Few Bright Spots in Calvert Cliffs Future
EDF faces serious barriers to taking over the project
Mark Friday October 8th as a 'black Friday" because it may be one of the most significant reversals in the short history of the U.S. nuclear renaissance. Constellation Energy (NYSE:CEG) startled the federal government and Electricite De France (EDF) by sending a fiery letter to the Department of Energy announcing it was walking away from the Calvert Cliffs III reactor. The utility said the reason is the government wanted a 12% "risk premium" payment of $880 million in return for a federal loan guarantee on the $7.7 billion project.
In the days that followed it became clear that Constellation really meant it. The firm offered EDF the entire project for $1 and reimbursement of $117 million in sunk costs since the two firms created their partnership in 2008. EDF will likely take it.
For its part, after it got over its shock at Constellation's move, EDF said it plans to buy out the utility's stake in the project. It will then have to turn around and quickly sell that stake to another U.S. partner due to the government's rules on foreign ownership of nuclear power plants. Good luck finding one. See more on the daunting propects below.
Constellation's actions seem more focused on the short-term to build shareholder value in the current fiscal year. The utility is still trying to get EDF to spend $2 billion to buy its coal-fired power plants, which is a provision embedded in the original deal between the two firms.
Assuming it forces EDF to pay $2 billion for the coal plants, which are only worth about $500 million, Constellation will book a $1.4 billion before tax capital gain. It's CEO will likely ride into the sunset with a golden parachute.
Maryland will be out 1,600 MW of new carbon emission free source of baseload electricity and the 4,000 jobs that would be working on site while the reactor was being built. Then there is the small matter of 60 years of 800+ high paying jobs and the economic benefits of reliable electricity.
What happed to Obama’s interest in nuclear energy?
The Obama administration, which set this chain of events in motion with its green eyeshade view of risk premiums, has been pretty quiet aside from some muted expression of surprise. Last February President Obama announced an $8.3 billion loan guarantee for Southern's Vogtle site to great fanfare. What happened to the White House commitment to nuclear energy and Constellation's desire to build a new reactor?
First, it's likely the president's enthusiasm for nuclear energy, which goes against the interests of his green Democratic party political base, was a short-term fling designed to entice republican votes for the now failed climate bill. Since then the White House has been distracted by the global economic crisis, massive U.S. unemployment, and its huge investment of political capital in health care reform and financial reform.
Second, Southern operates in a regulated market whereas Constellation is a merchant. This means Southern can recover the costs of construction for its twin Westinghouse AP1000 1,100 MW reactors as they are being built, but Constellation can't get a cent until its Areva 1,600 MW EPR enters revenue service. One would think with the backing of EDF'd deep pockets this wouldn't be an issue, but stockholder demands for quick returns may have trumped a longer term vision of success.
Third, demand for electricity dropped like a rock in the recession and the price of natural gas is at record lows because new supplies will come on the market from shale gas deposits. With no carbon tax, or carbon trading program, coming as a result of the failed climate bill, there is no economic incentive for utilities to go nuclear. All this may change by 2020, which is when the Calvert Cliffs reactor would have entered revenue service. It's getting more apparent publically-traded U.S. corporations can't think very far in the future.
Renaissance will be late in the U.S.
Where does all this leave the U.S. nuclear renaissance? Some experts think that instead of four-to-eight new reactors being built by 2020, that this number will be reduced to four-to-six. It's like the entire industry slipped on a bannna peel.
Scana is building two new AP1000s in South Carolina and says that while it has applied for loan guarantees, it doesn't need them. NRG is building two Toshiba ABWR 1,350 MW reactors in Texas, and is busily lining up Japanese investors for the project.
After that the prospects for new reactors become dimmer. Luminant wants to build two giant Mitsubishi 1,700 MW reactors in Texas, but was a fifth runner up for loan guarantees and has to contend with massive debt on the parent firm's balance sheet. Duke and Progress have put their plans for new reactors in North Carolina on ice and are looking to buy slices of Scana's project.
Plans by Florida Power & Light for twin new AP1000s near Miami are so far in the future that these near term distractions, like a global financial meltdown, will be history by the time they come off the drawing boards. The same can be said for Detroit Edison's Fermi III reactor project that will likely wait perhaps as long as a decade for the revival of Michigan's auto industry.
In the meantime, the rest of the world is moving quickly to embrace nuclear energy. China is leading the globe followed closely by South Korea, Japan, India, and even the U.K. Just this week the U.K. announced plans for eight new reactor sites with the first new power stations entering revenue service by 2018. Unless the U.S. government makes significant changes in its policies, it could be another two decades before the U.S. begins to catch up.
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