Fatal Combination for Nuclear

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Last One Out Turns Off the Light

Using price data for uranium reported by the consulting firm UxC on its Web site, the attempt by the nuclear lobby to breathe back hope into their industry, boosting uranium prices off their downward track since the Fukushima disaster of 2011, has failed. After testing lows near $40 a pound in early November 2012, from highs pre-Fukushima of more than $60, and recovering a little on the back of heavy coordinated media action to relativize the disaster and laud China's reactor building intentions, prices are now stuck in a downward tilting formation near $43 a pound.

The outlook is what analysts, brokers and fund managers call "challenging and risk off". This means they keep away from it, and keep their clients' money out of nuclear asset dabbling.

Especially in Europe and the US, the future of nuclear energy looks very dim. Reasons for this are not only convergent but intensifying. The bottom line is that nuclear power is too capital intensive, has a track record of fast rising front end capital costs and massive back-end reprocessing, waste storage and decommissioning costs, is cumbersome and time-consuming, and much too risky. Its vaunted merits of being "low carbon" like wind and solar power cut little ice given its extreme costs and risks. Public attitudes to n-power, if they see enough Fukushima clips, remains negative and fearful.

The rare and few contracts out to tender for building n-plants in Europe, the US and other OECD countries are themselves a disaster zone. In Europe, these effectively have boiled down to two-only, at Temelin in the Czech Republic, and UK government attempts to relaunch plant construction in Britain at sites including Hinckley Point. Theoretically, these two-only potential "real world" projects in Europe might have a total value far above $30 billion if they were built, but that is above all theoretical.

The Fukushima catastrophe, with a probable final price tag for the Japanese government and people  well above $500 billion led Germany to decide the closure of all its reactors. Italy and Switzerland dropped all future building plans. The only European examples of new build or expansion projects that are already under way, in France and Finland, have been bedeviled by delays and huge cost overruns. The Czech and UK projects were seen as able to restore confidence in n-power but today the projects, in both countries, are in serious doubt.

Asymetric Costs, Asymetric Risks

Despite its previous enthusiasm for private-funded nuclear power projects as a major challenge and big new opportunity, the global finance industry has started walking away from n-power. Regarding the Temelin project in the Czech Republic, analysts and advisors at J&T Bank in Prague now openly say the project "has no market logic". Financially, nuclear power is now treated by analysts as "incredibly risky", whenever and wherever the owner and operators have to bear all forward risks, and costs. In the Czech case, this would be (or would have been) the power producer CEZ, whose share value has fallen about 22 percent since January 1st.

Risk fear is already the main reason why potential bidders for UK new build nuclear are dropping out, one by one. Centrica's formal withdrawal on February 3 from UK government-led attempts to relaunch the building of n-plants was followed on February 4 by Electricite de France (EDF) threatening to do the same unless it obtains government underwritten tariff guarantees. These would extend for as long as 40 years forward, as opposed to 15 years for solar and windpower projects, and are a condition for EDF agreeing to build and operate new reactors in Britain. These are called "Contracts for Difference" (CfD) in British government newspeak: the main difference being the staggeringly high price of nuclear power, versus other alternatives.

The Temelin project in the Czech Republic, in order to keep at least some plant builders in play and actively bidding, will need British-type CfD contracts: the CEZ utility has cited the UK model of government support as an "inspiration". Final tariff guarantees are not yet settled in the UK, but likely to attain or exceed 100 GBP ($160) per 1000 kWh. The Czech utility is asking the government, its majority shareholder, to guarantee future purchase prices for electricity produced at Temelin, able to ensure that CEZ gets a positive return on its investment. The price will be high.

The economic risks of nuclear power start with the nitty-gritty basic of power prices, which in Europe are not only affected by fast-rising non-fossil power supplies, which radically increase price volatility, but also by the effects of Europe's lengthening, probably deepening economic recession. In Germany, wholesale power prices in the period Dec 2008-Dec 2012 more than halved, as the economic crisis cut demand and green power supply soared, while large industrial consumers - including all major carmakers in Germany - announced plans for sharply cutting their electrical energy intensiveness and increasing their own-generation or locally developed, non-grid power supplies.

Nuclear power's large dependence on carbon financing has become another handicap, as EU carbon permit prices continue to slump, cutting away even more of nuclear’s advantage over fossil fuels.

The move away from nuclear power in the European Union, very slow or no growth of plant orders in the US, complete uncertainty regarding Japan's stalled, or possibly abandoned nuclear plans, the probably certain continuation of "no nuclear" policies in Australia and New Zealand and a possible sharp reduction in India's n-power plans, stands in contrast to China which has 26 reactors planned and under construction. Russia has 12 reactors under construction and India presently has 7 planned or being built. Both Taiwan and South Korea remain "committed to nuclear power" but new reactor orders, worldwide, are stuck in the post-Fukushima track of near zero.

All however depend on nuclear power being able to compete with its traditional largest competitor - coal. When only front end costs are counted, back end costs are ignored or "forgotten", and accident risk insurance is treated as a "minor" cost component, nuclear power can still remain attractive. The EU's likely abandonment of nuclear power is with no coincidence happening in the world region with the largest number of old reactors - sealing the fatal importance for n-power of its back end costs, including reactor disassembly, Safestor long-term decommissioning, and site recovery.

The relatively new and surprising financial difficulties of electric power utility companies in many countries, not exclusively European but most intensively in Europe is signaled by the continent's major utilities divesting or selling off assets and reducing capital spending, becoming "risk off". Many utility chiefs paint a glum future for their business, especially in Europe, making it legitimate to ask if they will be there of 40 years time to spend billions on making their shut down n-plants safe.

Catastrophic Loss

Even unusual industrial and commercial sector burden sharing frameworks as used in Finland, where industrial groups are formed to pool funding in return for shares of plant output, and share operating risk and costs, were tested to the limit with Areva of France's extreme high cost reactor building foray in Finland.  For the large majority of utility companies that might buy and operate reactors, the front end costs will need increased corporate debt financing at a time when banks and investor funds are starting to take a harder look at electricity production and distribution infrastructures and their real value.

As we know from the case of Tepco in Japan, owner and operator of the Fukushima 6-reactor complex, the catastrophe not only revealed the frail financial health of Tepco, but almost instantly destroyed the firm as a "normal business". It is now completely state controlled and financed, due to its inability to finance even a fraction of the costs caused by the catastrophe. One worst possible nuclear accident means instant corporate death for the plant owner and operator.

Increasing utility company risk is also due to financialization, which severely fragilized Tepco long before the Fukushima catastrophe. Taking on both large new debts, and almost open-ended financial risks with nuclear investments results in operating structures that make analysts unable to confirm that such spending can even be financed by utilities. Needing to use more and more of their cashflow to extract positive earnings from hedging operations, recourse to debt is their only way out. For large new capital spending projects, like n-power this becomes heavily "risk on" and firmly advised against by financial and capital managers with a role on utility company boards.

Risks for the consumer, from nuclear power are also large. In the Czech Republic case, prices of electricity would have to rise by about 50 euros ($65) per 1000 kWh, and stay high for about 10 years to make the Temelin venture possible, according to Credit Suisse. In the UK case, literally extreme high electricity prices would be needed to ensure project feasibility. Other examples of hoped-for nuclear projects in Europe, all of them government led, included two now probably failed, and certainly politically unpopular initiatives in eastern Europe - both of them shot down by unsure or impossible financing. The initially German-supported n-power project in Roumania is in abeyance since late 2011, and the Lithuanian government proposal to build a new 1350 MW reactor at Visaginas was rejected by voters in a non-binding referendum, in October 2012.

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About Andrew McKillop

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