Nuclear Roulette

The US Department of Energy announced selection of four finalists to build the next generation of nuclear power plants and receive $18.5 billion in loan guarantees. The tea leaves are being studied as I write this to assess the winners and losers in this announcement.

Nuclear power provides about 21% of the US power generation from 104 reactors that generated a record 806.5 billion kWh and achieved an average 91.8% capacity factor in 2007.  A new commercial nuclear reactor last came on line in 1996 with the opening of TVA’s Watts Bar unit 2 at Spring City Tennessee. TVA rebuilt another plant which reopened in 2007 near Athens Alabama.  There has been a concerted effort to streamline NRC regulation, standardize and pre-approve new nuclear designs learning from the considerable experience of the French and Japanese and, more recently, Chinese experience in building new plants as well as our own past mistakes.  On the architect-engineer side there is fierce competition between the traditional builders of these plants GE-Hitachi, Toshiba-Westinghouse, and Areva.

Here’s my quick take based upon the information available:

  1. Solid winners: UniStar Energy, NRG, Scana, and Southern Company. Two utilities and two merchant generators is a good balance and all four of these players have a long track record operating nuclear power plants. UniStar is the new joint venture name for the Constellation/EDF partnership.  NRG is a current owner in the South Texas Nuclear Project and has proposed major expansion.  Scana and Southern are fixtures in the nuclear-friendly Southeast and both have sought to be active participants in this competition for Federal support.
  2. Surprising Losers:  Entergy and Exelon. Two of the largest and best performing US nuclear fleet operators are missing from this list.  The most likely reason is their choice of GE-Hitachi as their A/E partner.  GE-Hitachi’s plant design has not yet been certified by the NRC so a selection may have been seen as prejudging the regulatory process by the Department of Energy.
  3. A/E Winners:  Toshiba-Westinghouse and Areva. UniStar will use the Areva design but the other three will use Toshiba. Being first to have bragging rights can be useful in marketing and financing these projects, but it should not be interpreted as precluding others from joining later.  The winner’s curse also means these four players bear the brunt of the public and regulatory attention in this new round of nuclear roulette and that can clearly be a mixed blessing.
  4. GE-Hitachi must double down to get NRC certification.  This is embarrassing for GE and means it will need to pour on the steam at the NRC and put up big bucks to help its customers offset the added costs of losing out in round one.  Don’t count GE out by any means, but don’t underestimate the body blow that this is to Jeff Immelt who is being panned by the biz press for GE’s performance.
  5. Less than half a glassful of support from Team Obama for nuclear. While this is clearly an important step forward for the nuclear power industry, many had hoped for more financial support than the $18.5 billion given the Administrations policy goals of reducing emissions.  This is probably more politics than policy. Many of the administration’s environmental supporters are of mixed feelings about nuclear power.  Some still hate it as much as ever.  Others see nuclear power as an unfortunate beneficiary of the conflicting policy goals in which greenhouse gas emissions with its reduced dependence on fossil fuels is more important that preventing nuclear power expansion.  But given the thousands of construction, manufacturing and service jobs building these huge projects will generate the announcement should have produced more sizzle from Team Obama than it got.  It didn’t help that the Republican response to Team Obama’s Waxman-Markey effort has been to propose 100 new nuclear power plants just ahead of this announcement.

M&A Mash-up Mischief Food for Thought

This announcement and the other tectonic shifts taking place in the energy industry today also lubricate the prospects for another round of consolidation and could make for some interesting, and maybe nasty, M&A fights on the radar ahead as the major market participants adjust their strategy.  In the interests of full disclosure I hold no financial interest or shares in any of these companies except where they may be part of my 401k mutual fund holdings I do not directly control.

So here are some ideas to chew on:

Exelon-vs-NRG. Exelon’s unsolicited and unwelcome takeover proposal for NRG was designed, in part, to position it to play on both sides of the A/E table with its own GE-Hitachi fleet in hand as well as NRG’s focus on Toshiba-Westinghouse.  It also helped diversify the market footprint into ERCOT and WECC markets Exelon does not currently play. And third, it strengthens the unregulated merchant generation side of the Exelon business with a solid NRG portfolio.

Of late, NRG seemed to be holding Exelon off and prospects for that deal have cooled. Will Exelon press forward?  Does this US DOE pick of NRG raise its value and price and thus make a sweetened deal more likely because now NRG faces the prospect of much high costs given the small $18.5 billion loan guarantee pot split four ways?  Such a deal also now advantages NRG more than before since it too could play on both sides of the A/E street improving its competitive position unlike its three other fellow winners.  The other risk is that NRG is seen as prey by other players and a distracting auction or unsolicited bidding contest raises its valuation but threatens its performance near term when it can least afford it—and pushes David Crane out just when its getting fun.  John Rowe could also further sweeten the deal and let David Crane be CEO of the merged company to his Chairman and then retirement.  I hope these guys can kiss and make up as this would be a game changing combination on many fronts and keep competition alive and well.

Entergy Breaks Out. This is a great company, well managed and well positioned to straddle the Eastern Interconnect and ERCOT.  It may be in a good position to be the spoiler at the Exelon NRG party if it chooses to up the ante and go after NRG so it can dominate the ERCOT market as its does in a large swath of the Southeast. But the problem with ERCOT is—well, its just ERCOT—and to scale the business any big player needs a footprint in multiple markets and abilities to play its hand based upon price and competitive advantage.  The Republic of Texas is a good place to do business for many reasons but it’s fragmented among too many players.

Entergy’s dueling A/E opportunity is the same as Exelon.  Southern again demonstrated its well earned reputation for regulatory relationships in its selection by US DOE.  For Entergy the key question is whether it invests its considerable strengths and capacities in battling Southern in its home Southeast markets—or creates a better defense and offense by positioning itself to compete in other segments or other markets.  Southern is ring fenced in the South sandwiched between Duke and TVA to the North and FPL and Progress to the South—there isn’t much for Entergy to do in the Southeast except hunker down with its regulated energy delivery companies.

Entergy has another play option focused on transmission where a substantial expansion or leverage of its existing transmissions system could give it superhighway potential as the gateway between the Southeast and ERCOT on the Obama NIETC interstate electric superhighway, but this is a longer shot and complicates its strong generation portfolio with regulatory issues.  My advice to Entergy is “consider the diamonds” I wrote about earlier using the NIETC initiative to be the East-West highway builder that links its nuclear generation into a broader smart grid structure to deliver renewables from West Texas and Iowa to markets East and West and send excess southeast generation potential to the Rockies and Alberta for oil & gas production and send what’s left to California.

THE BIG GREEN MACHINE: Exelon+Entergy+GE.  Of course there is another option with or without NRG.  Put together the GE-Hitachi players and tell Immelt to bring his checkbook.  Doing so positions the company to be the undisputed leader in nuclear plant operations and with a GE NRC certification it can play wherever it wants. Add GE Energy’s renewable business and access to its its combined cycle gas plant building prowess where needed for mid-merit units and you have the BIG GREEN MACHINE!

Nuclear’s Time is Now—Don’t waste it!

Nuclear Power has a good story to tell with great performance from the existing nuclear fleet, solid operators in place and the perfect timing to tell it given the Waxman-Markey frothing over greenhouse gas emissions reduction.  All the nuclear players should go for broke NOW getting their own Congressional delegations to back and earmark expansion of the nuclear guarantees from US DOE.  Even the public power players with nuclear interests should support this.  Obama will swallow that but will not propose it.  A solid base load nuclear capacity expansion is the best option for offsetting coal market share in the generation future and enabling renewable energy’s further growth as a bonus.