U.S. Nuclear Power Expansion on Shaky Ground

 | Dec 15, 2012 | 11:00 AM EST  | Comments
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Cost and schedule overruns are eroding the economic benefits of Southern Co.'s (SO) new nuclear power units under construction in Georgia. The outcome could affect a similar project under way by Scana (SCG) in South Carolina.

Southern is attempting to expand its Vogtle Electric Generating Plant, known as Plant Vogtle, to four nuclear reactors from two. The new units will be Westinghouse AP1000 1,117-megawatt next-generation reactors. If completed, Plant Vogtle will be a 4,660-megawatt facility, the eighth or ninth largest nuclear plants in the world. (The largest is Japan's 7,965-megawatt Kashiwazaki-Kariwa Nuclear Power Plant, whose units may not be restarted.)

Southern Co. and the Georgia Public Service Commission (PSC) describe these new nuclear units as the most cost-effective, reliable and environmentally responsible fuel source today. They claim nuclear power is a proven technology that produces no greenhouse gas emissions, and that it can relieve cost uncertainties caused by coal and natural gas prices. But, while nuclear fuel is cheap, capital costs for a nuclear plant are not. The levelized costs for new nuclear power plant currently exceed the cost for new gas turbines.

Southern's strategy is about the long term, and here nuclear power is a likely winner. But, in the short term, a natural gas plant outperforms a nuclear plant, at least on paper.

The cost-competitiveness of nuclear-generated electricity is illustrated by Dominion Resources (D). In the 1970s, Dominion struggled to finish building four new nuclear units. Today, Dominion's consumers enjoy some of the lowest electric rates in the nation. In New England, where nuclear power units are being shuttered, industrial customers pay an average price of $0.1209 per kilowatt-hour, according to the U.S. Energy Information Administration  In Virginia, customers pay $0.0682.

In this light, Southern Co.'s expansion is an economic hedge against future natural gas and coal costs. It is also an environmental hedge, because nuclear power plants produce no greenhouse gases. By displacing carbon-producing plants, they feature carbon footprints of less than zero.

But the Vogtle project's cost and schedule estimates are growing rapidly, even before the difficult aspects of construction has begun. A lot of dirt has been moved and impressive structures have been built. But the most challenging work -- including welding, piping and wiring -- is hidden from view and occurs late in the schedule. These jobs have a tendency to delay the critical path -- activities that must be completed before subsequent project steps can be taken.

The Atlanta Journal-Constitution reports that a one-year delay is in the works for both of Southern's new units. The Augusta Chronicle quotes experts warning that that one-year delay may not be enough.

A rule of thumb is that a one-day delay in a reactor project would increase the cost estimate by $1 million. A one-year delay for two units would then translate to an additional $720 million. Sure enough, last month, Plant Vogtle's contractor and reactor vendor filed a lawsuit against the project's owners -- their third -- this one seeking $900 million in cost adjustments.

Shaw (SHAW) is the project's engineering, procurement and construction management contractor. (Shaw is being taken over by Dutch-based Chicago Bridge & Iron (CBI), in a deal expected to close in 2013.)

Toshiba's Westinghouse Electric is the reactor manufacturer. It owns the AP1000 technology and the design certification, recently granted by the Nuclear Regulatory Commission. Westinghouse is a party in the Plant Vogtle lawsuit.

The project could be forced through to completion by a determined utility and PSC. But will Georgia's PSC allow consumers to absorb serial cost and schedule overruns, or will it begin to look at alternatives? Some are betting that alternative will become too attractive and that regulators may opt for a less risky investment.

Investors should consider the real possibility that Plant Vogtle's nuclear expansion will not be completed. If the project is stopped early, Southern's shareholders and Georgia's consumers should suffer little harm. However, Shaw and Westinghouse could feel the fallout from the loss of business.

Other utilities could be affected as well. These include Scana, which owns, along with Santee Cooper, a state-owned municipal utility, the V.C. Summer nuclear power plant in South Carolina. SCANA received approval from the Nuclear Regulatory Commission in 2012 to add two new reactors to the Summer plant. The project is a carbon copy of Vogtle and uses the same contractors. Some market observers believe that SCANA -- with a market capitalization of approximately $6 billion -- is too small to be taking on a $14 billion nuclear project.

If the Georgia nuclear project is abandoned, the South Carolina could be shelved as well. This would leave the U.S. with no new nuclear power projects under construction.

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