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Power-Plant Development: Raising the Stakes

Duke Energy’s Jim Turner and other utility executives weigh the odds on billion-dollar bets.

Fortnightly Magazine - May 2007

number of nuclear plants that actually can be built in the U.S. This is the belief of Jack Bailey, vice president, nuclear generation, Tennessee Valley Authority (see sidebar, “Battle of the Big Nukes,” on what nuclear designs are favored) . An example is the recent spike in uranium prices, which have soared to $95 per pound, from less than $20 three years ago, as a result of supply disruptions and dwindling inventories. The Nuclear Energy Institute, which represents nuclear operators and uranium suppliers, has said if the fuel prices don’t moderate, nuclear power will be somewhat less profitable.

Of course, anyone that has been watching TV or reading the newspaper lately will know that far greater considerations than just input commodity prices are driving power-generation technology decisions.

The Supreme Court recently ruled that the Environmental Protection Agency has the authority to regulate the emission of “greenhouse gases” linked to global warming. In the meantime, talks of national carbon-emissions legislation have all but changed the economic calculus of choosing non-carbon emitting nuclear versus other technologies.

“Electricity demand and other factors such as global warming concerns continue to drive major investments in power-plant development,” says Accenture’s Webster. “We’re seeing an increasingly challenging environment for utilities to deliver successful plant construction projects that meet their cost, schedule, and operability objectives.”

That may explain TXU’s decision as part of its acceptance of a leveraged buyout offer from private equity firm Kohlberg Kravis Roberts & Co. and Texas Pacific Group, to scrap plans to build a large fleet of coal-fired power plants in Texas. The coal plants were highly controversial and drew much public criticism. It also had been widely debated in the industry whether TXU would have been able to build the 11 new coal-fired power plants in Texas at an original cost estimate of nearly $1 billion a piece.

“As I talk with investors and others in the industry over the last year, we never totally got what TXU was doing anyway. I’m not sure I ever totally believed the cost estimates associated with their build. So, maybe I’m alone in this, but I don’t think I was very shocked that they canceled those units,” said Duke Energy’s Turner.

Meanwhile, perhaps because of the growing expectation of climate-change regulation, TXU in early April announced its shift to nuclear power, joining an ever growing list of utilities.

Currently, three other organizations—NRG Energy Inc., Exelon Corp., and Amarillo Power—have said they, too, may build nuclear plants in Texas.

Given climate change, it is no coincidence that utilities are placing ever greater bets on nuclear, but experts warn that the technology is not a panacea for meeting future demand.

John G. Rice, vice chairman, General Electric (GE), speaking at CERAweek 2007, advised against utilities looking for a silver bullet, no matter how tempting.

“There is not one technology. If I listen to the discussions that take place in Houston, or in Washington, or in Beijing, or in Brussels, or anyplace else where this is the subject of discussion, the one fallacy that you [hear] is that people tend