Nuclear Power: Maximizing Profits and Socializing Risk

The United State’s much-touted nuclear renaissance is in jeopardy, but it is not primarily from environmental and safety concerns. The industry is finding it increasingly difficult to make the economic case for building new nuclear plants.

The enormous capital cost of building reactors is just one factor holding back the long-promised nuclear revival. Just as critical is the risk that the 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.  Companies are facing difficulties financing their plants due to the long lead times needed for permits and construction before they can begin to recoup capital expenditures. Then there’s the potential for cost overruns, so companies are 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.

The nuclear revival is already being challenged by competition from natural gas, which is keeping fuel costs much lower than had been expected just a few years ago, while at the same time, 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 percent just this past December.

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, not traits for which this industry is known.  Then there is the cost on the other end of the nuclear life cycle of decommissioning old plants as they age out of usefulness.  Those actual costs are, as yet, unknown and there is no way to predict whether the funds being set aside for decommissioning will come close to covering the cost of decommissioning a plant 30 to 40 years after it comes online.

Given the unwillingness of Wall Street to finance reactor construction, the Federal government is offering an $18.5-billion (U.S.) loan guarantee program for utilities who are first out of the gate in building new reactors. But some companies 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.

Some states, for instance – 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.  In effect, transferring financial risks from the investor-owned companies to their customers.  But in states where early cost recovery is not allowed, the utilities claim they are unlikely to be able to proceed with the plants.

These are just a few of the things that the U.S. nuclear industry has structured to shift risk off of companies and their shareholders and onto the backs and the pocketbooks of ratepayers and taxpayers, socializing the risk and maximizing the profits of these companies.  In an era where poor management of risk led to a massive global financial downturn, it seems unconscionable that energy companies and the Federal government should be promoting an energy source that is clearly a huge fiscal risk.