Nuclear Energy's Second Act?

Bid to Build Two New Reactors In Texas May Mark Resurgence;
NRC Gears Up for Many More

By REBECCA SMITH
September 25, 2007; Page B1

In a move that could mark the beginning of a nuclear-power revival, a New Jersey-based energy company today plans to submit an application to build and operate two new reactors. The request, the first submitted to the Nuclear Regulatory Commission in 31 years, comes from an unlikely source: NRG Energy Inc., a company that has never before built a nuclear plant.

The application -- for a two-reactor addition to the company's existing South Texas nuclear station -- could offer the first full test of the nuclear agency's new licensing process, which has been under development since the 1980s. The new process allows companies to submit a single application for a construction permit and conditional operating license, eliminating the risk that a firm could build a plant but not be allowed to run it.

The nuclear agency has geared up for an expected flood of applications over the next 15 months, which could cover as many as 29 new reactors at 20 sites and represent a possible investment by the U.S. power industry of $60 billion to $90 billion. Companies are rushing to get their applications in quickly, hoping to qualify for potentially billions of dollars in federal incentives and loan guarantees offered in the Energy Policy Act of 2005.

Barring an unexpected move on the part of Congress, a decision by the commission could clear the path for NRG to go ahead with its plans. Congress has mostly encouraged the revival of nuclear energy, concluding the nation's aging nuclear fleet needs refreshing, though opposition could surface now that the industry appears to have momentum.

The NRG application likely will revive debate about the wisdom of building more nuclear reactors, especially since the industry still doesn't have a federal repository for the radioactive waste from an existing U.S. fleet of 104 operating reactors. Efforts to license a waste repository at Nevada's Yucca Mountain, have been opposed by Nevada officials and Senate Majority Leader Harry Reid.

Still, the renewed optimism within the industry is noteworthy, given that it was virtually left for dead a decade ago, in the wake of safety worries stemming from the 1979 accident at the Three Mile Island plant, huge cost overruns and disappointing operating performance. In the late 1990s, plants were practically being given away by frustrated operators. A handful of consolidators started picking them up and the industry dramatically improved its productivity, often spurred by the profits available in deregulated electricity markets like Texas.

More recently, the industry has regained momentum, partly because other forms of power generation have continued to show significant flaws. Coal-fired plants undermine efforts to combat global warming. Many natural-gas-fired plants rely on a fuel with volatile prices. And renewable energy mostly comes from intermittent forces like wind, rain and sunlight.

This first application comes from a somewhat unlikely source; NRG is a so-called "merchant generator," a company that makes electricity and sells it on the open market. NRG has never built a nuclear plant, and because it doesn't own a utility, has no ratepayers to whom it could bill the estimated $5.5 billion to $6 billion expense.

"We're like the uncola," says David Crane, NRG chief executive in Princeton, N.J.

In December 2003, NRG exited federal bankruptcy protection, the result of overly aggressive expansion in the 1990s. Recently, it announced plans to spend about $16 billion adding 10,350 megawatts of new generation to its existing fleet. It has a 44% ownership interest in the existing South Texas nuclear station and intends to bring in other investors to share in the cost of the additional plants, if approved.

Under the new application process, nuclear regulators are pushing standardization -- both in plant design and in applications seeking licenses. For those companies that satisfy the nuclear agency's requirements, the agency is promising a 42-month review period, culminating in a license decision. But the level of scrutiny will be strict and demanding, the agency says.

NRG says it hopes to have approvals in hand by 2010, though the nuclear agency hasn't promised that the review will be that quick. NRG's ultimate aim: to install two new 1,350-megawatt units, designed by General Electric Co., with Toshiba Corp. taking the lead on construction. The company hopes to have them ready for commercial operation in 2014 and 2015.

In order to speed the process, NRG is using a reactor design that the nuclear agency already has certified for U.S. use and which has been in use in Japan for more than a decade. It is the only reactor design being considered in the U.S. that can make both claims.

Both the power industry and the agency face significant risks going forward. The industry risks spending billions on designs not built here before. The agency's challenge: to stick to timelines promised and maintain high safety standards with a work force facing large numbers of retirements.

To date, most of the companies that have expressed an interest in building nuclear units have been traditional utilities that built plants in the past, such as Southern Co., Dominion Resources Inc. and Duke Energy Corp. Regulated utilities expect to put new investments "in ratebase," meaning they are allowed to charge ratepayers for the expense and book a profit.

But a few merchant operators, such as NRG, Exelon Corp., Constellation Energy Group Inc. and TXU Corp., are now jumping in, proposing to build plants without traditional rate protections. Because they have no one to whom to pass along the costs; the merchant operators must cover expenses and make a profit as a result of open-market power sales. If they guess wrong, shareholders will be hurt. NRG's Mr. Crane thinks merchant operators, with so much at risk, will provide the truest test of the financial viability of nuclear power.

Mr. Crane says his firm has arranged for Toshiba to build the nuclear reactors because "the Japanese have built four of these already, on time and on budget."

Andrew White, president of GE-Hitachi Nuclear Energy, a joint venture of General Electric and Hitachi Ltd., said both firms participated in construction of GE advanced boiling water reactors in Japan and Taiwan and he said GE helped NRG prepare its license application. Due to the U.S.'s long period of dormancy in nuclear-reactor construction, many U.S. companies are playing catch-up with Japanese and European outfits.

The GE design selected by NRG was certified by the regulatory commission in 1997. Mr. Crane said he looked at other reactor designs, including the Westinghouse AP 1000 reactor, the only other design currently certified by the safety commission. But in the end, Mr. Crane decided against "building something that's never been built before. [That] creates a risk I can't quantify."

Contract terms also were a factor. Mr. Crane said Toshiba "understood we would need a fixed-price, fixed-schedule contract...where, if you're late, you bear the cost" and was able to offer more cost certainty because it's built the plant before. Other vendors, he said, offered less protection. He said Toshiba is offering units with a blended price of $2,000 to $2,250 per kilowatt of capacity, substantially less than the $3,000 per unit of capacity that other utilities have cited as a ballpark estimate of cost.

So far, it appears merchant generators think Texas provides the most promising market. Deregulation in that state has resulted in a sharp run up in wholesale power prices since 2004. A recent decision by Dallas-based TXU to abandon efforts to build eight coal-fired plants could result in shrinking electricity reserves in the coming years, creating an environment receptive to operators looking to bring large units online and sell such units' full output.

Write to Rebecca Smith at rebecca.smith@wsj.com1