Nuclear Power in the US – Deader than Dead

Warren Buffett, the famed investor, owns a holding company named Berkshire Hathaway. Berkshire Hathaway invests in a number of industries where Berkshire’s leadership believes that they can make money over the long term.

Berkshire Hathaway made a lot of its money in the insurance business (GEICO). They like the steady returns and solid, understandable business model behind insurance. Also, due to Berkshire Hathaway’s AAA rating (VERY few US companies have this rating), they have a very low cost of capital which gives them a significant cost advantage against competitors.

The US utility industry (electricity) is an area where Berkshire Hathaway has made investments over the years. Berkshire Hathway bought up a group of Iowa utilities (where I used to work) that were rolled up into a company called MidAmerican Energy. Berkshire Hathaway has a very long time horizon (other CEO’s have to hit immediate earnings targets and are impatient) and thus they can be opportunistic, holding on to their (vast) cash until the right target comes along. Berkshire Hathaway jumped on Pacificorp, which had previously been bought up by Enron, when Enron’s finances imploded.

Recently Berkshire Hathaway bought up Constellation Energy, which is the electrical utility with nuclear plants that serves Maryland and Baltimore. Constellation Energy had a large energy trading arm that was intertwined with Lehman; when Lehman went bankrupt Constellation was going to be forced to put up more collateral and faced a downgrade in their credit ratings. Their stock plunged from $100 / share in early 2008 to as low as $13 before Berkshire Hathaway agreed to buy them; the stock is now at $26 / share and the company is worth $4 – $5 billion.

Constellation Energy was one of the “dreamer” companies that was thinking about taking advantage of US government tax breaks to re-invest in nuclear power. As I have noted previously, don’t bet on any of these plants getting built (maybe TVA builds one and someone else another one; this is not going to even cover those plants at end-of-life and being retired from service, much less constitute a renaissance in nuclear power).

Per a September 26, 2008 Wall Street Journal Article titled “Buffett Could Reshape Nuclear Power Industry” –

“Warren Buffett’s decision to rescue Constellation Energy Group Inc. gives one of the nuclear power industry’s biggest skeptics some important clout in deciding its future.”

Uh, why would that be? Why would a man revered as being one of the greatest financial minds in history (and who apparently escaped this whole economic panic unscathed) not want to invest in nuclear power, which has made a “comeback” in the popular press?

“For Mr. Buffett, price has always been the major sticking point. His energy company, MidAmerican, formed a special unit last December to explore possible construction of a nuclear plant at a site in Idaho. That created a flurry of excitement as people in the industry believed that Mr. Buffett might finally throw his weight behind the technology. But MidAmerican pulled the plug seven weeks later, saying it was too costly.”

I get it… Warren Buffett understands basic economics and probably looked at this for five minutes and told his minions to give it up. Let’s run through the “business case”:

1) whatever you do will be fought fanatically by every NIMBY across the nation
2) construction will be measured in geological time (didn’t we start that plant in the Cretaceous period?)
3) costs will start in the billions and go up from there… no one really knows
4) everyone who is working in the nuclear power industry in the US is about 15 minutes from retiring (remember, the Simpsons have been on almost 20 years, H*mer is getting long in the tooth)
5) technology is in transition from the older proven technology to the next generation, which may be a lot better or may not prove viable at all
6) if you do spend billions and take the decade or so to get the plant done, there is no mechanism to recover these costs and get them back from ratepayers

It probably took about 30 seconds for Warren to laugh out loud and tell them to get out of his office he has better things to do. Probably when Warren was listening to this business case he was asleep like that scene in the new B*atman movie where Bruce naps through the business pitch. Remember, he just spent $5B to get a big chunk of Goldman Sachs, and $5B likely wouldn’t even buy you 1/2 a next generation nuclear plant. Oh, and Constellation Energy’s market value at the time of collapse was under $5B.

The final, saddest part for nuclear plant dreamers is that about the only person in the land who could have financed one of these things is Warren Buffett and Berkshire Hathaway. They have the AAA rating to raise money in these dark times and they could just finance it themselves if they wanted to out of the billions just sitting on their balance sheet.

While I personally think that nuclear power should be built for the United States my point is that this NEVER was going to happen and Mr. Buffett, who could finance one of these in a heartbeat and could have pulled it off, just put the final nail in the coffin.

Cross posted at LITGM

18 thoughts on “Nuclear Power in the US – Deader than Dead”

  1. As an ex US Navy nuke, the entire nuclear “scare” that this country is in is quite frankly embarrassing. I have tried to convince people how their fears are irrational regarding nuclear power by presenting them with basic concepts regarding radiation, contamination and the facts surrounding TMI, Chernobyl and other “accidents” but it usually comes down to them wanting a 100% guarantee that nothing will ever go wrong. This, to me, is the problem….nuclear power is held up to a standard that nothing else is held up to with regards to safety and reliability.

    Why does there have to be a guarantee that nothing will ever go wrong with nuclear power? Do we have that guarantee with oil burning plants? Do we have that guarantee with any human engineering endeavor? Why then is this required of nuclear power. The answer, of course, is irrational fear of the boogeyman that is the powerplant undergoing the thermonuclear detonation. Death and injury is bad, but death and injury *by nuclear means* is even worse, of course!!! This is the exact attitude that actually permeates modern revisionist thinking on the atomic bombs that we dropped on Japan. I live near Pearl Harbor, my wife is ethnically Japanese(along with about 35% of the Hawaiian islands) and we are constantly in contact with rememberance ceremonies of one kind or another having to do with them bombing us, us bombing them and so on and so forth and it never ceases to amaze me the number of people who hold special reverence for those killed by the atomic bombs as opposed to any other casualty of the war. The train of thought there is killing millions of Chinese and pacific islanders by bayonet, fire, and poison gas is business as usual, but killing 200,000 by nuclear means? Well, that’s just evil.

    More than one person has literally just said “Well you just can’t convince me that nuclear power is safe”. No matter what. The would acknowledged that I had years of experience and education on the subject and understood it better than they could hope to in the near future, but it didn’t matter.

    I held an informal debate with an Engineer from Hawaiian Electric several months ago where he had taken the position that nuclear power couldn’t be made safe and regulated well enough. Now, his position with a company that has the prime position on the islands here in Hawaii and certainly does not want a new market of power providers in nuclear power coming along is certainly understandable. But he had “philosophical” reasons for not liking nuclear power. His main complaint was that nuclear power couldnt’t be regulated and made safe enough and of course since it would be run by corporations and that people would get hurt because of that. I reminded him that his own power company operates coal plants and certainly noone has been hurt or killed in the coal industry because of corporate greed or otherwise lack of care….

  2. The sad thing is that 20-30 years from now when China is the place of cheap power and the center of all heavy industry, the very same people who killed nuclear power will be looking around wondering were all the jobs are.

  3. At this point, only sovereign power can get a nuke plant built. If we had a national grid, I could see some of the ‘back water’ states taking advantage of this, unfortunately this is not so.

  4. A small correction. Enron bought Portland General Electric. Scottish Power bought PacifiCorp before selling it to Mid-American.

  5. Do all the people who make money buying and selling derivatives in Manhattan have a plan for still having derivatives to buy and sell once there’s no heavy industry left in the US?

    Why will China need _them_?

  6. The rest of the world (especially Asia) is going nuclear in a big way.

    Toshiba bought the nuclear power division of Westinghouse a few years ago.

    It is likely that all of the heavy industry will go to Asia (and other places) and the U.S. will continue to specialize in “light” industry and services. Needless to say, people like me will be either living in Asia or doing the bulk of our sales and business there. I can always retire back in the U.S. in a nice big home and have lots of “greenie” young people work as domestics for me.

    When the world gives you lemons, you make lemon aid.

  7. Good catch on the Scottish Power vs. Enron. Sorry ’bout that. I have trouble keeping all the mergers straight.

    I would say that a lot of the nuclear plants even overseas are likely to get hit now that liquidity is drying up. But certainly whatever gets built won’t be in the west.

  8. “I can always retire back in the U.S. in a nice big home and have lots of “greenie” young people work as domestics for me.”

    Up in Maine, the greenies wanted and pretty much did, shut down the lumber, pulp mills and paper plants, many with union jobs. When asked what about all the workers, they said they could become chaimbermaids and tour guids through the great north woods. You know, rich urban green uppies would vacation. In droves. It would be fine. And, anyways, the workers mostly were old guys and gals, a bit to rustic and ignorent and reactionary( hunting, guns, chainsaws, that kind of thing ). So, let them die, save the woods.

  9. This article really doesn’t present anything new or fresh, beyond of course that WB is in the mix.

    Yeah Nuclear plants are very expensive and getting more so, JUST LIKE EVERY OTHER KIND OF PLANT, it is called inflation, a consequense of a de-valued dollar.

    So if the dollar is down like what 40% over the last 7 years, wouldn’t you expect prices to be up everywhere. So remember this….no matter what your preferred energy technology, the costs are going to be alot higher today and tomorrow than they were yesterday.

    Also dont kid yourself into thinking that other green energys make their power plants out of straw and leaves they dont. They use resources just like all other power generators.

    Nuclear power will have to take hold in the US with growth going forward, or else we will continue to be gross poluters or just sit in the dark, simple as that. Its all about scale and transmission, and unfortunately solar is much more expensive than nuclear, always has been, which is why it has been subsidized for 30 years and still accounts for less than 5% of US energy generation vs. Nuclear whis is at 19%.

  10. In 2002 when most of these arguments were relevant, coal cost $20 a ton. The average coal fired plant eats 4 million tons a year, and most of the operating cost has been tied up in fuel, not capital costs. Therefore, increases in fuel costs have a huge impact on marginal operating cost, and the current price for coal is around $140 a ton. Most of the actual costs of coal burning are externalized to the environment. The huge capital expenditures associated with nuclear power plants are to prevent such an externalization from occurring. The capital cost associated with the construction of new coal fired plants have risen for the same reasons that construction costs for nuclear plants have. It costs over a billion dollars to build a new coal fired plant and now you need half a billion a year just to fuel it, over against $30 million for a nuclear plant. Nuclear plants also last 60 years. 40% of mercury pollution comes from coal plants, how much is that worth on the balance sheet? How expensive would it be to generate coal based electricity that doesn’t poison us? With the still rising price of coal, I would say it will turn out to be multiples of the price of Nuclear, we’ll have to see what Warren thinks.

  11. Hey Sam. Sorry my insight wasn’t fresh for you. I have written dozens of articles on power and have worked at most of the utilities in the nation over the last couple of decades.

    Your backwards arguments are that because everything else is expensive we will have to start nuclear plants make no sense. Nuclear plants were a unique construct of our regulatory structure in the 60’s and 70’s and now that structure is dead. There is no way to finance a nuclear plant today, and the economics are upside down.

    I am FOR nuclear power, I am just pointing out the sad reality that it won’t get built. We need to accept reality, and move forward from there.

    I am not a greenie nor do I believe that solar is the answer or even coal plants. You can’t build them either in the current legal and financial climate.

    Essentially, we are screwed. We will just wind down what we have and deal with rolling blackouts. Businesses will develop their own power or move elsewhere and households will have their own backup power.

    Kim, your arguments are in space. “Externialities” don’t count in the real world. I agree that it costs less to fuel a nuclear plant than a coal plant, but so what? We aren’t building any of either one.

    Meanwhile China is building unlicensed coal plants with no scrubbers every day and shooting the dirtiest debris into our atmosphere. Since it is one planet, they are getting a free ride from an externiality perspective while we starve our economy.

  12. Carl, there is a chance that small nuclear will save us. We are now building these hulking monsters that require huge capital cost for containment structures and exorbitantly expensive reactor vessels etc.

    Could you comment on the IRIS project for “grid appropriate” generation,

    Hyperion’s nuclear batter technology, 25 MWs constant AC for five years before the module is taken back and refuels with Uranium hydride fuel, which is readily recycled,

    The different pebble bed reactors that China, Russia, the Republic of South Africa and the DOD are developing.

    The liquid fluoride thorium reactor, which has run as a prototype now in at least four different forms.

    Hyperion’s design is slated for mass production starting in 2014. Since they are going to be mass produced, they should respond to economies of scale. A cluster of 8 will produce 200 MW of power and the modules themselves of such a plant will cost around $200 million dollars, with no fuel costs for five years.

    LFTRs will also be amenable to mass production. The fuel for these reactors will require no physical fabrication. This is a Gen IV design and is probably 20 years off. It is two bad that there are no longer companies in the US capable of footing the engineering bill for this kind of project. Developing the LFTR is the quintessence of building the better mouse trap. They burn their thorium fuel down to almost nothing, leaving only fission products that decay to background in less than 5 centuries. They can even accept waste from other reactors and burn this down, all the while producing high enough temperatures for not only electrical generation but also industrial scale hydrogen production. The US government invented this reactor at ORNL in the 50’s and 60’s but the LWR was easier to establish.

  13. I am not an engineer and can’t speak specifically on the designs you have mentioned.

    I do know that people in the industry have been talking about them for decades and they haven’t come to fruition. No power is being generated by these devices today, and they aren’t on the near term (5-10 year) drawing board.

    I also know that there are no mechanisms to fund this development, unless someone like TVA builds one. The reactors that seemed likeliest to get started were using older, known technology because the risk was perceived to be lower, even though that may not be the best idea.

    I will post what is likely to happen, which is mass disinvestment and the “privatization” of the grid as the public grid falls apart, similar to what happened with the airlines, public schools, etc…

    Note too that there are bona-fide incentives for generators to NOT build more generation – they just make more money on long paid for units when power is scarce, since their older units receive revenue based on the marginal costs of the peaker (natural gas) units. The fact that many generators have fallen into the hands of private equity (TXU) and non traditional companies (Warren Buffett) means that they will be far more likely to make Enron-like decisions (good for us, bad for consumers) than the traditional balance between ratepayers, shareholders, and the common good that regulation (tried) to instill.

  14. Hyperion and IRIS are slated for the next five years, the former will be quicker to production, but IRIS had been worked on by a consortium since the mid 90’s. It is a small modular, easy to construct, easy to contain 330 MW reactor. Instead of building a huge single reactor, you can build multiple smaller plants with two reactors each. In theory, since everything is smaller and requires vastly less material this should lower the capital cost associated with individual reactors. Since you will need more individual units and much of the modular design will be factory assembled, this will allow greater economies of scale. These reactors are also able to utilize either Westinghouse’s annular fuel of Thorium Power’s seed and blanket fuel design, lowering operating cost and decreasing waste volume dramatically. All these factors should make IRIS an attractive option.

    Hyperion is already taking orders for their reactors and expects to deliver the first batch in 2014. This technology was developed at Los Alamos starting in the 90’s. Toshiba has the 4S reactor already, they have been working on it for over a decade. The Japanese also have the latest generation LFTR running in test phase, called the Fuji II. It is rated at 130 MW electric output. The RSA is pouring the first concrete for the pebble bed reactor they have been developing from the German design over the last decade, in part using contract work from Idaho National labs. The Chinese have been running their HTR-10 pebble bed for a few years and are in the process of producing a commercial power generation plant, pouring concrete and putting up steel as we speak. They have offered one to Canada to produce process heat for oil sand processing. The DOD is years away from building our prototype in Texas. Livermore is working on the SSTAR, which is similar in concept to the 4S.

    What all these have in common is that they are small compared to the 1+ GW reactors, they are all safer to operate, they all produce less waste, especially if run on Thorium based fuels, and they should all respond to economies of scale, some better than others. Most will require multiple reactor modules in individual power stations, which has the added benefit of not having all your power generation eggs in one basket. If you need to re-fuel or take a reactor down for maintenance, there are other generators that remain on line.

    Finally, we will start to toll power generation for their externalization of cost to the environment. This will first come in the form of a carbon tax, but other pollutants will also become penalized as society realizes that coal plants are costing lives and health care dollars and someone is making money to do so. You can’t externalize your cost of doing business to the rest of society and think that at some point society will not make you stop it. The impact of coal is huge and few people realize the magnitude. Carbon dioxide is the tip of the iceberg, the real hazard is heavy metals, particularly mercury and arsenic. 40% of all mercury pollution is caused by coal burning, then there are the particulates that the Bush administration claims kills 12,000 Americans a year. We burn 3.8 billion tons of coal a year for electrical generation and the average coal plant emits 30,000 pounds of mercury vapor, along with Thorium and Uranium. The DOD used to obtain uranium by burning brown coal from North Dakota and then extracting the Uranium from the ash which was richer than high grade ores from open pit mines. There is also the acid rain. I don’t think I’m a “greenie”, but mercury accumulates in the environment, constantly increasing as we burn more coal, the steady state levels are rising. What China does is not irrelevant, we cannot make it an excuse for our own bad behavior, it doesn’t work that way past the age of 8 or 9.

  15. If anyone wants to bet on whether new reactors are actually going to be put in commercial service beyond MAYBE 1-2 units total (TVA will probably do one, they’re ambitious, and then maybe one for the rest of the commercial non-public utility industry), I will take that bet in a heartbeat.

    I am a finance guy, and I am telling you that there is no money available for this. The mechanisms that fund this type of construction are just plain dead; the states have deregulated, and the private operators (like Buffett) are interested in making money, not in risky projects like unproven nuclear technology.

    It is a strange and useless exercise to compare US cost of building coal and nuclear because WE AREN’T BUILDING EITHER ONE. And no hydro, either. Pretty much just natural gas units and the occasional government sponsored project and then some renewables which are not even a dent in our total energy demand. Nothing is happening.

    I find it nearly insane for people to pretend that things will get built when the track record of building these new plants is about as good as the Cubs winning the world series, as in very low.

    Remember, even if you want to keep our current share of nuclear power alive, you need to build a bunch of units just to “tread water” because our fleet today is aging badly.

    What people don’t realize is that the funding mechanisms to build these new plants is just dead and gone, and it goes for transmission, too. What we have is what we will have for the next decade or so, because nothing significant is coming on line any time soon.

    If anyone wants to bet real, US dollars (actually a Euro probably would hold value better) that 10 years from now we will have more than 2 new nuclear units built, I will take that bet in a heartbeat. And those 2 units won’t even keep up with what will have been retired in the interim, so nuclear’s share will be going down. I don’t have an exact count on coal plants, but for big baseload units in the next decade it is likely less than 8-10, tops, which won’t keep up with those going out of service, either.

    Effectively we aren’t investing anything substantial in generation and not much in transmission. Theoretical arguments about how we would invest more of this or that fly in the face of reality, because it isn’t happening, it hasn’t been happening, and it won’t happen.

    I’m not saying that this is good for the country, because it isn’t, but it is reality.

  16. Finally, we will start to toll power generation for their externalization of cost to the environment. This will first come in the form of a carbon tax, but other pollutants will also become penalized as society realizes that coal plants are costing lives and health care dollars and someone is making money to do so. You can’t externalize your cost of doing business to the rest of society and think that at some point society will not make you stop it. The impact of coal is huge and few people realize the magnitude. Carbon dioxide is the tip of the iceberg

    Bull crap. Manmade Global Warming isn’t even happening.

    Folks.. this nonsense about CO2 has to stop and it has to stop now.

    All of these socialist agenda items are all being shoved down our throats by fraud and deceit and if us people who can see through this scam don’t speak up we’re going to find ourselves in a world controlled by the very same people who have just bankrupted the United States via the deliberate corruption and destruction of the world finance system.

  17. Quoting Next Big Future regarding the Hyperion :

    “As of September 9, 2008, HPG has ten installation commitments and 50 pending. The first HPG reactors should be ready in 2013. The cost of the reactors will be about $1400/kw.”

    This claim seems to contradict Carl’s position that these things aren’t going to get made, but I suppose that depends on the definition of “instalation commitments.”

    Also, Toshiba was as of April still moving ahead with its attempt for NRC approval of its 4s generator for use in Galena, AK.

    Would be interested in a Palin comment on the issue, but not holding my breath.

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