Capital markets assess risks and business prospects. If they like something, the money flows. If not, pity the firm trying to raise funds. This is particularly the case for nuclear power, because cost of capital makes up a large part of its overall costs. Sometimes the market, like the ancient Greek Delphic Oracle, needs some interpretation. Lewis Hart, a veteran utility banker and principal of Chappaqua Capital Consultants LLC, has been interviewing energy financiers for years to get their views, so we asked him about what his latest survey says about financial community attitudes toward nuclear power.
1. What's the take on the future of nuclear?
To answer that question, I framed the interviews in terms of expectations for nuclear in the coming decade (short term) and expectations beyond the coming decade (long term).
In the short term, not one respondent expected nuclear construction beyond the ongoing Vogtle, V.C. Summer and Watts Bar projects. The nuclear renaissance has fizzled out thanks to low natural gas prices. Combined cycle natural gas plants are seen as having lower all-in generating costs because a technological transformation in drilling techniques (hydraulic fracturing) is perceived to have permanently lowered natural gas costs. Interviewees seemed happy that generation companies could also avoid perceived higher nuclear construction risks.
The survey respondents split almost evenly between nuclear optimists and pessimists. At the time of the completion of the survey interviews in November, “The Optimists” (27 in all) believed that the five nuclear units presently under construction would almost balance out the then recently announced nuclear closings (Crystal River, Vermont Yankee, Kewaunee and two units at San Onofre). Hence, a near stable level of nuclear capacity would be maintained.
The 24 “Pessimists” expected nuclear to decline over the next decade: already announced closings were perceived as the vanguard of a domino effect. The Pessimists thought that the older, often smaller, single nuclear units would have trouble competing. Interestingly, the 10 interviewees who exhibited a viscerally anti-nuclear attitude focused, not on lack of permanent storage for spent nuclear fuel, but rather on potential cost overruns, construction delays and accident related safety concerns. Even the modest, announced construction delays and cost overruns at Vogtle 3 and 4 and V.C. Summer 2 and 3 had rekindled fires of doubt.
Who’s perspicacious – the Optimists or the Pessimists? Since the interviews last fall, two more nuclear plant closures (Fitzpatrick and Pilgrim) were announced by Entergy. Then, just as I am about to sit down for this interview, on June 2, 2016, I learn that Exelon has decided to shut down the Clinton and Quad Cities plants due to lack of regulatory support. So, maybe it’s “Advantage-The Pessimists.” We are, however, still in the first quarter of a four quarter contest. Related: Can Trump Change The Direction Of U.S. Energy?
Beyond the short term/next decade view, the Pessimists offered the same number of votes for continued decline in nuclear, but the Optimists replaced their anticipated short term nuclear standstill with nuclear growth expectations. For the post ten year out long term, the number of those surveyed who predicted a stable level of nuclear capacity dropped from 27 to 7, but the number believing that nuclear generation would grow rose from 5 to 26.
Why the change in view between short term and long term? Nobody is predicting that natural gas prices would spike near term, but the expectation is that they will remain volatile in the long term and could rise from present low levels and make nuclear “all in” competitive with base load natural gas generation.
Also, respondents commented that wind and solar generation would not grow fast enough to replace fossil fuels, and the intermittent nature of wind and solar does not allow them to be matched with demand. Thus, the Optimists offered, well, more long term optimism. The view is that nuclear power will eventually be needed again to achieve carbon reduction objectives and save us from the “ravages” of climate change.
What form would new nuclear facilities more than ten years out take? We did not have a specific question on that topic in the survey. However, those few who took the initiative to comment did not necessarily foresee a new generation of 1200 MW pressurized water reactors like those now under construction in the U.S.
A senior banker said, “When and if nuclear comes back, don’t look at existing nuclear power stations as a model for the future. Nuclear power may come back in a form that is vastly different from what we see operating today.”
An institutional investor offered, “Of all the nuclear developmental technologies that are out there today, one or two of them will become the technologies of the future. We don’t now know what they are, but twenty years from now we will know and we will look back and say that we should have known back in 2015 that these were the ones.”
2. Small modular reactors (SMRs) have received lots of attention lately. What does Wall Street think about their prospects?
The Survey and its accompanying report were born at a time when people expected a “nuclear renaissance.” From 2010-2013 my partner and I asked whether SMRs were likely to become a viable option for the power generation market. Each year the majority had “No Opinion”. The “No Opinions” varied from 60 percent to 72 percent of interviewees during that four year period. The SMR was too far from commercial operation to generate enthusiasm in the financial community. Related: Kurds To End Oil Standoff With Baghdad For $1B
In The 2014 Survey Report the “No Opinion” percentage of respondents dropped from 72 percent to 22 percent while those with a negative view of viability rose from 11 percent to 49 percent. Both Westinghouse and Babcock and Wilcox subsidiary mPower in early 2014 announced that they were de-emphasizing SMRs. No orders and no customers! As a result of this apparent decline in interest in SMRs, I made a call not to include the SMR question in my 2015 survey.
One SMR developer entity, NuScale Power, has received significant financial backing from its new owner, construction company, Fluor Corp, and from U.S. DOE. NuScale appears to be developing potential customer relationships with western municipal utilities. NuScale expects a commercially operating unit by 2022. DOE expects potential operation by 2025.
As mentioned, half of our 2015 interviewees see potential for a nuclear rebound after the current decade, and several suggested that the rebound would feature a new nuclear design. Since we did not ask a specific question about what a new design would look like, only a few took the initiative to offer comments. However of those that did, two suggested that it might be something close to NuScale’s current SMR proposals.
Going back to the “broad brush”, it is clear to the interviewees that the current economic environment will not allow this to be nuclear’s moment. What is encouraging, however, is the 2015 survey report. Approximately half of the interviewees see a “nuclear revival” in the long term with nuclear having a chance of being both economically competitive and a vehicle for supporting carbon reduction. I am already booked to probe more deeply into the financial community’s expectations re timing, design, and regulatory approval in my 2016 survey report. For those who are interested in my full 2015 survey report, it is available for a modest fee and will be provided in response to any email request addressed to me at email@example.com
By Leonard S. Hyman and William I. Tilles
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