SAN FRANCISCO (MarketWatch) -- Nuclear power, after a 30-year hiatus, is on the march.
Facing steadily growing energy demand, pressure to cut airborne emissions, and armed with a raft of federal incentives, U.S. power generators are reassembling the pieces needed to build commercial reactors.
There is widespread belief in the industry and among analysts that the first of these new nuclear facilities will be on line by 2015. While that's a very long lead time by most industry standards, its practically breakneck speed compared with the 1970s and 1980s, when the last of the nation's big reactors went up.
Which is why Wall Street is gauging the opportunities and pitfalls already taking shape.
"The nuclear industry is getting a lot of interest, but it's still far down the road," said Caren Byrd, executive director of Morgan Stanley's Global Utility and Power Group. "It's important to see whether the capital is available for this industry. Nobody is writing checks yet. But we're pointing in that direction."
Accelerating the push are two key pieces of legislation, the U.S. Energy Policy Act of 2005 and the Department of Energy's annually-funded "Nuclear 2010" program, which have laid out the rules and federal financing available to the industry.
The Energy Policy Act includes major tax breaks to stimulate the development of generating stations run by alternatives to coal, oil or natural gas, whose emissions are increasingly seen as a liability to operators confronting global efforts to reduce greenhouse gases.
Nuclear, though long decried by critics as a dangerous course, is now lumped together with the "low-emission, innovative design" plants championed by the Energy Policy Act. Nuclear is also winning acceptance among environmentalists who see it as the lesser evil if the alternative is more coal-fired plants, which already account for half the power generated in the United States ( compared with just under 20% for nuclear) and are roundly blamed for global warming, acid rain and other ills.
Just as importantly, the Energy Policy Act offers generous production tax credits and federally-backed loan guarantees on up to 80% of a project's cost.
The guarantees mean better credit and cheaper capital to finance projects that, by most industry accounts, are expected to cost about $2 billion for a typical 1,000-megawatt power station. That, in turn, can lower the cost of power sold by the plants by as much as 25%, according to the Nuclear Energy Institute, a Washington-based trade group.
Further federal guarantees come in the form of $2 billion worth of "standby" insurance aimed at helping the first six nuclear projects clear financial hurdles posed by lengthy regulatory delays - a hallmark of the industry that perhaps more than the infamous Chernobyl accident in 1986 financially crushed plans at the time to build more reactors in the United States.
"Those first units are likely going to need that help," Byrd said.
Rush is on
But here's the rub: To qualify for most of the financial goodies in the Energy Policy Act, applications to build a nuclear unit must be in the hands of the Nuclear Regulatory Commission by Dec. 31, 2008. The deadline has triggered a veritable stampede in an industry long-accused of moving at glacial speed.
According to the NEI, over the past year the commission has received 19 applications from 13 companies or consortia to build 31 separate reactors.
About half of these plants would be built for regulated utilities, primarily in the South and on the East Coast, where the need to add new power plants is most acute, with the rest classified as merchant plants, producing power for sale on the open market rather than into a geographically defined customer base.
There is a firm commitment to push ahead with only one of these plants, NRG Energy's (NRG) South Texas unit. But if all the plans handed to federal regulators get the green light, raise the necessary financing and move ahead, analysts figure they will add 13 gigawatts of electricity to the U.S. power grid by 2020 at a cost of roughly $60 billion. Only China and India are pushing more ambitious commercial nuclear programs.
So who is behind the applications?
"The existing nuclear power plant owners are going to be the new owners and likely the operators," said Adrian Heymer, senior director of new plant development at the NEI.
They are well-known names in the utility business: Entergy Corp. (ETR) , Exelon Corp. (EXC) , Southern Co. (SO) , Duke Energy Corp. (DUK) , Dominion Resources Inc. (D) , FPL Group, Inc. (FPL) , Progress Energy Inc. (PGN) and Constellation Energy Group Inc. (CEG) , nearly all of which have spent the past few years building up their nuclear generating fleet through acquisitions.
Together, this group now controls over half of the generating capacity at the nation's 103 licensed reactors, building economies of scale and driven by a desire to diversify their power portfolio -- a move made all the more urgent by recent volatility in the natural gas market.
All of the "new build" reactors are in various stages of the application process, all racing to meet the 2008 deadline. Getting there is not quick or cheap, for a reason. Applications are comprehensive documents "developed" at a cost of about $50 million. They aim to secure a coveted combined Construction and Operating License, or COL.
"In the past, it was design-and-construct as-you-go. We don't have that now. Now, everything has to be approved by the regulators up front," NEI's Heymer said.
The COL closes a loophole that sank several nuclear projects in the past, when completed facilities were stopped in their tracks by endless hearings and regulatory reviews that prevented them from ever receiving an operating license, ultimately unraveled the economics of the project.
The streamlined licensing process, which theoretically goes even faster when using standardized, "cookie-cutter" reactor designs, may be able to knock six years off the time it takes to bring a plant on line, Heymer said.
That doesn't mean the process is fast, however. Applications are still seen taking three or four years to go through and construction is seen taking another five, which is how most analysts arrive at 2015 as the earliest date the country is likely to see a new commercial reactor to go live.
Vendors in a row
The next generation of nuclear power plants in the United States is likely to be dominated to three vendors, whose reactor designs have already been submitted to the Nuclear Regulatory Commission for what amounts to pre-approval. They are General Electric Co's (GE) GE Nuclear Power, Westinghouse, and Areva.
"I think utilities are responding pretty positively to the government incentives," Andy White, president and chief executive of GE Nuclear Energy, said.
"Nuclear is not going to be the only answer to more power or cleaner energy. It'll be part of a portfolio," White said. But GE is banking that it'll be lucrative, not only in plant design but also in the maintenance contracts that accompany a plant built to run around the clock for several decades.
White predicts that GE Nuclear can turn itself from a $2 billion business today into a $3 billion to $6 billion company by about 2010, with much of the growth in North America. While this is a small slice of GE's vast $160 billion in annual sales, it's a business that he says has been growing at a double-digit pace.
Areva, the giant French nuclear power company, is the closest thing the industry has to a fully vertically integrated player, with uranium mining and enrichment operations, design, construction and marketing divisions. Most of its finished plants are operated by Electricite de France, providing 75% of France's electricity.
Westinghouse Electric Co., after ownership bounced in the 1990s from CBS Corp. to Britain's state-owned British Nuclear Fuels Plc. (BNFL), is in the process of being acquired yet again, this time by Japan's Toshiba Corp. (TOSBF) in $5.4 billion deal that includes the sale of BNFL's U.S. subsidiary.
Toshiba's move gives the industrial powerhouse a major foothold in the emerging U.S. nuclear engineering market and reflects the continued global consolidation of a once fragmented, heavily nationalized industry.
Joining Toshiba as one of Westinghouse's buyers, with a 20% stake, is Shaw Group Inc. (SGR) , the Baton Rouge, La.-based engineering company that has led the construction of several U.S. nuclear facilities, and Japan's Ishikawajima- Harima Heavy Industries (IKWJF) , with a 3% stake in the venture.
Lurking in the wings is a fourth vendor, Mitsubishi Heavy Industries (MHVYF) , which lost its bid for Westinghouse to rival Toshiba. Mitsubishi Heavy Industries is currently seeking to certify one of its reactor designs in the U.S., and clearly intends to have a presence in the resurgent U.S. market.
Bringing Japan's heavy manufacturing industry into the mix is seen as a prudent move by many in the industry.
One of the problems with nuclear plant construction is securing the massive steel castings used in such critical parts as the reactor vessel and the vessel lid. The last orders for such items in the U.S. were placed in 1979. Since then, those foundries have folded, making the U.S. reliant on foreign suppliers such as Japan Steel Works Ltd.
The problem is not unique to the United States. France's Areva just last month completed its acquisition of SfarSteel from France Essor Group to ensure it can continue making large forged parts for its next generation of nuclear power plants.
There are other technical trouble spots facing the industry, not least of which is ensuring that the ageing North American power grid, already struggling to meet 2-3% annual growth in power demand, can support a new fleet of big nuclear power stations.
"We do have a concern for the infrastructure to support this," Heymer said, adding that this is a big reason many of the next generation of nuclear units will likely be built alongside existing units, taking advantage of existing switchyards and transmission lines.
Other concerns voiced throughout the industry is the dearth of skilled technicians and engineers, the result of an industry perceived for years as having no future. Nuclear Regulatory Commission officials regularly cite access to qualified staff as a prerequisite to approving a ramp-up of the industry.
"There are still quite a few challenges facing the industry, starting with the fact that they haven't built one of these plants in a long time. We have new rules, and they haven't been tested. So there are many uncertainties," Morgan Stanley's Byrd said.
By Jim Jelter, MarketWatch