Wednesday, June 28, 2006

S&P: Nuclear Power is "Heating Up"

S&P Ratings News just published a research note entitled "Nuclear Power Is Heating Up Again:

Interest in the energy source is on the rise across the country, and financial risks are lower. S&P sees no slowing of the trend...

(snip)

Standard & Poor's recognizes that the federal government is initiating numerous structural changes designed to prevent a repeat of the extremely negative and financially ruinous experience of the last nuclear construction cycle.

These include things such as standardizing reactor designs, providing tax breaks and loan guarantees, and creating a combined construction and operating license. This is occurring while the industry itself has demonstrated an ability to operate safely and efficiently in recent years. So, while it may be slow and steady, the return of the nuclear power option has considerable momentum that is not likely to wane.
For more on this area, visit NEI's Financial Center -- in particular, our latest Wall Street Briefing.

Technorati tags: , , , , ,

14 comments:

David Bradish said...

S&P is slowly coming around. But at least they're recognizing.

Everyone else on Wall Street are way ahead of them.

gunter said...

Hi,

There are a few of explicit points in the S&P June 26, 2006 report "U.S.is Looking at a Paced Reemergenc of the Nuclear Power Option" not mentioned in NEI's thumbnail sketch of this recent financial analysis.

1) S&P also recognizes "the single greatest hurdle to licensing the next nuclear facility, and funding, is public acceptance of the technology." The issue of operational safety continues to keep the industry on thin ice given that an increasingly competitive electricity market has forced operators to continually gamble safety margins against production margins.

This is the root cause of incidents like the Davis-Besse hole-in-the-head.

And while we would not expect to see the replication of the Davis-Besse vessel head degradation (2002), there are plenty of other safety-related systems, structures and components susceptible to same bottomline vs. safety margin mistreatment by industry and NRC.

2) The S&P report also recognizes that "the threat of terrorism injected a whole new risk element into the equation." Not a minor point to overlook, considering the 911 Commission reports that reactors were identified as critical infrastructure on al Qaeda's target list and GAO has identified that site security is receiving the same bottomline mistreatment by NEI/NRC as was the case with the Davis-Besse Syndrome of "too costly to care about right now."

3) The S&P also points out that "Financial Considerations Remain Daunting" and that nothing has changed "From an investor's perspective, the legacy of the unpredictable and prolonged construction period of the last nuclear build cycle and the mixed operating performance of the industry until about 10 years ago remains graphically inked in a collective conscience."

Sounds indelible to me.

While the June S&P report recognizes that industry lobbying efforts and the Bush Adminstration persist in trying to drag out a taxpayer safety net under the first few company's considering the jump to new construction, nothing has changed from S&P earlier analysis this year where even more taxpayer subsidies will not be enough to sustain a revival, particularly on the scale contemplated and portrayed by industry.

"Credit Aspects of North American and European Nuclear Power," S&P, Jan. 9, 2006 opens "In general, nuclear plant ownership tends to be less supportive of credit quality becuase it introduces added levels of operating, regulatory and environmental risk to a business profile."

Nothing in the June report changes or recants this earlier and more comprehensive financial analysis, only adding the now recognized security risks to an already shaky business profile.

David Bradish said...

Gunter,

In your first two points you didn't include what the entire paragraph said from the report. Here's what it says for the rest of the readers:

"Perhaps the single greatest hurdle to licensing the next nuclear facility, and funding it, is public acceptance of the technology. There are two principal considerations in this regard: operational safety and waste disposal. On the operational front, nuclear plants have demonstrated a strong history since the mid-1990s of safety and operational performance. The performance of safety systems has achieved very high standards, and the absence of headline news and the reduction of forced outages have added to the relative comfort that the public has generally achieved with nuclear technology, until the threat of terrorism
injected a whole new risk element into the equation. However, this last consideration does not appear to be deterring companies in the Southeast and Midwest."

It appears the paragraph contradicts what you are saying about safety.

As well, companies in the Southeast and Midwest are not phased about the threat of terrorism. Why aren't they phased? Maybe it's because the threat of terrorism at a nuke plant isn't as hyped up as you and other anti groups make it out to be.

Here's what they said about waste: "Standard & Poor's Rating Services believes the waste issue will remain a very challenging political problem, but will not be sufficiently disruptive to prevent the licensing of new plants."

With regards to financials, all S&P can do is base their position on history which is fair enough. But they now recognize "that the federal government is initiating numerous structural changes
designed to prevent a repeat of the extremely negative and financially ruinous experience of the last nuclear construction cycle, such as standardizing reactor designs, providing tax breaks and loan guarantees, and creating a combined construction and operating license, while the industry itself has demonstrated an ability to operate safely and efficiently in recent years."

Here's the last line of the report that's the kicker: "So, while slow and steady, the return of the nuclear option has considerable momentum that is not likely to
wane."

Can't say it much better that that.

Gunter said...

Building momentum for a charge back into a familiar financial swamp doesn't prove much more than industry's willingnes is to sink more taxpayer money into bad investments.

A lot of eyes (including Wall St.) are on the two GE ABWR units under perpetual construction in Lungmen, Taiwan as the current bellwether for new advance reactor construction costs, and in the words of Talking Heads,"same as it ever was..."

Construction costs are out of control, money is short and completion times keep slipping away.

Issued a construction license in 1996, Lungmen unit 1 was supposed to be commercially operational in 2004.

Oops... make that possibly 2010 or longer and still a few billion $'s short.

They just might beat Watts Bar's record of 23 years under construction.

I wont dispute that "Nuclear Power is Heating Up" but the evidence of risk clearly remains of it financial backers going down in flames.

David Bradish said...

gunter,

Let me again repeat the quote from S&P about financials:

"the federal government is initiating numerous structural changes designed to prevent a repeat of the extremely negative and financially ruinous experience of the last nuclear construction cycle, such as standardizing reactor designs, providing tax breaks and loan guarantees, and creating a combined construction and operating license, while the industry itself has demonstrated an ability to operate safely and efficiently in recent years."

We've been working on the regulatory framework since 1992. It appears S&P is just finally catching on. You should too.

Even though it took Watts Bar more than two decades to become operational they by far have the best lifetime capacity factor around 90%. TVA will definitely be making its money back with that machine.

gunter said...

While we are still on the subject of S&P, let's remember that it was also the Jan 2006 report that said that the taxpayer subsidies are not likely enough to sustain a revival, particularly for improving risky credit ratings.

TVA ran up more than a $28 billion debt over it nuclear projects, Watts Bar being just one of its last white elephants. The US taxpayer absorbed those costs---not an economically viable and marketable industry.

It was TVA debacle that put some of the last nails in the financial confidence coffin for nuclear power.

David Bradish said...

Let me show the quote again for the third time from S&P:

"At the same time, we recognize that the federal government is initiating numerous structural changes designed to prevent a repeat of the extremely negative and financially ruinous experience of the last nuclear construction cycle, such as standardizing reactor designs, providing tax breaks and loan guarantees, and creating a combined construction and operating license, while the industry itself has demonstrated an ability to operate safely and efficiently in recent years.

So, while slow and steady, the return of the nuclear option has considerable momentum that is not likely to wane."

That's all that needs to be said.

gunter said...

Well of course, more can be said and you can cut and paste the quote for a fourth time.

Poitical leadership can also change and so with it any commitments to appropriating taxpayer money to bad investments.

S&P and others clearly understand adding that kind of financial risk to any business profile as well.

We'll see.

KenG said...

The choice of Lungmen (Taiwan) as an example is interesting and, perhaps, even more informative than Gunter would have thought. Lungmen is delayed and over cost directly as a result of political interference and inability to make decisions, rather than any direct technical cause.
There are several Japanese plants that are essentially identical to Lungmen and those plants were completed on schedule and budget and are operating very well in Japan. However, in Japan, when a decision is made, work proceeds without endless interference.

So the question this raises is really which path are we going to take in the US? If we are going to disrupt billion dollar projects for petty political squabbles we shouldn't build new nuclear plants - or wind farms or ethanol plants or advanced hybrid cars or tidal power installations, etc.

David Bradish said...

We'll see is exactly all we can say.

The regulatory structure has changed and are not the same as they were in the past. S&P believed the incentives last year weren't enough yet we have more than 20 new reactors in the works. Clearly the utilities don't seem to share S&P's opinion.

At the same time take note of who's building new plants. Companies are teaming up and consortiums are forming who will share the risks together and raise plenty of capital.

It's a smart strategy to prove the risk of building new plants will be low and predictable.

gunter said...

According to a Congressional Research Service report, GE originally projected construction costs for the ABWRs in Japan at $1500/KWh and at least the first two units were completed at around $3000/KWh, so not on budget as the previous writer states.

Letters of intent are not the equivalent of "20 reactors in the works." Nobody has applied or submitted one of these Combined Operation Licenses and that regulatory change has been around for more than decade.

Talk of "renaissance" is still cheap, while S&P downgrading credit ratings with an announcement of a COL is the risk.

David Bradish said...

First of all the units of capital costs are $/kW not $/kWh. $/kWh are for operating costs and its actually cents/kWh or $/MWh.

Right now 12 companies are writing up their applications to submit to the NRC in the next couple of years. So it is fair to say reactors are in the works.

Gunter said...

Right.

Point being construction cost for the ABWR in Japan was twice projected.

Moreover, the last round of US construction demonstrated that you can not necessarily rely on economy of scale or even from prior construction experience to keep costs down, Watts Bar, the last reactor to receive a U.S. commerical license, being an example. No political interference or public intervention there.

KenG said...

gunter said "GE originally projected construction costs for the ABWRs in Japan at $1500/KWh and at least the first two units were completed at around $3000/KWh".

GE originally projected $1500/kw for ABWRs built in the US (cost is now probably closer to $2000/kw because of recent escalation in general construction costs). Japanese construction costs are significantly higher. Numerous sources can easily be found with an Internet source quoting GE and the Japanese utilities stating that the first two ABWRs were built for $2000/kw. I have never seen a higher number. The owners of the plants claim they were built on budget.