The Nuclear Option

Two new reactors are proposed, as subsidies lure builders

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NRG Energy wants to build more reactors at this Texas plant.

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If the first nuclear power plant proposal in 29 years doesn't flower into an industry renaissance, it probably won't be because of the environmentalists. It'll be because of the costs.

At least that's what industry observers were talking about last week after NRG Energy said it would ask the federal Nuclear Regulatory Commission for permission to construct two new reactors at its existing South Texas station 85 miles south of Houston. The estimated price tag: $5.5 billion to $6 billion. The NRC says at least 17 other companies have 29 more plant proposals in the works.

Why the sudden rush to build? Mainly because the 2005 energy bill passed by Congress included an estimated $15 billion in subsidies to jump-start an industry that has been dormant—at least in new construction—since the 1979 partial meltdown of Pennsylvania's Three Mile Island reactor. The catch: Builders have to act early, because only the first few reactors will enjoy full benefits under the short-term scheme enacted.

With energy prices skyrocketing and concerns mounting about electricity supplies, Congress was determined to promote nuclear power. Another key factor: Some notable environmentalists, like Greenpeace cofounder Patrick Moore, now endorse nuclear as the only large-scale electricity source with no emissions of global-warming gases. To be sure, most green groups remain wary—particularly because there's no long-term storage site for the radioactive waste.

But concerns over spent fuel may be dwarfed by the worries over upfront costs. Nuclear capital costs are an estimated 65 percent higher than the price per kilowatt of coal and nearly six times as high as natural gas.

Traditional utilities must gain approval from state regulators before passing such costs on to ratepayers. But NRG is a merchant energy company—not a utility. It doesn't have captive ratepayers in deregulated Texas. Frank Bowman, president of the Nuclear Energy Institute, said NRG's proposal "represents a new market approach to building a nuclear power station."

If so, it's a market that enjoys a heavy helping hand from government. In addition to long-standing liability protection in case of a nuclear accident, Congress has added a production tax credit (estimated value: at least $6 billion) and promised reimbursement of all costs, up to $500 million apiece for the first two new reactors, for any government-caused licensing delays. But perhaps most important for Wall Street are the billions of dollars in loan guarantees.

It became clear just how much is riding on this subsidy when the Bush administration proposed to limit the guarantees to 90 percent of a project's debt, expressing concerns that lenders take at least some risk as an incentive to perform due diligence. But six big banks told the Department of Energy that new nuke projects would not be able to get financing without 100 percent coverage of debt—a position to which it now appears the administration has consented.

New bill. Meanwhile, a longtime industry booster, New Mexico Republican Sen. Pete Domenici, sought to assuage industry concerns by having Congress beef up the loan program. If Domenici's language holds up in the new energy bill now being hammered out with the House, nuclear projects would probably consume most of more than $50 billion in loan guarantees for new technologies—a huge enhancement to the original plan.

Jim Harding, a utility consultant, thinks companies want to get into the pipeline while they wait for the loan-guarantee issues to be resolved, because the obstacles ahead are great. He points out, for instance, that there's only one steel plant in the world, in Japan, large enough to turn out a nuclear pressure vessel. About 25 reactors are under construction outside the United States, and China hopes to build 30 over the next 15 years. Builders have to get in the queue. Uranium fuel costs also have risen substantially. It will be hard to find skilled labor if several plants get underway at one time in a single region of the country—the Southeast—as seems likely. "So I think we will definitely see orders and attempts to move forward," Harding says. "But the renaissance is overblown."