A U.S. Nuclear Power Renaissance
No accidents since 1979, environmental concerns over coal and gas, what's not to like about nukes? Here are some ways to play the new interest
by Vaughan Scully
From Standard & Poor's Equity Research
During the past three decades, nuclear power has held a less than enviable place in the mind of the American public. Targeted by environmentalists concerned about the dangers of storing spent radioactive fuel, the nuclear power industry also earned the scorn of investors and power customers in the 1980s after several high-profile construction projects went bust, sticking lenders and customers with the bill.
That has changed. The U.S. nuclear power industry has been virtually accident-free since the meltdown of Three Mile Island Unit 2 in March, 1979, and mounting concerns over the environmental effects of greenhouse gas emissions have led activists to shift their attacks to coal-fired generators and the large amount of carbon dioxide they emit. Meanwhile, rising and increasingly volatile natural gas prices have made the economics of using it to generate electricity less attractive and, more important, less predictable.
Additionally, the old two-step process for approving new nuclear plants created a risk that a developer could get a license to build a plant, but then not receive a license to operate the plant once it was completed. The Nuclear Regulatory Commission has implemented a new streamlined process that combines the construction and operating licenses into one, eliminating that risk and reducing the overall cost of obtaining a license.
Competitive Platform for Generating Electricity
With electricity demand rising every year and the latest energy bill providing generous incentives for nuclear generation, the allure of building a new nuclear power plant is proving irresistible. Last week, New Jersey independent power producer NRG Energy (NRG; $43) filed the first application in almost 30 years to build a new nuclear power plant in the U.S., and other new reactors are in the works as well: The NRC expects to receive 21 applications for 32 reactors over the next two years.
"If companies can keep the price per kilowatt of capacity at relatively low levels, then nuclear power provides a competitive platform down the road for generating electricity," says Christopher Muir, equity analyst at Standard & Poor's covering independent power producers. "Most of these companies have been talking about building new nuclear plants for several years now. NRG was the first one to put something forward, and I think that there's going to be several more before the end of the year."
NRG will reap substantial benefits from being the first to the line with a full application from special incentives granted to the first set of applicants, Muir says. "[But] that's a long way off and shouldn't affect the stock at this point." Even so, NRG is still an attractive stock, he says, as are several other independent power producers—companies that own generating stations and sell their power in the wholesale market instead of supplying it to an affiliated distributor under regulated prices.
Fixed Costs Comparable to Coal
S&P has buy ratings on NRG and independent power producers Dynegy (DYN; $9), AES (AES; $20.31), Constellation Energy Group (CEG; $86), and Mirant (MIR; $40). (Constellation's joint venture with French nuclear reactor manufacturer Areva is expected to submit an application in 2008 for a new reactor.) Current electric power prices "are strong enough to generate interest in building new baseload generation—units that run even during nonpeak demand periods—including nuclear," Muir says.
Part of the reason for that is that the fixed costs of building new nuclear power generation units are now comparable to that of coal-fired generation when the cost of removing carbon dioxide is factored in. NRG's new reactors will cost about $2,200 per kilowatt of output capacity, while the cost of a technologically advanced coal plant that gasifies the coal before combustion and stores the carbon dioxide underground is about $2,135 per kilowatt, according to U.S. Energy Dept. figures.
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