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With Cheap Natural Gas, Who Needs Nukes?

A glut of natural gas has upended the cost-benefit of new and existing nuclear plants


Officials at Scana (NYSE:SCG) and Santee Cooper, South Carolina’s largest utility, celebrated last month’s federal approval to build two new nuclear reactors by throwing a barbecue for employees and construction workers at the site on Monday. But with prices for another “clean” energy — natural gas — falling through the cellar, the real party is likely a long way off.

Whether you’re talking about the two new units at Scana’s Summer plant near Columbia or Southern Company’s (NYSE:SO) two reactors at the Vogtle plant near Augusta, Ga., success ultimately will be measured on whether the costs of nuclear power — including safety and regulatory compliance — will be able to compete with natural gas by the time the first reactors come online around 2017.

A natural gas supply glut, new exploration technologies such as fracking and an unusually warm U.S. winter have combined to push prices down 57% since their highs last June. Although natural gas producers are expected to slow production significantly to boost prices in the short run, their ability to tap into massive shale gas formations will give those companies the edge over the long term.

That poses a big challenge for nuclear operators such as Entergy (NYSE:ETR), Exelon (NYSE:EXC), Duke Energy (NYSE:DUK), First Energy (NYSE:FE), Progress Energy (NYSE:PGN) and PG&E (NYSE:PGE).

Nuclear energy companies’ chances for a renaissance will depend on four factors:

1. Bringing the new reactors online without delays or cost overruns

2. Minimizing accidents or incidents at existing plants that could fuel public opposition to nuclear plants

3. Ironing out financing challenges

4. Radically boosting taxes or fees on CO2 emissions and methane leakage, which could make nuclear more competitive from a cost standpoint

Unfortunately for the nuclear industry, the first three are difficult to control and the last one is out of their hands almost entirely. Here are some examples of why that’s the case:

Tennessee Valley Authority (NYSE:TVE) announced last week that its construction of a second reactor at its Watts Bar nuclear plant near Knoxville will cost $4 billion to $4.5 billion to complete instead of the planned $2.5 billion. It also will take nearly three years longer than expected.

Southern California Edison’s (NYSE:EIX) San Onofre nuclear plant has been shut down since January due to leaky tubes found in steam generators installed within the past two years. The leaky tubes released “a small amount of radioactive steam” according to the company. The Nuclear Regulatory Commission  has barred the utility from restarting the reactors until the cause of the excessive wear on the tubes is found and corrected.

To jumpstart the new Vogtle construction, President Obama promised SO more than $8 billion in federal loan guarantees. In the wake of the Solyndra debacle, the White House may be less willing to go to the mat to keep its funding promises for another energy project. Utility ratepayers, who already are seeing “construction in progress” rate hikes for the reactors, are annoyed at best.

In a speech last year, Exelon Chairman and CEO John Rowe said new nuclear construction makes economic sense only if there is a shortage of — and stable, high prices for — natural gas. “This condition cannot be met due to the influx of shale gas into the market,” he said. “Shale is good for the country, bad for new nuclear development.”

The bottom line: Rowe is right. The economics of new nuclear development are far less compelling today because of the availability of cheap, abundant shale gas and lower demand for power generation. The five nuclear plants currently licensed will have to run hard to control costs, while the 104 U.S. plants currently online must revive the confidence of ratepayers and utility commissioners.

But any nuclear renaissance almost certainly requires the natural gas industry to fall flat on its face. The TVE, SO and SCG projects are the first nuclear reactors to be approved since the Three Mile Island disaster in 1979 and are likely to be the only reactors online before 2020.

So barring extreme regulatory measures that wipe out the cost and potential safety advantages of natural gas, nuclear operators are not likely to be throwing more parties anytime soon.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.

Article printed from InvestorPlace Media,

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