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New Nuclear Construction: Still on Hold

A number of factors point to expanded nuclear generation. But when?
Fortnightly Magazine - December 2003

near-term and advanced gas-cooled reactors that could be built underground and are supersafe for the longer term." Taylor noted that the gas-cooled option could produce hydrogen at a low cost and fuel a new hydrogen economy. However, he cautioned: "We have not decided to build a new reactor." 12

In the current investment environment-recession, excess capacity, and bad experiences with power sector projects-it is understandable that no U.S. utility has yet committed to the high capital costs and long construction duration of a new nuclear unit. But the investment climate could change for two reasons:

  • The rising cost of natural gas. The recent increase in gas prices probably improves the economic attractiveness of new nuclear only to a limited extent, since the projected price of natural gas a few years down the road matters more than the current figures. But if gas prices remain high into next year, these projections will likely adjust upward; executives and investors may then have increased concern over the risks of over-dependence on gas.
  • The potential for a carbon policy. Exelon CEO John Rowe described the influence of a carbon policy very clearly, in an interview with the Sustainable Energy Institute: "Sooner or later, we're going to have ever-tightening standards on carbon and that is going to force a new generation of nuclear in this country." 13

Edward Tirello of Berenson & Co.'s Power and Utilities Group recently provided an upbeat assessment of nuclear power's future, telling Fortune magazine last year: "If they use advanced designs, and get all the litigating done up front before construction starts, and the companies have assured Wall Street that they have markets for the power output, these plants are bankable. Nuclear plants are the best assets you have in the power business, because the power outflow, costwise, is steady." 14

The key to future nuclear orders may be the industry's ability to share risks for first-of-a-kind plants and produce economies of scale by forming a consortium that would build several plants. Southern Nuclear CEO George Hairston told Fortune this might involve "a group of four or five utilities, vendors, and financial institutions coming together and building perhaps eight plants, and charging everybody the average cost, so nobody has to bear the risk of the first plant alone." 15

The timing of new plants may also depend on whether investors differentiate risks between non-utility generators (NUGs) and traditional utilities. NUGs carry enormous debt from the recent over building, while utilities do not; and NUGs build new capacity based on price signals, while utilities building baseload units appear to continue to focus on demand growth. It may be that the bad experience with deregulation is still too fresh in investors' minds to differentiate the risks this way. Moreover, utilities may not yet see sufficient baseload demand growth to justify new nuclear units, but an increasing dependence on expensive gas-fired units for baseload generation could quickly change this view.

In the hope of overcoming hesitation on Wall Street and in power company boardrooms, the nuclear industry has lobbied for some form of stimulus or