Ken Silverstein EnergyBiz Insider Editor-in-Chief

The result is expected high upfront costs to build nuclear plants along with added levels of financial, operational and regulatory risks. Credit ratings agencies are therefore "less supportive" of future development because of the effect it would have on a utility's business profile. In such countries as Korea and Japan, General Electric and others are building nuclear plants in about five years but in this country, no new plant construction has been started since 1979 when the Three Mile Island scare occurred.

"The need for new, advanced nuclear energy plants that are safe, clean, and dependable and can generate electric energy without emitting air pollutants is growing more evident every day," said Marilyn Kray, president of NuStart Energy Development, a consortium of the nation's largest nuclear power companies interested in building new plants. "Our country needs these advanced nuclear plants. We Americans want affordable energy and a clean environment without risking climate change."

NuStart recently selected Grand Gulf Nuclear Station and Bellefonte Nuclear Plant as the sites to apply for operating licenses for new nuclear plants. NuStart will provide the Nuclear Regulatory Commission with detailed engineering and environmental reports in late 2007 or early 2008 and the commission could issue a license by 2010. Currently, 103 nuclear units provide 20 percent of the country's electricity.

The federal government has said clearly it wants to kick start nuclear development. Through the Energy Policy Act of 2005 passed last August, utilities would get a 1.8 cent per kilowatt hour tax credit for 6,000 megawatts -- for eight years -- of new nuclear generation. It also extended the Price-Anderson Act that limits utilities' liability with any potential nuclear accident.

Besides NuStart, UniStar, a joint venture between Constellation Energy and France-based Areva, will file an application to build a plant in the United States this quarter. Entergy announced it will prepare its own application for construction for its River Bend Station in St. Francisville, La. while Dominion Resources, Progress Energy and the Tennessee Valley Authority also want to do the same.

But, in a report just issued, Standard & Poor's is somewhat sanguine. It says that new construction cost would be about $1,500 per kilowatt hour, which is twice that of a coal-fired generation plant. At the same time, plants could expect to see cost-overruns because the designs and technologies would be the most modern available.

Federal support "may not be enough to mitigate the risks associated with operating issues and high capital costs that could hinder credit quality," says S&P.

Persistent Fear

In an interview given to the Washington Post, Thomas Capps, CEO of Dominion, explained that the new energy law does not offset the risks tied to nuclear development. For example, a new 1,400 megawatt nuclear plant would cost about $2.6 billion and take more than six years to build. That's paid for by issuing stocks and bonds, although no money would be coming in to compensate the investors and lenders.

"Moody's would go bananas if we announced we were going to build a nuclear plant," says Capps, in the story.

Consider the Long Island Lighting Co.'s Shoreham nuclear power station, which started in 1965 and was estimated to cost $65-$75 million: After 20 years of legal battles and local opposition, the final tab increased to nearly $6 billion. State politicos and regulators, meanwhile, shut down the plant. Any facility constructed today would contend with many of the same issues -- all of which would make the capital markets leery, credit analysts say. Lenders would no doubt demand a premium for the risks.

And the safety issue remains atop the minds of consumers. The Union of Concerned Scientists joined a complaint alleging that Progress Energy's safeguards at its Shearon Harris plant were lax. Progress said there is no evidence of this. FirstEnergy Corp.'s Davis Besse plant, meantime, had to pay $400 million for upgrades when it discovered a crack in the reactor vessel head. And critics complain that the difficulty of disposing radioactive waste makes nuclear an unappealing option.

The Nuclear Energy Institute in Washington says that industry's safety record is impeccable. It does admit that overcoming the financial impediments will be a challenging task. But, once a plant is up and running, it says that the operations and maintenance costs are low, at about 1.7 cents a kilowatt hour. That compares to 3-5 cents for coal and natural gas.

Meantime, a University of Chicago study says that the principal economic barrier to nuclear power will be the ability to address the costs associated with building and operating the first few nuclear plants. Those early plant costs, which can include "first-of-a- kind" engineering costs as well as the construction and financing expenses, disappear by the time a third or fourth plant comes online.

Other Trends

S&P also notes a trend occurring in the nuclear sector: consolidation. In other words, utilities that own single nuclear units are selling them to those companies that have large nuclear fleets. Over the past six years, it says that 21 units have been purchased by six large utilities that include Dominion, Entergy, Exelon Corp. and FPL Corp. And more sales are expected.

John Reed, CEO of Concentric Energy Advisors outside Boston, says that the dynamic is a good thing. His company is working on behalf of Alliant Energy that is selling its Duane Arnold Energy Center to FPL in a deal expected to close soon. It's beneficial to both parties, he says, noting that FPL is committed to getting the plant re-licensed and will be able to operate it more efficiently.

"The risk-reward is not there for utilities with a single plant," says Reed. "It's not core to their business. Consolidating nuclear fleets makes economic sense from a ratepayer's perspective and an investor's perspective."

While nuclear energy may be poised for a comeback, utilities are clearly looking before they leap. Companies are constantly honing their risk management skills while nuclear advocates continue to emphasize nuclear energy's benefits. The U.S. federal government has said the nation needs the fuel diversity and is trying to offset the potential risks. As of now, the financial and regulatory hurdles remain high.

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