USE OF U.S. ECONOMY UPHELD FOR EQUITY CALCULATIONS
The Federal Energy Regulatory Commission, in seven rate cases involving interstate natural gas pipelines, has upheld a new policy on...
An analysis of the business opportunities behind coal and nuclear plant expansion.
Electric power industry trade publications and the popular media have noted a growing interest in the rebirth of both nuclear power and coal-fired generation. These technologies would be a supplement to, or an alternative to, the natural gas fired generation that appears to be the predominant fuel and technology for new power generation facilities in the coming decade.
Nuclear power enthusiasts express the notion that this country's need for several hundred thousand megawatts of new generating capacity over the next 10 to 20 years, the interests of fuel diversity, clean air issues, and energy security should be enough to drive this rebirth. Coal enthusiasts stress that new coal-fired generators can be much cleaner than existing units, and clean enough to meet anticipated stringent environmental requirements. We have not seen a strong advocacy on the basis of competitive financial opportunity, although the growing number of new coal-fired project announcements suggests that some developers see such opportunity.
With regard to nuclear, there appears to be a divergence of views, with advocates sensing that energy policy issues will drive rebirth, and the financial community sensing that a realistic promise of sound economics and profitability in the competitive generation environment is an essential prerequisite to any rebirth.
According to Douglas Kimmelman, a chief energy analyst with Goldman Sachs, "It really comes down to the fully loaded capital cost. Unfortunately, investors won't make decisions based on national energy policy." 1 We agree with the investment community, which lead us to undertake this brief study of the prospective economic and financial drivers of new nuclear and coal fired generation.
Regional Diversity: Are Nuclear and Coal the Answer Everywhere?
Approximately 45,000 megawatts of new coal-fired generation projects have been "announced"; some appear to be under serious development. 2 About 12,000 megawatts are proposed for the Western Systems Coordinating Council (WSCC). In the East, the NERC regions SPP, ECAR, MAIN, and SERC appear to be most active. While several leading nuclear plant operators have expressed interest in developing new nuclear plants, we know of no firm development plans at this time. Natural gas fired simple cycle combustion turbine and combined cycle units very heavily dominate the new generation outlook in all markets.
Our study focuses on several key questions (see sidebar, ). It considers new coal plants brought into service in 2006, and new nuclear plants brought into service in either 2006 or 2011, in some or all of nine selected market areas within the Eastern Interconnection.
The key figure of merit is the all-inclusive nuclear or coal plant initial capital cost, expressed in year 2001 dollars per kilowatt, that yields an internal rate of return (IRR) value that is comparable to the value projected for contemporary (in time and location) natural gas-fired combined cycle units. The latter are selected as the reference because of their energy producer role, even though in some markets, notably ECAR, simple cycle combustion turbine peaking units may be financially preferable to combined cycle units in certain time frames. These "parity capital