Future of Nuclear Power in the U.S.

Will new loans spark a reaction?

In the next few weeks, the Department of Energy is expected to announce that it will begin distributing $18.5 billion in nuclear loan guarantees authorized by Congress in 2005. In its 2011 budget unveiled on February 1, the Obama administration proposed tripling the loan guarantees to $54 billion. This follows a resurgence of interest on both sides of the political aisle to reduce carbon emissions through increased use of nuclear power. New reactor designs promise to make nuclear power cheaper, safer, and more efficient. But the United States has not constructed a new nuclear power plant since 1979. Recent efforts have been plagued by delays and cost overruns, as builders attempt to satisfy stringent regulatory standards put into place following the Three Mile Island disaster. Furthermore, environmental groups concerned with the inherent dangers of nuclear power have hampered the sector’s growth despite its low carbon profile.

To examine the potential impact of these loans, Ergo asked leading experts to explain the challenges companies will face in revitalizing the U.S. nuclear sector.

Insights from the Ergo Network

• Expert 1: Operations director of a nuclear reactor manufacturing company

  Challenge: Financial risk to lenders
  
  

  "Because of that early experience where most of the companies took a bad hit financially, the financial industry is very conservative about nuclear power. If things go well and the government doesn’t change the rules on us and succumb to interveners, the financial risks are quite tolerable. If on the other hand the whole plant is delayed for a decade, the risks become intolerable. The biggest constraint right now to nuclear power expansion is financial risk concerns on the part of lenders. Everybody wants to be the first person to do the second plant; nobody wants to be the guy that does the first one."

• Expert 2: Director of the nuclear waste program at a national power regulatory association

  Challenge: Negotiating a new contract for waste disposal
  
  

  "There is a contract between the [Department of Energy] and the existing reactor owners for the disposal of the spent fuel. That contract is in breach and is going to result in the government paying the utility owners. For this next round of reactors that’s being considered, they need to have a similar contract with the federal government to have them dispose of the waste in the future. The government has revised the contract for the new reactor owners; when you start producing energy, now you have to start disposing of the waste."

• Expert 3: Senior official at a nuclear energy policy organization

  Challenge: Shortages of key components due to high demand
  
  

  "Component shortages should not be an issue. Many of the companies that are applying for nuclear loan applications already have orders in for some of these long lead components. You also have to recognize that the first wave of new construction that we envision is going to be on the order of 4-6 plants in the 2016-2018 timeframe. Even though the potential growth of the nuclear sector over the next 30 years is considerably larger than that, the fact is that we’re going to move into that at a fairly steady and measured pace. It’s not as though were talking about building 100 reactors over the next 15 years. It should not overburden these components companies and should proceed at a pace that if companies need to increase their stock, they will be able to do so."

• Expert 4: Executive director of an electrical power research institute

  Challenge: Avoiding rework late into the licensing and construction process
  
  

  "We are all learning a lot from the mistakes made at the [Olkuluoto nuclear power plant in Finland]. A lot of that has to with the licensing process over there. They still have the kind of process we had in the ‘70s with a design as you go, license as you go process. Here in the United States, the regulations that went into effect in the late-80s and early-90s basically require us to have a complete design with all the engineering done before you can even begin construction. The NRC has been so demanding in their reviews that the chances of any reengineering or rework or rebuild here are vastly lower than construction projects overseas."

Looking Ahead

A low carbon emitter, nuclear power is expected to benefit from any climate change legislation that comes out of the Senate – and it’s one the least expensive sources of energy to boot. Still, the U.S. nuclear sector will be unable to reach its full potential until the industry can address the abovementioned challenges to the satisfaction of government regulators, environmental groups, lenders, and investors.

Ergo’s experts believe that the current $18.5 billion in nuclear loan guarantees will be sufficient to fund the construction of at least two new nuclear power plants. If Congress approves the 2011 budget, the additional guarantees could pay for at least four more plants. The technical and regulatory hurdles have largely been overcome, and once these loans have been secured, construction should be able to proceed without issue.

The Department of Energy has selected four companies as finalists for the loan guarantees; NRG Energy, Scana Corp., Unistar Nuclear, and Southern Company. It’s been three decades since the last plant was built in this country – no one knows quite what to expect, in terms of upfront costs, regulatory challenges, and opposition, when the ultimate beneficiaries begin new construction. If the first few plants are constructed mostly without issue, the lending environment could greatly improve, leading to a surge in interest nuclear energy and significant advantages for those companies with experience building these plants. If, on the other hand, construction is encumbered by cost overruns, delays, or opposition from environmental activists and interest groups, the nuclear revival could melt down before it begins.

Ergo has conducted numerous studies on the U.S. energy sector. With access to leading experts on energy legislation, technology, and long-term capacity trends, Ergo has helped clients achieve successful returns on their investments.