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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

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…

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Nuclear’s Demise Continues: Another Huge Project Cancelled

On July 31, SCANA Corp., a South Carolina utility and its construction partner, Santee Cooper, the state power authority, announced separately, their decisions to cancel the twin unit V.C. Summer nuclear project in Jenkinsville, SC.

In terms of chronology, Santee Cooper’s board of directors met on July 31 to review the revised estimates for the completion for the now ill-fated nuclear project. (Santee Cooper owns 45% of the project and SCANA the rest.) According to local press reports, Santee Cooper’s board was informed that it would require an additional $11.4 billion to complete the nuclear project for a total project cost of $25 billion, which would bring the project’s cost estimate up 75% from the original estimate when the project was initiated, and the completion date for in service would be delayed by five years. As a result, the Santee Cooper board voted unanimously to cancel the nuclear project.

Finding that its partner in this vast nuclear construction project was backing out, SCANA’s board of directors was faced with one of three decisions: 1) go it alone and complete the project as sole owner, 2) complete unit 2 and cancel unit 3 and construct a gas-fired plant to make up for the loss in generating capability, or 3) follow its partner’s lead and cancel the entire project. The board chose the third option.

This decision follows an announcement by Toshiba, owner of bankrupt Westinghouse, which was building the plants, that it would make a final payment to Santee Cooper and SCANA of $2 billion to cover its guarantees on the project, an amount significantly below the $11.4 billion required to complete the project. Westinghouse had originally guaranteed a fixed price for V.C. Summer (as well as for Southern Company’s Vogtle nuclear project in Georgia). Both projects used Westinghouse’s AP 1000 reactor design. The fixed price guarantees for both projects, which seemed like an aggressive move back in 2007, led to Westinghouse’s bankruptcy filing. So count the problems at Summer as fallout from the Westinghouse bankruptcy. Guarantees only have value if the guarantor has the assets to meet the obligations. Related: Oil Prices Slip Despite Modest Draw In Crude Inventories

In the press release, SCANA reaffirmed earnings guidance and a long term earnings growth rate of 2-4%. The press release made no mention of dividend policy. (The nuclear project represents one quarter of SCANA’s assets. Roughly 18% of the electric bill and two thirds of earnings are accounted for by consumer payments on capital invested in Summer.) The focus now shifts to SCANA’s balance sheet with respect to write-offs for this now abandoned project and the appropriate “sharing” of costs between ratepayers and shareholders. We expect that the bond rating agencies will soon have something to say on this.

The announcement may place enormous pressure on Southern Company, which plans its own cost review of the Vogtle nuclear project for next month.

Finally, we continue to believe that the problem with new nuclear (small modular units excepted) power plants is not that they generate electricity with nuclear fission. The difficulty is economic. The nuclear units are expensive, base load generating units in a world where production of electricity is becoming less expensive and increasingly decentralized. Base load power plants (and especially nuclear ones) are, in general, must-run, inflexible price takers. Going forward there will be less need for those facilities regardless of how they are fueled. Furthermore, the builder of a nuclear plant must bet an enormous sum on the need for electricity a decade hence, when the plant is completed. Given the uncertainty in power demand and prices, that is a gamble uncompensated in the regulatory process.

Southern Company, it’s your move now.

By Leonard Hyman and William Tilles for Oilprice.com

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