Tokyo Electric willing to make an equity investment IF AND ONLY IF the loan guarantee is signed.

    My colleagues and I have been debating whether Constellation would beat us to the guarantee. I thought it hinged on whether the thousands of new jobs would benefit Steny Hoyer’s reelection or whether the environmentalist anti-nuke sentiment was more important. Looks like Hoyer didn’t need or want the jobs that much. The French government, which owns 49.9% of Constellation and would provide the reactor, aren’t going away.

    The Texans and the Washington Democrat establishment have been on a collision path for months. few think that anything positive will happen until well after the new Congress is seated.

  2. I wish you well with your efforts to build that plant and I probably should put it in my posts more that I am 100% pro-nuclear.

    We just put so many road blocks up and then don’t support the industry so it is financial suicide for American companies to get involved.

    It is sad but the foreign companies like Toshiba and also the Koreans and French can see the longer view than the Americans that are focused on quarterly numbers.

    Still, it was idiotic giving anything to Constellation or NRG. There was no way they were going to be able to pull this out. I guess if you look at them as “front” companies for the Japanese and French, respectively, it might make a little sense.

    SCANA is way over extended but I hope they pull it out. I would be 10-1 though that by the time they are through (and new owners take over the remnants) they will have wished that they didn’t lead the charge on this. Not because they aren’t a good company but they are taking a huge risk to pull this off.

  3. What I want to know is where the money’s going.

    It’s a building, made out of concrete and steel and other materials. It will contain turbines and generators, and it sits on land that has to be purchased. It will also contain a nuclear reactor and its support stuff. People build buildings all the time, and while they’re expensive it’s nothing like this. Turbines and generators cost a lot, but somehow when they run on natural gas they’re affordable. A reactor is a complex machine that needs some exotic materials, but it’s still just a machine.

    When I was in aviation, we used to joke that you established prices by taking the general market and moving the decimal point one place to the left, because it said “airplane” somewhere in the paperwork. It looks as if pricing in nuclear is done by a similar method, except that the movement is three decimal places.

    What are the cost drivers that push it up so outrageously?


  4. Take a look at that PDF that I sent over at the SCANA web site that details all of the many milestones involved in setting up a nuclear plant and getting it ready to run. The milestones are towards the back of the document and they will give you some idea of the magnitude.

    The costs cover many elements – components, labor, overhead, interest on the debt that is being undertaken (called AFUDC for this purpose). Many of the costs are driven by the continuous and constant need for permits and re-work to satisfy myriad state, Federal and local agencies as well as any re-work that comes from testing.

    Everywhere there is work, testing, rework, and delays as parts come from everywhere around the world. The US has lost a lot of the manufacturing and local know how due to decades of neglect of our nuclear program.

    But we are leaders in lawyers and layers and layers of useless regulations and they will continually dog this program.

    If there is any nuclear incident anywhere in the world during the time it takes this SCANA reactor to get on line, for instance, you can be sure that protestor minions will demand studies and delays so that they can challenge this design for some ex-post facto issue.

    And note that while you are building all this you still need power to run the state – power that you buy from someone else, that gets passed on to customers. All these delays not only make this plant cost more but you pay more in replacement power AND more on interest in your ever increasing mound of debt.

  5. That’s about what I thought, Carl.

    A long long time ago I had a close friend who worked for the nuclear division of a major company, down in the drafting-machine-and-slide-rule trenches (though, of course, slide rules were becoming passé even then). His stories were always interesting.

    What you’re telling me is that nothing has really changed in over three decades. We have two effects that feed on one another:

    A) Reactor plants aren’t “engineered” and “manufactured”. They are built by what amounts to artisanal handwork, with not only each plant but each tiny part of the plant individually spec’ed, designed, selected, and installed, then tested and certified — and ripped out and the process begun from scratch if it’s painted the wrong shade. The result isn’t an industrial product, it’s a Fabergé egg made by an enormous committee.

    B) All that is overwatched by a horde of lawyers, inspectors, and regulators, each of them empowered to block or redirect the process for good reason or none. Their input would be valuable as QC to the artisanal process, catching mistakes before they were incorporated into the result, if they were knowledgeable and interested in the success of the project. Unfortunately most of them couldn’t read a vernier caliper to a close order of magnitude, and none of them can establish their importance (for which read “power”) unless they can find a nit to pick.

    It’s the airplane business times two orders of magnitude. The wonder is not that so many projects fail; it’s that any projects at all go to completion.


  6. Well put, Ric Locke: thanks.
    As an airplane owner, I understand exactly what you mean (“the replacement part costs WHAT??”) Part of it is the typical fixed cost/variable cost conundrum: it’s why in some respects 2010 automobiles have electronics that are far ahead of private aircraft: yet, a well equipped luxury car runs $50,000, and a base model piston aircraft starts well north of $120,000, easily running up to >$500k.

    I have a company in which we plan to injection mold one of the key parts. The MOLD will cost nearly $70,000. Once we make 70,000 widgets, the unit cost will be $1.00 plus materials (call it $2.50). If we were making 100 of them total? $700.00 plus.

    Lawyer layers. That is, I suspect the focal issue.
    Bring the ‘custom tailored’ factor into the picture, and you have the perfect setting for a great product that nobody can afford.
    I vaguely recall an article in the last few years discussing nuclear plant design in a ‘turnkey’ fashion: if there was sufficient demand, the design costs for a more or less unitary model that could be built in 20 locations would be not dramatically higher than the cost for 1. If a billion dollars of the cost goes into design and ‘customizing’, you’ve knocked down the pricetag substantially.

    The current administration wants nothing to do with any such solution. They want to trumpet their openness to nuclear power to proponents, while the Byzantine regs and financial hurdles continue to satisfy the opponents.

    Just remember: more people have died in the US driving with Ted Kennedy than from nuclear power.

  7. Why? Why? Why are they Faberge eggs when they should be egg cartons? Why are they custom designed? Why does this happen: “Everywhere there is work, testing, rework, and delays as parts come from everywhere around the world.”

    It doesn’t make sense that things that are going to be subjected to high temperatures and effects of radioactive material should need to tested and reworked over and over.
    Henry Ford made autos affordable for many people by standardizing on limited designs.[ and other things..] It is my understanding that the French decided on very few, if not one, models of reactors. You can be plopped in the control room of any of them and not be aware where you are except by looking out the window.
    I also read that the instrumentation specified in a design may be out of production by the time it the order is placed. The “Latest and Greatest” would then have to go through the complete process, adding more delay.
    My late aircraft powerplant engineer Father told me that it seemed that every engineer wanted to design a new starter for turbine engines, and was loathe to use the model that was on the shelf, in production, of proven reliability, and was readily available in mass quantities at reasonable prices. He said they’d design one from scratch, with its accompanying testing regime, parts train of numbering and stocking, manufacturing scheduling, and the whole thing was redundant to say the least. Most cases could have worked well with a standard product, but they didn’t. That was the aircraft way. The designer in one case for a P&W turbojet had spec’d two different bushings for the turbine shaft, upper and lower. Dad said, “make them the same, exactly, to meet face to face, so there is one part number, one set of specs, one drawing, one set of machining instructions & measurements”, etc. That one change saved FoMoCo AED thousands and thousands. Replicate the same thought process throughout the nuclear plant industry, the savings should be significant.
    More on topic, we are now paying for the Southern Co’s design and building of their plants in our power bills even though we will not be getting power until I am likely no longer around, one way or another.

  8. It’s a variant, or corollary, of the concept of “rent seeking”. If you provide an opportunity for rent seeking, you will get many applicants.

    The glaring example I know of comes, again, from the aircraft industry: the so-called “authentic parts” system. If you want a mechanic to fix your airplane, he has to use “genuine” parts, not “forgeries”.

    But “genuine” vs. “forgery” is strictly a matter of the paper trail. In order to be “genuine”, the part has to be traceable back to approval by the original manufacturer. Sounds nicely plausible, doesn’t it?

    Fooey. It’s all paperwork and “pedigree” — there’s nothing in the standard that says anything about the strength, reliability, or correct paint color of the part. If it has a number that can be traced back to the manufacturer’s files it’s good, otherwise not.

    So there’s nothing whatever preventing the manufacturer from going down to the hardware store, paying 39 cents for something made of best Polish butter, and putting it in a nice, sealed, anti-static envelope with a twenty-four-digit string on the label, all nicely recorded and filed — whereupon the mechanic, after having waited half a year for delivery, pays $39 for it and charges you, the aircraft owner, $139. The mechanic, who knows what’s needed, could have more easily gone to the hardware store and paid $3.90 for something that exceeds the necessary quality by a factor of 10, but if he does he goes to jail, or at minimum loses his license to fix airplanes. He didn’t use a genuine part! Crucify him!

    It’s a nice profit center for the manufacturer, though. They can even get nice chunks of change, rather than nickel-and-diming, by charging somebody for a license as an “authorized supplier”. Rent seeking disguised as “regulatory compliance”. Just from Carl’s description and my own minimal knowledge, it looks like the nuclear “industry” is a massive, interlocking set of rent-seekers.


  9. One more bragging point for Jerry Brown is that he shut down the last nuclear power plant in California.

    I have heard of some forgery of parts stories. Sizable parts made of pressed powdered metal instead of forged and that sort of thing. One place I know of it is in marine parts. I know of a couple who lost their boat due to an anchor swivel that was a counterfeit from China.

  10. If that sounded like I’m advocating no standards for airplane parts, you have mistaken my intent.

    There should be standards for airplane parts, and they should be rigorously enforced — but they should be quality standards: is the airplane safe if this part is incorporated?

    To do that, though, would require inspectors who can, for instance, tell the difference among a forged part (good), a properly-consolidated powder metallurgy part (which can also be good — they use them on the Space Shuttle), and a poor-quality part, whether made by powder metallurgy or otherwise. But that’s not on the curriculum at Harvard Law, and that’s not what the standard is. The standard is good paperwork, with the assumption that the manufacturer will provide good parts, so if the documentation traces back to the manufacturer the part is good. Is the underlying assumption a good one?


  11. Most of the “overnight” construction cost of a nuclear power plant is in the concrete, reinforcing steel, and construction labor. However, the timing of the cash flow and the time value of money makes the initial design and licensing a possible huge burden, especially when the startup is stretched out.

    While we are SUPPOSED to be under new, “more efficient” licensing rules (10CFR52), the guys at the NRC seem stuck in their ways. EVERY letter or presentation to the NRC has to be approved by a lawyer charging $500 an hour.

    For example, the spent fuel racks. They are sheet metal honeycombs sitting in 50 feet of water of what looks like a big swimming pool. We’ve been doing these since the Manhattan Project, We’ve had no serious accidents with them, they just sit there. Yet, for the new racks, the NRC requires new, expanded calculations for criticality, seismic, material degradation, etc, etc. Frankly this is a HUGE waste of money and talent but the NRC charges the applicant $250 an hour to require new analysis and to then review them.

    My favorite comparison is between Experimental Breeder Reactor #1 (EBR) and my South Texas Project. EBR took 18 months from announcement to the very first electrical output from nuclear power. South Texas Project 3 & 4 will take 4 and a half YEARS from application, using a previously certified design with similar designs already in operation in Japan, to JUST GETTING THE LICENSE to first turn dirt. Over 111 specific permits, federal, state, and local are required.

    Yes, foreign interests are indeed trying to fill the gap on nuclear investment in the US. They see new nukes as reliable cash cows once in operation, too important to SANELY close down (for the big ones anyway.) They can serve to hedge dollars, making the investment, which pays out in dollars, somewhat immune to FOREX fluctuations.

  12. The US used to be rich enough for such foolishness. Even if Obama and his crew are forced out and Republicans have an inspired new faith in market economics and cutting spending, it will take years to dig out of the rubble of the Great Society, which is what this is. Maybe, as this reality sinks in, the ideologues will lose their power to block oil and gas drilling and nuclear power.

    I’m also hoping for great things from bioengineering. Craig Venter is already the first bioengineering billionaire. I would be happy to see him the first trillionaire in that field as he is building a lot of the future at UCSD. Maybe, for example, microorganisms make oil from coal. The world of the extremophiles is wide open. If we had a Mars lander with a little backhoe that could dig five feet down, we would probably find extremophiles there. They seem to be eating the Titanic. Read about the rusticles which seem to have some characteristics of life.

    The story of the Human Genome Project and Venter’s program is a useful parable of government funded research and the profit motive. Venter is widely hated in the academic molecular biology world because there were thousands who thought they had a ten year grant fountain in the Genome Project. Then Venter came along and did it in two years. And made a profit. He is acquiring every aggressive molecular biologist from around the world. They are moving to San Diego and driving Ferraris now. And the research coming out is astonishing.

    Many of the people who oppose nuclear power are the sort to believe in healing crystals and other phenomena. A friend calls them “granola people.” There is no arguing with them. But they are not the majority and the majority may realize we can’t afford this anymore.

  13. Yes: from what (little) I know, the goateed PhD crowd hates Venter. How DARE he truncate this grand project outside of its proper place in academia, and needlessly ‘hurry’ the results?
    Craig stuck it to the grant-fed mopes. I don’t care if he did it for pure profit; I don’t care if he dedicates his work to Great Lord Satan. Just do it efficiently, and well. Ditto nuclear power.

  14. Here’s the link to Constellation’s letter to OMB:


    Key words – “shockingly high,” “wholly uncertain,” unrealistic flaws that persist in OMB’s methodology”

    Like I’ve long noted, Obama’s Office of Management and Budget: was told to kill new nuclear project. Republicans are already saying that when they regain control of Congress, they WILL pass legislation to resolve any internal roadblocks to restarting nuclear power in this country.

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