All Energy Options Aren't on the Table

 | Sep 10, 2012 | 5:30 PM EDT  | Comments
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It does not matter who is elected president of the United States in November, nuclear power is not on the table. Neither is coal. There is a good reason: the president lacks the authority to build commercial nuclear or coal power plants in any state. The decision to build is governed by state-sponsored rules. Financing is constrained by uncertainty. Licensing is blocked by federal courts.

And there is one other problem: Few companies want to build or own a new nuclear or coal power plant. Should the federal government want to pursue a nuclear and coal construction, it would have to shower private sector companies with unheard of benefits to entice participation.

Regulations are to blame -- but not just federal regulations, it is mostly state regulations. One by one, states passed laws that either outright banned the construction of new nuclear power plants or made financing new plants, nuclear or otherwise, virtually impossible.

The last point is often missed by politicians. In the 2008 election, John McCain and Sarah Palin promised they would immediately build 30 new nuclear power plants, if elected. The problem was that few utilities had the money to build one $8 billion plant, let alone 30 of them. But this time, both Republican nominee Mitt Romney and President Obama seem to understand that project financing is the challenge, and they wisely avoided making the McCain-Palin mistake.

To appreciate the financing challenge, think of building large power plants like building new homes. Homeowners must show they have the income to pay back the bank loan and they must put equity on the table. When it comes to large power plants, only 1% of the nation's utilities have enough money to build a single new nuclear power plant, and very few can afford a new coal plant. But not a single utility can prove they will have the income needed from new nuclear or coal plants to pay lenders back.

Southern (SO) and SCANA (SCG) appear to be exceptions; however, they are not. Both utilities successfully financed approximately $15 billion to construct two new nuclear power plants. But when shareholders look deeper, they realize the state and local governments took most of the financial and construction risk.

When it comes to power plants, remember the golden rule of business: "He who has the gold makes the rules." In the case of the Vogtle and Summer power plants, Georgia and South Carolina, not the utility companies, have the gold. It will be the states, not Southern or SCANA, that decide if construction will be completed. If construction costs increase, schedules become stretched. Or if consumer demand for power slips, the states may change their mind and withdraw financial support.

Georgia and South Carolina's willingness to assume $15 billion worth of construction risk is not the rule. No other state has shown a willingness to assume the financial risks associated with new nuclear construction, and few states will consider the risks associated with new coal plants.

While Romney and Obama may claim nuclear and coal are on the table, they are not options that the federal government exclusively controls. Power plant construction remains mostly a state's rights issue.

But many states can no longer authorize financial support for new nuclear or coal power plants. Many states have decided powered plants are not natural monopolies and removed them from the rate base. Historically, the rate base was the utility's primary vehicle for project financing.

Even if states could authorize new construction, neighboring states would likely object to neighboring nuclear or new coal facilities and file complaints in the federal courts. It has happened numerous times over the last decade. In fact, some of those state-to-state spats spawned a flurry of new federal regulations from the Environmental Protection Agency.

A good example is Massachusetts v. EPA (549 U.S. 497), where 12 states, three cities, one territory and several private organizations complained about cross-border air pollution. They sued the EPA, demanding it regulate carbon dioxide and other greenhouse gases as pollutants. The Supreme Court ultimately heard the case and sided with the states. Now the EPA is issuing new regulations, primarily focused at power plants, that effectively prevent the construction of traditional coal-fired power plants.

While national politicians may be putting all energy options on the table, many states are taking options off the table. Until the next generation nuclear and clean coal power plants become reality, meaningful amounts of new nuclear and new coal are definitely off the table, at least for the next decade.

When All Energy Options Aren't on the Table

What politicians running for national office may say about nuclear power is much different from what states will do.

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