(January 2008)Entergy Corp.’s announced plan to spin off about 5,000 MW of nuclear assets generated a major buzz when it was announced in early November.
Nuclear Power: A Second Coming?
Here’s what’s driving the renaissance.
Nine companies, consortia, or joint ventures are planning approximately 12 new nuclear power plants in the United States. How do the business challenges they face differ from the challenges faced by companies using other fuel sources?
History will record that the rebirth of nuclear power in the United States did not begin in 2005, but 13 years earlier, in 1992. Back then, a few companies were struggling to complete the last three or four of the 103 nuclear plants that now supply one-fifth of U.S. electricity. The common wisdom held that no electric utility would ever build another nuclear reactor in the United States. And Congress passed the 1992 Energy Policy Act , which overhauled a cumbersome and unworkable approach to designing, building, and licensing nuclear plants, replacing it with the more efficient, predictable process being used today by companies planning new nuclear plant construction.
The 1992 Energy Policy Act also set in motion negative trends and events that led to today’s energy market conditions. For all its virtues, the 1992 energy legislation unleashed a lengthy period of turmoil in the electricity business, one that continues to this day. It eliminated forever the presumption that electricity generation was a natural monopoly, and mandated open access to the transmission system for all power producers. It institutionalized competition, and prompted restructuring of the electricity business at the state level, starting in the mid-1990s. It forced companies to seek out the business model best suited to their core competencies: Fully integrated? Wires and pipes only? Generation only? Spin off the generating assets to create additional shareholder value? Stick with the regulated business (a bit dull perhaps but steady and predictable)? Or venture into the unregulated enterprises like generation and trading (more attractive price/earnings multiples but highly volatile)?
A Decade of Underinvestment
This continuing business uncertainty made for heady and exciting times, but it had a crippling effect on capital investment in the electricity sector. Transmission transactions increased 400 to 500 percent in the last half of the 1990s, but transmission investment in 1999 was less than one-half of the level 20 years earlier. Investment in coal-fired and nuclear power plants—the capital-intensive baseload technologies that form the backbone of U.S. electricity supply—all but collapsed. Between 1992 and the end of 2004, a meager 9,500 MW of new coal-fired capacity and 4,300 MW of new nuclear capacity started commercial operation, and construction had started on all of it long before the ’92 Energy Policy Act.
Instead, the U.S. power sector built massive amounts of gas-fired generation—more than 275,000 MW between 1992 and the end of 2004. When the gas-fired build cycle started in the 1990s, the market needed gas-fired capacity. The United States ended the 1980s heavy on baseload coal and nuclear plants, and needed mid-merit and peaking capacity to rebalance the system. Gas-fired capacity serves that part of the dispatch order well.
As the decade wore on, however, construction of