Carbon Caps May Give Nuclear Power a Lift
By REBECCA SMITH, Wall Street Journal, May 19, 2008; Page A4
As Congress debates whether to limit carbon-dioxide emissions, one of the most vocal supporters of such legislation -- the nuclear-power industry -- is poised to reap a multibillion-dollar windfall if restrictions take effect.
Some nuclear operators are already forecasting how much their profits could increase under various versions of greenhouse-gas legislation that are under consideration. Among the nuclear operators that stand to profit most are Exelon Corp., FPL Group Inc., Constellation Energy Group, Entergy Corp., FirstEnergy Corp., NRG Energy Inc. and Public Service Enterprise Group Inc.
Carbon limits could usher in a period of "supernormal profits" for nuclear operators in markets where rates are deregulated and have more ability to rise, says Hugh Wynne, utilities analyst for Sanford C. Bernstein & Co. But he warns that profits, if perceived as excessive, run the risk of inciting a public backlash, perhaps including calls for a windfall-profits tax.
Congress is considering several measures that would impose a so-called cap-and-trade system, which would limit the amount of carbon dioxide companies are allowed to emit. Lawmakers this summer are expected to take up a bill sponsored by Sens. Joseph Lieberman (I., Conn.) and John Warner (R., Va.) that initially gives the power industry about half the allowances it needs and requires generators to purchase the remainder on an open market or cut emissions.
Nuclear operators stand to gain from greenhouse-gas legislation in two ways. For starters, their plants don't spew carbon dioxide, so they would not have to buy emissions allowances, giving them a competitive advantage over competitors that burn fossil fuels.
In addition, a cap-and-trade system would probably push up wholesale electricity prices in deregulated markets, as coal- and natural-gas-burning utilities jack up prices to recover the additional cost of allowance purchases. In deregulated markets, generators with the highest costs set the market price, so lower-cost nuclear operators could enjoy the higher prices charged by coal- and gas-burning utilities without the higher costs. In states that didn't deregulate their electricity markets, nuclear plants mostly are part of regulated utilities and furnish electricity to utility customers at prices tied to their underlying costs, eliminating the opportunity for such profit.
Chicago-based Exelon, the nation's biggest nuclear-plant operator by output, could reap as much as $2 billion a year in added earnings before interest, taxes, depreciation and amortization, says Mr. Wynne. His calculation assumes that the cost of carbon emissions would be $25 per million metric tons of emissions, an allowance price typical in Europe.
Exelon has not released its own profit estimates. Executives agree that carbon legislation would burnish earnings, but they say the benefit would be less than $2 billion. They say higher profits are fair because they recognize a multibillion-dollar investment Exelon has made in nuclear power and could fund new plants.
"We have invested in a low-carbon fleet and our rates reflect that," said Elizabeth "Betsy" Moler, executive vice president at Exelon. "Our rates are higher than rates for coal utilities."
New Orleans-based Entergy -- which is seeking regulatory approvals to spin off six nuclear plants into the nation's first stand-alone nuclear-power company, dubbed Enexus Energy Corp. -- says an allowance price of about $30 could net the new company $600 million a year of added profit.
FPL Group, Juno Beach, Fla., calculates its potential boost in earnings, before certain expenses, at $130 million to $727 million, depending on allowance prices and how much electricity is sold. The money would come from FPL's unregulated generation unit, which has interests in three nuclear plants and renewable-energy installations, such as wind farms, not its regulated Florida utility.
For Baltimore-based Constellation, higher profits from its nuclear plants would be partly offset by higher costs for its coal-fired units. Even so, it estimates gross profit would rise by more than $225 million a year, if carbon emissions cost $25 a ton.
Penalizing carbon emissions would improve the economics of nuclear-power development. A study by the Congressional Budget Office, released this month, concluded that nuclear plants could make electricity more cheaply than any other form of power generation if carbon allowances cost $45 apiece.
Opinions differ about how quickly a cap-and-trade system could cause wholesale electricity prices to rise or what allowances would cost. The intent of the Lieberman-Warner bill is to cut greenhouse-gas emissions to 65% below 1990 levels by 2050.
Nuclear-plant owners aren't the only ones that stand to benefit. Natural-gas-fired generators would benefit if they sell electricity where coal-fired plants set prices. That is because gas plants release only about half as much carbon dioxide as coal plants and would need fewer allowances, so their profit margin would widen.
Utilities are lobbying Congress to influence the allowance-allocation method adopted.
Exelon favors an approach under which government officials would sell or allocate a greater portion of emissions permits to utilities with retail customers, rather than to power generators that sell wholesale power to utilities. That would help customers of Exelon's two retail utilities, Commonwealth Edison in Chicago and PECO in Philadelphia, since the utility could sell the allowances to generators and use the proceeds to offset higher energy costs for their customers. It would allow prices to rise on the wholesale market, financially rewarding Exelon's nuclear unit.
Big coal-burning utilities oppose full auctioning of allowances, saying it could drive up their costs and produce an enormous spike in electricity prices, harming many consumers.
Economists generally favor selling allowances rather than giving them away. That is because selling them sends "price signals" to consumers, encouraging conservation and construction of cleaner forms of power generation, helping society achieve permanent greenhouse-gas reductions.
"It's not a bad thing to give more money to nuclear operators if you're trying to give them incentive to invest in new nuclear generation," says Greg Gordon, a utilities analyst for Citigroup Investment Research in New York.
Under the Lieberman-Warner bill, the Environmental Protection Agency would create 125 billion allowances, enough for all 38 years of the program, commencing in 2012. About 5.2 billion allowances would be available the first year. The number would drop by 96 million each year until only 1.56 billion remained in 2050, the final year of the program. The program is intended to make emissions progressively costlier to drive the market to make permanent reductions.
Exelon Chairman John Rowe says the power sector may have to spend as much as $400 billion by 2030 replacing polluting plants with cleaner ones. The sum is nearly equal to the market capitalization of U.S. utilities.
Write to Rebecca Smith at rebecca.smith@wsj.com
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New Wave of Nuclear Plants Faces High Costs
By REBECCA SMITH, Wall Street Journal, May 12, 2008; Page B1
A new generation of nuclear power plants is on the drawing boards in the U.S., but the projected cost is causing some sticker shock: $5 billion to $12 billion a plant, double to quadruple earlier rough estimates.
Nuclear power is regaining favor as an alternative to other sources of power generation, such as coal-fired plants, which have fallen out of favor because they are major polluters. But the high cost could lead to sharply higher electricity bills for consumers and inevitably reignite debate about the nuclear industry's suitability to meet growing energy needs.
Nuclear plants haven't been built in meaningful numbers in the U.S. since the 1980s. Part of the cost escalation is bad luck. Plants are being proposed in a period of skyrocketing costs for commodities such as cement, steel and copper; amid a growing shortage of skilled labor; and against the backdrop of a shrunken supplier network for the industry.
The price escalation is sobering because the industry and regulators have worked hard to make development more efficient, in hopes of eliminating problems that in the past produced harrowing cost overruns. The Nuclear Regulatory Commission, for example, has created a streamlined licensing process to make timelier, more comprehensive decisions about proposals. Nuclear vendors have developed standardized designs for plants to reduce construction and operating costs. And utility executives, with years of operating experience behind them, are more astute buyers.
Now, 104 nuclear reactors are operating in the U.S. Most are highly profitable but that was not the case until fairly recently. For the 75 units built between 1966 and 1986, the average cost was $3 billion or triple early estimates, according to the Congressional Budget Office. Many plants operate profitably now because they were sold to current operators for less than their actual cost.
The latest projections follow months of tough negotiations between utility companies and key suppliers, and suggest efforts to control costs are proving elusive. Estimates released in recent weeks by experienced nuclear operators -- NRG Energy Inc., Progress Energy Inc., Exelon Corp., Southern Co. and FPL Group Inc. -- "have blown by our highest estimate" of costs computed just eight months ago, said Jim Hempstead, a senior credit officer at Moody's Investors Service credit-rating agency in New York.
Moody's worries that continued cost increases, even if partially offset by billions of dollars worth of federal subsidies, could weaken companies and expose consumers to high energy costs.
On May 7, Georgia Power Co., a unit of Atlanta-based Southern, said it expects to spend $6.4 billion for a 45.7% interest in two new reactors proposed for the Vogtle nuclear plant site near Augusta, Ga. Utility officials declined to disclose total costs. A typical Georgia Power household could expect to see its power bill go up by $144 annually to pay for the plants after 2018, the utility said.
Bill Edge, spokesman for the Georgia Public Service Commission, said Georgia "will look at what's best for ratepayers" and could pull support if costs balloon to frightening heights. The existing Vogtle plant, put into service in the late 1980s, cost more than 10 times its original estimate, roughly $4.5 billion for each of two reactors.
FPL Group, Juno Beach, Fla., estimates it will cost $6 billion to $9 billion to build each of two reactors at its Turkey Point nuclear site in southeast Florida. It has picked a reactor design by Westinghouse Electric Co., a unit of Toshiba Corp., after concluding it could cost as much as $12 billion to build plants with reactors designed by General Electric Co. The joint venture GE Hitachi Nuclear Energy said it hasn't seen FPL's calculations but is confident its units "are cost-competitive compared with other nuclear designs."
Exelon, the nation's biggest nuclear operator, is considering building two reactors on an undeveloped site in Texas, and said the cost could be $5 billion to $6.5 billion each. The plants would be operated as "merchant" plants and thus would not have utility customers on the hook to pay for them, as is the case in both Florida and Georgia. Instead, they would have to cover expenses through wholesale power sales.
Several things could derail new development plans. Excessive cost is one. A second is the development of rival technologies that could again make nuclear plants look like white elephants. A drop in prices for coal and natural gas, now very expensive, also could make nuclear plants less attractive. On the other hand, if Congress decides to tax greenhouse-gas emissions, that could make electricity from nuclear plants more attractive by raising costs for generators that burn fossil fuels. Nuclear plants wouldn't have to pay the charges because they aren't emitters.
Some states are clearing a path for nuclear-power development, even before costs are fully known. They are inspired by a growing fear of climate change. "The overwhelming feeling in Florida is that nuclear power is popular and that's why it's going to go ahead," said J.R. Kelly, head of the Office of Public Counsel in Tallahassee, which represents consumers. "Our main concern is the tremendous cost."
In Florida, state officials are allowing utilities to collect money from customers to cover development and construction costs. In the past, regulators typically required utilities to bear the costs until plants were finished.
Many utilities said they are watching with interest. Ralph Izzo, chief executive of Public Service Enterprise Group Inc. in New Jersey, said his company may not be big enough to build a nuclear plant, even though it is a nuclear operator. "We're concerned by the rise in construction costs," he said.
Write to Rebecca Smith at rebecca.smith@wsj.com
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• The News: Estimated costs to build the next generation of nuclear power plants have soared to $5 billion to $12 billion a plant.
• The Debate: Questions are emerging over the affordability of nuclear power, despite its popularity as an alternative to polluting coal-fired plants.
• What to Watch: If Congress taxes greenhouse-gas emissions, nuclear plants, which aren't emitters, will become more attractive. But if coal and natural-gas prices decline, nuclear-plant economics will get worse.
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