NuclearÂ’s ambitions may go up in smoke

- North AmericaÂ’s much-touted nuclear revival is in jeopardy, but it is not environmental and safety concerns that are undermining it. The industry is finding it increasingly difficult to make the economic case in both Canada and the United States.

The enormous capital cost of building reactors is just one factor holding back the long-promised nuclear renaissance. Just as critical is the risk that already high costs will balloon as companies build new-generation plants that must be able to withstand the impact of a terrorist crashing an airliner into one.

In announcing their proposed merger, two North Carolina-based utilities, Duke Energy and Progress Energy say the combined company would possess the added heft needed to finance three planned nuclear projects.

But financial strength alone is not enough. The companies are also looking for political and regulatory support to shift financial obligations onto customers and taxpayers to minimize risk in what Moody’s Investor Service Inc. has dubbed a “bet-the-farm” type of project.

That effort to offload financial risk to partners, customers and governments is the hallmark of the 21st-century nuclear industry.

It has been a key factor in Ottawa’s decision to sell Atomic Energy of Canada Ltd., and Ontario’s refusal to purchase reactors from the Crown corporation – neither the federal nor provincial government wants to be on the hook if AECL can’t deliver a new reactor on budget. Private-sector bidders for AECL, including Montreal-based SNC-Lavalin are insisting on continued government backing for the company’s new-generation reactor program in order to avoid undue risk.

The nuclear revival is already being challenged by competition from natural gas, as development of vast reserves of shale gas in the United States and Canada promise to keep fuel costs much lower than had been expected just a few years ago.

To a maintain any hope of a renaissance, the nuclear industry will have to find ways to spread the financial risks – without unduly burdening taxpayers and customers – and show far more discipline in controlling costs.

Executives at Duke and Progress say the combined company would face lower borrowing costs on its nuclear projects, and be better able to take on the associated financial risk. But other roadblocks loom.

“I’m skeptical the merger will make much difference,” said John Parsons, director of the energy and environment program at the MIT Sloan School of Management.

He said nuclear is increasingly seen as uncompetitive with natural-gas-fired plants as gas prices fall and global construction costs soar. In 2009, MIT doubled its forecasted construction costs of new nuclear plants, while the U.S. Energy Information Administration increased its 2009 estimate by 37 per cent just this past December.

At the same time, companies face difficulties financing their plants owing to the long lead times needed for permits and construction before they can begin to recoup capital expenditures. Then thereÂ’s the potential for cost overruns.

The industry insists that, over the long-term, nuclear remains competitive. But those calculations include the rising cost of carbon emissions from coal and natural gas plants, and assume that nuclear plants will be built on time and on budget.

“All [cost] estimates have a huge amount of uncertainty,” Mr. Parsons said. “There is a big unknown in how reliable the contractors are going to be in coming through with their estimated costs. And similarly, how good they’ll be at constructing them on time.”

The nuclear industry is introducing a new generation of reactors that is meant to be more cost efficient and safer than previous models, with reinforced walls and automated shutdown procedures to deter terrorist attacks.

But none of the major reactor vendors has received certification for their reactor designs from the U.S. Nuclear Regulatory Commission. The NRC is reviewing new reactors being developed by Toshiba Corp.Â’s Westinghouse Electric Co. GE Hitachi Corp., and FranceÂ’s Areva Group.

The industry is pursuing a variety of strategies to overcome its financial challenges, even as it projects the need for more than 46 new nuclear plants by 2030 to meet U.S. power demand and WashingtonÂ’s target for reducing greenhouse gases.

Given the unwillingness of Wall Street to finance reactor construction, the U.S. government is offering an $18.5-billion US loan guarantee program for utilities who are first out the gate in building new reactors. U.S. President Barack Obama has called for an expansion of this support program.

Southern Nuclear Operating Co. Inc. has received promise of an $8-billion US loan guarantee to build two Westinghouse AP1000 reactors at its Vogtle plant in Georgia. Two other companies, Scana and NRG Energy have applications pending for projects in South Carolina and South Texas, respectively.

But Duke and Progress are less worried about loan guarantees and more concerned about the ability to begin recouping costs on the projects long before any electricity is being generated, company spokesman David Scanzoni said.

Florida, George and South Carolina allow utilities to begin charging customers for development costs on nuclear projects, even before companies make a final commitment to build. North Carolina – whose residents would consume power from two of the three plants the companies are proposing – does not allow that early cost recovery.

Without such a policy, the utilities are unlikely to be able to proceed with the plants, Mr. Scanzoni said.

But critics argue the regulators are, in effect, transferring financial risks from the investor-owned companies to their customers by allowing early cost recovery with guaranteed rates of return.

“It is one of a slew of things that the nuclear industry has structured in the United States to shift risk off of their companies and their shareholders and onto the backs and the pocketbooks of ratepayers and taxpayers in the United States,” said Stephen Smith, executive director of the Southern Alliance for Clean Energy.

“They want to socialize the risk and maximize the profits of these companies.”