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Nuclear vs. IGCC

Next-gen technologies race to dominate the big build.

Fortnightly Magazine - July 2007

safety structures and beginning to move components into place.”

Which companies will actually seek to break ground on a new nuclear plant in the first wave is somewhat difficult to predict. No companies have made firm commitments to build new nuclear plants. But in addition to the aforementioned Constellation, several other utilities, including Ameren, Dominion, Duke, Entergy and Southern Co., seem likely to be among the first group to move toward construction. NRG Energy also is proposing a merchant nuclear project with plans to file a COL application in 2008.

This apparent reversal of fortune for nuclear power is being driven by federal-level policy changes. Namely, the 2005 Energy Policy Act included promises of federal tax credits, schedule insurance and loan guarantees for the first new nuclear plants. And the Nuclear Regulatory Commission (NRC) is implementing a new licensing process that promises to eliminate the most deadly regulatory risks.

Specifically, the NRC has trimmed the hydra-headed monster of nuclear permitting down to a single COL application. The NRC seems eager to approve the first new reactor licenses, and standardized and certified plant designs give applicants a much better chance of cruising through the safety-review process than was conceivable in the 1970s.

However, no company has yet submitted a COL application to the NRC, and the public-review process has not begun in earnest for any of the planned reactors. Although some environmental groups have started supporting nuclear energy as a climate-friendly power source, only time will tell whether public and political sentiment about nuclear power really has improved. Given the long lead time for licensing and construction, and high capital costs, nuclear plants present unpredictable development risks.

“We’re believers in nuclear power, and we think the problems are solvable,” says Ray Spitzley, a managing director with Morgan Stanley. “But every year or two you add to a project fundamentally changes the risk/reward equation. In the seven or eight years it will take to license and build one of these things, a lot will happen that could change the viability of a project. Only the federal government can cover that risk.”

And the loan guarantees promised in EPACT have yet to materialize in a way that project sponsors can take to the bank. In May 2007 the DOE revised its draft guidelines for the Title XVII loan-guarantee program, but restrictive terms disappointed prospective borrowers. Specifically, the initial guidelines would limit the federal government’s exposure to 90 percent of the project debt and 80 percent of total project cost, leaving remaining costs to be financed at market rates. It also would require any syndicated or secondary-market debt to be subordinated to DOE’s lien – increasing the costs for commercial debt financing.

These terms are considered problematic for financing, and stakeholders are watching closely to see how the final program will be structured.

“It will have an enormous effect on the economics of new nuclear projects,” Christopher says. “With loan guarantees, the first units may be able to get 5 to 6 percent interest-rate financing, but without loan guarantees they’ll be paying 10 to 15 percent.