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Nuclear Power: A Second Coming?

Here’s what’s driving the renaissance.

Fortnightly Magazine - February 2006

up to 6,000 MW of new nuclear capacity. The production tax credit places emission-free nuclear energy on an equal footing with other sources of emission-free electricity (including wind power and closed-loop biomass), which have received a production tax credit since 1992.

The 2005 energy legislation also provides an innovative form of investment protection for the first six reactors. This risk insurance is similar to the sovereign risk insurance available through institutions like the Overseas Private Investment Corp. to American companies doing business elsewhere. The federal government will cover debt service and other costs for the first few plants if commercial operation is delayed for reasons beyond the company’s control, such as a failure by the NRC to meet schedules and litigation. The industry believes the NRC’s new licensing process will work as intended, but no one can be completely certain until it has been tested. The regulatory process is the one risk that industry cannot hedge. The delay insurance will allow boards of directors to authorize multi-billion-dollar investments in new nuclear plants, confident that they are protected against unforeseen delays.

The financial stimulus provided by the 2005 Energy Policy Act affords the nuclear industry substantial flexibility in structuring and financing new nuclear projects and in managing the risks associated with financing. The industry expects to see a spectrum of financing arrangements: Regulated projects, merchant projects, varying degrees of leverage, projects built by single companies, projects built by consortia in order to share risk, projects that are non-recourse to the project developers’ balance sheets, and projects that are full recourse.

In those states that are still operating under cost-of-service regulation, companies likely will build new nuclear plants as rate-base projects, using a conservative 50/50 capital structure. This regulatory arrangement provides substantial protection: Investors know they have reasonable assurance that all costs prudently incurred can be recovered through rates. Unregulated generating companies will build new nuclear power plants as merchant projects, with the financing supported by long-term power purchase agreements and loan guarantees.

Companies now are preparing applications for combined construction/operating licenses (COLs). The first of these will be submitted to the Nuclear Regulatory Commission (NRC) in 2007, and should receive NRC approval in 2010 or so. Assuming a 48-month construction period, which has been achieved routinely overseas, the first new nuclear plants will be operating in 2014-2015, close on the heels of the next wave of new coal-fired capacity that is now starting construction or well along in the development process. By 2025, an educated guess shows approximately 30,000 MW of new nuclear capacity operating, with at least that much under construction.

Fuel and Technology Diversity

During the 1990s, the conventional wisdom held that the risks associated with nuclear power plants—operations, used fuel management, licensing, and construction of new plants—were uniquely overwhelming and insurmountable. It is now clear that the common wisdom should be greeted with considerable skepticism, and that the nuclear industry’s business challenges are quite manageable.

In the mid-1990s, the common wisdom (including the Annual Energy Outlook produced by the DOE’s Energy Information Administration) forecast that one-half of U.S. nuclear generating