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Five years after a devastating earthquake, tsunami and nuclear accident at Fukushima that killed thousands and displaced many more, the Japanese are still cleaning up, people still cannot return to their homes and, possibly the least important statistic, Tokyo Electric Power’s shares sell at one quarter of the preaccident price.
Roughly five years ago, the British government and French utility EDF began a process to build another nuclear power plant at Hinkley Point, an investment still awaiting the approval of EDF’s board. As odd as it seems, the tragic disaster and botched business deal have a common thread (other than the fact that EDF shares sell at one third of their 2011 price): the role of government in nuclear power.
Let’s start with Fukushima. According to a report in the Financial Times, the Fukushima nuclear disaster has cost Japan $118 billion to date and Tokyo Electric Power’s shareholders have picked up only 20 percent of the tab. The government and consumers paid the rest. But Tokyo Electric shares had a market value at time of accident of only one quarter of the expenditures to date. Bankrupting the company wouldn’t have raised the cash needed (assuming that anyone knew the cost then) and the government couldn’t have walked away from the problem. Nuclear operators are not required to have the capital to cover the costs of a giant disaster and they do not have the insurance coverage either. That means that the government, taxpayers and specific utility customers have to pay.
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Next to Hinkley Point. EDF’s CFO just quit, reportedly because he opposed the firm’s involvement in Hinkley Point (described by BBC as “the world’s most expensive power project”), which is a key component of David Cameron’s UK energy policy and of François Hollande’s plan to revive France’s nuclear industry. Yet despite being 85 percent stateowned and the world’s largest nuclear operator, with 58 plants in France alone, EDF required UK government guarantees for debt and power pricing before it signed on to the project. EDF then sold 33.5 percent of the project to a Chinese state nuclear company and may be seeking additional investors. (Holding more than half of Hinkley Point would require EDF to consolidate the project on its books, opening it up to investor scrutiny for decades.) Not even a company as large as EDF can take on a project like this alone.
So, this leads to our first point: despite its private enterprise facade, when big bills have to be paid nuclear power becomes a government business. Old facilities, though still fairly expensive to operate, require regulated pricing and new ones can't even be built without government financial and sales guarantees. Both need a shield from liabilities in case of accident, which makes the government and its taxpayers the insurers of last resort. That’s it. Normal business concepts don’t work here. And the insurance can't get priced into the nuclear cost-benefit analysis. If the insurance bill were correct, it would bankrupt the company in short order.
Nuclear plants require huge amounts of capital. Cost of capital accounts for close to half the price of nuclear power. And risk determines cost of capital. Nuclear plants are risky for numerous reasons apart from catastrophic failure and meltdown. They take a decade or more to build and construction delays are an inherent part of the process. Conditions in the market may change drastically from inception of construction to completion. If oil prices move from very high to low over ten years the economic rationale for the plant may vanish. New safety rules, typically appearing after "mishaps", may require expensive plant modifications.
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The plants are also too big in relation to the capital of the builders. Any costly extended outage or delay can have a drastic financial impact on the owner. Having to fix a plant and buy replacement power for say two years is a billion dollar item. Accident remediation costs might spiral beyond the company’s ability to pay. Pro-nuclear governments try to shield the nuclear operator from these risks, if possible. They protect the nuclear operator from lawsuits (reducing insurance costs). They guarantee debt (reducing interest costs). In the U.S. they tend to pass on unexpected (but prudently incurred) costs to the consumer.
That leads to our second point: these measures do not reduce risk, they just shift it. The risk never goes away. The government and consumer now bear part of it. But consumers do not take out nuclear risk policies with semi-annual payments. They do not see the cost so it doesn’t exist for them until the electricity bill goes up. In the same way, government can deny the costs of acting as an insurer of last resort because no line item appears in the budget to cover the costs until an accident happens (that’s the way a Congressional staffer explained it once at a meeting on the future of nuclear power).
Does Hinkley Point, needing so much government aid to get off the ground, stand at the end of the road for big nuclear reactors? Maybe, but as American philosopher, Yogi Berra, said, “When you reach the fork in the road, take it". Hinkley Point, we believe, is at that fork. One path leads to more strained efforts to make a gigantic public works project—with hidden and unknown costs and unspecified and dubious public benefits—look like a commercial business. (Maybe energy prices skyrocket and that private owner of the power plants keeps the benefits and the consumers and taxpayers still pay the fixed costs.) But the strain seems hardly worth the effort, since other means exist to produce low carbon, secure power at similar or lower costs. And, as Donald Trump has asserted so often, politicians don’t know how to make deals.
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The other path leads to nuclear power as a quasi-government project, requiring at least the same public scrutiny as a decision to build a new airport runway or bus station. If the project gets approval, government and consumers will pay a lot and take substantial risks they can't avoid. They deserve a proportional share of the benefits and profits. If the answer is “No More Nukes", once all the information is out, move on to some other solution, until reaching the next fork in the road.
Let's face it: the only reason nuclear is in play right now is because of its low carbon footprint and valid concerns about global warming. Nuclear is a solution but we doubt if it’s the solution. The next promising fork may lead to small, modular nuclear units that even normal companies can afford to build.
By Leonard Hyman and William Tilles
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Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…