Nuclear Power: The Investment Outlook
Publication Date: June 2007
Author(s): Nicole Gelinas
Keywords: investing; energy; nuclear; investments
Coverage: United States
As the partial meltdown at the Three Mile Island nuclear power station in 1979 fades from memory and as demand for electricity grows, executives at some electricity generation companies hope to order and build new nuclear plants in the United States for the first time in over three decades. But nuclear power executives must overcome a significant roadblock before they can start to build: for bank lenders, bond investors, and other sources of project capital, the exceptional risks of investing in new nuclear power projects continue to outweigh the potential rewards, according to many of the nearly two dozen participants in an evening discussion preceding the Manhattan Institute's March 28, 2007, conference, "Is the Atom the Answer? Meeting America's Energy Needs."
The nuclear bulls hope to benefit from fundamental changes in the industry that have taken place since companies built their first generation of domestic nuclear plants. First, and most recently, the federal government offers an improved regulatory climate as well as generous new incentives to encourage new nuclear construction.
Second, deregulation of the power markets means that the mechanisms for recouping risky investments in new sources of generation have changed. While deregulation still sometimes works better on paper than in real life, power executives in most states, particularly in the Southeast, generally can expect to pass through new construction costs to their ratepayers.
Third, fleet companies now specialize in operating portfolios of nuclear power plants. Companies that carve a niche out of nuclear operations, rather than operating just one or two nuclear plants as in a past era, can achieve economies of scale, unlocking more value from their assets than single-nuke operators.
Finally, the possibility, even the high probability, of a national constraint on carbon emissions, whether a carbon tax or a cap on such emissions, arriving in the U.S. in the next couple of years could potentially change both the politics and economics of new nukes.
But, as the discussion participants concluded, the obvious hurdle looms: key sources of financing are reluctant to step forward in today's political, regulatory, economic, and investment climate to take on the very real risks of investing money in these capital-intense projects, whose costs could easily exceed $1 billion per reactor when the time horizons for financing payback still outlast most political and economic cycles.