America's Nuclear Future

 

Takeaway

  • Regulated utilities are better suited than others to back risk-heavy investments in nuclear plants
  • Low natural gas prices are enticing investors away from nuclear
  • Plant owners must pay for the first $12.6 billion in damages caused by meltdowns, but taxpayers are responsible for expenses beyond that amount

Nuclear energy has never been an easy sell in the U.S. It’s had an image problem from the very beginning, worsened by the looming threat of nuclear warfare during the Cold War and the disasters at Three Mile Island, Chernobyl, and more recently the Fukushima meltdown in Japan.

Despite these negative associations, nuclear has a solid foothold in the American energy grid. In the U.S., 104 nuclear plants are currently in operation, generating about 20 percent of the nation’s electricity. Two new plants — the first to be built in the U.S. in 30 years — are under construction in Georgia, and two more are planned in South Carolina.

The four plants on the horizon represent progress in the movement to establish nuclear as a mainstream rather than alternative energy source, but the rest of the world is moving even faster. More than 60 new nuclear plants are under construction outside the U.S. — about half of them in China alone.

So what’s holding us back?

Investment Risks

Experts cite uncertainty about the financial viability of nuclear — rather than concerns over safety — as one of the main reasons so few plants are planned in the U.S. Before a company can start building a new nuclear facility, it needs to find investors to fund the project — investors who must be willing to spend a lot of money up front, then wait at least 10 years before the plant is operational and generates returns.

Brant Meleski, a managing director at Bank of America Merrill Lynch, says this is considerably riskier than investing in a typical Wall Street startup. Meleski and other experts discussed strategies for financing nuclear projects at a panel at the McCombs School of Business in May.

“We’re not talking a couple million dollars to help Mark Zuckerberg get by on his expenses living in the Harvard dorm room,” Meleski said. “You’re asking investors to help fund a multibillion dollar project that might not see revenue for 10 years. That’s a bigger risk than any venture capitalist out there is taking.”

Still, Meleski said utility companies in regulated markets are better situated than others to back risk-heavy investments like nuclear plants. Regulation makes the market more stable for these utilities, meaning they can recover the costs of the investment, plant operations, and interest on debt, while also seeing a more reliable rate of return than their non-regulated counterparts. This gives them the flexibility to change their rates to cover costs over time, thereby sharing the risk with their customers.

“There’s still a risk for all the parties, but it’s at least more balanced,” Meleski said.

Merchant power plants, on the other hand, sell energy on the wholesale market and rely on investors rather than rate-paying customers to fund major projects. As a result, they are more vulnerable to the fluctuating market price of electricity. Investing in merchant plants can be risky because it is difficult to predict how costs might shift in the 40-60 years the plant is operational.

“It’s impossible to hedge that,” Meleski said. “So because of that, your investors … are taking on significantly more risk than [shareholders of] regulated utilities.”

All together, these risks are causing most investors to keep their distance from nuclear projects for the foreseeable future.

Safety Concerns

The March 2011 meltdown of Japan’s Fukushima reactor is the most recent display of the dangers of nuclear power. But was the ensuing anti-nuclear sentiment justified, or was it an overreaction?

Some experts have compared the Fukushima incident to the partial meltdown of the Three Mile Island reactor in 1979 — both accidents sparked a swift downturn in the public’s opinion of nuclear as an energy source.

But while enthusiasm about nuclear power has waned in recent years, safety concerns might not have been the only factor driving that trend.

“A lot of people think Fukushima took nuclear plants off the market. It didn’t,” said Dale Klein, former chairman of the U.S. Nuclear Regulatory Commission and the associate vice chancellor for research at the University of Texas. “What took those off the map was cheap natural gas.”

Nevertheless, the consequences of the Fukushima incident rippled out to countries around the world. Germany’s government shut down half the country’s nuclear reactors as a direct result of the accident, and later announced plans to eliminate all nuclear plants within a decade.

But Sheridan Titman, a finance professor at McCombs, argues that Germany’s decision is short-sighted, because other energy sources are not well suited for that part of the world. Natural gas is more expensive there than it is in the U.S., and there is not enough year-round sunlight to sustain a solar grid. While the country has found some success with wind energy, it is cutting back on coal because of the greenhouse gases and other concerns.

“It’s going to be hard for Europe to keep reasonable electricity prices without nuclear,” Titman says.

Germany is also far less prone to being affected by natural disasters than Asia and much of the U.S.

“In Germany they don’t have earthquakes. They don’t have tsunamis,” Titman says. “They’ve got very good engineers, and they actually have nuclear plants in place, so to close those down seems completely crazy to me.”

Who Pays for Damages?

In addition to safety risks, nuclear plants also carry major liability implications: Meltdowns and associated property damage are expensive to clean up, which can scare off potential investors. Congress addressed that issue in 1957 with the Price-Anderson Act, which created an insurance pool for plant owners to pay for damages associated with nuclear accidents. The industry fund covers the first $12.6 billion in damages and lawsuits (a figure that has been gradually adjusted to account for inflation) — but taxpayers are on the hook for any expenses that go over that amount.

The act was an effort to encourage utilities to begin investing in nuclear plants by putting a cap on their liability in the event of a meltdown.

Some experts argue that the industry’s contribution should be greater, citing a 1982 study commissioned by the Nuclear Regulatory Commission, which estimated that a nuclear meltdown could cost as much as $720 billion in property damage, adjusted for inflation. And because Price-Anderson puts the government (and taxpayers) in charge of paying the bill, homeowner insurance policies don’t cover damages associated with nuclear accidents.

Long-Term View

For all of the risks associated with nuclear energy, it does carry some major benefits. It produces lower levels of carbon dioxide than traditional fuels. It generates a steady flow of electricity, especially compared to renewables such as solar and wind. But perhaps most importantly, it is an insurance policy against unpredictable swings in prices of other fuel sources, particularly natural gas.

“If all you’re building is gas, you’re subject to some major price shock in five years, 10 years, whenever we no longer have $2 [natural] gas,” Meleski said. “You have to have some new nuclear in the portfolio.”

From the perspective of Wall Street in 2012, investment in nuclear energy looks like a losing bet, Klein said. But the payoff will become more apparent as time goes on.

“In the short term, right now, it’s a no brainer: You just can’t afford it,” he said. “If you’re building a nuclear plant today, you’re building it for your great-grandkids.”

This article is the fourth part of "The Truth About Alternative Energy," an ongoing Texas Enterprise series.

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U.S. Nuclear Plants at a Glance

  • The U.S. is home to 104 nuclear plants, concentrated primarily in the East Coast and the Midwest
  • Our nuclear infrastructure is aging: All but three of the plants have been in commercial operation for more than 20 years, and more than half have been open for more than 30 years
  • Two new plants — the first to be built in the country in 30 years — are under construction in Georgia
  • Two more plants are being planned for South Carolina
 

Faculty in this Article

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

About The Author

Rob Heidrick

Writer, McCombs School of Business

Born and raised in Austin, writer Rob Heidrick has spent several years as a contributor and editor at local magazines and community newspapers. He...

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