Nuclear Asset Proliferation

The rush to nuclear power is on ! Worldwide, only in the 2010-2020 decade, as many as 200 new, large, high tech reactors could be built at a total cost of perhaps US$ 1000 to 1250 billion. This excludes the fuel, waste handling, and related downstream costs such as the basically ineffective, but expensive measures for reducing the risks of weapons proliferation. The bad news is that proliferating numbers of reactors and construction projects will be expensive - very expensive - in their collateral economic and financial damage, let alone any damage related to risks of reactor meltdowns, dirty bombs or Depleted Uranium weapons.

Reactor construction costs are now on a tear: since 2005 estimated costs, for some projects, engineering materials and supplies have tripled while others have 'only' doubled. Incredible? Unfortunately it is no real surprise because nuclear assets behaved exactly that way in the conveniently forgotten - but real - nuclear asset boom of the period around 1974-1985. In that period, ending with the Nuclear Winter for atomic energy sealed by the 1986 Chernobyl disaster, we find for example that uranium prices more than tripled (200 percent inflation) in 3 years. This pushed Westinghouse to declare force majeure on supply contracts for the many reactors it was building - and triggered ever more ferocious inflation in the nuclear sector.

Today the same process is operating, as nuclear assets of all kinds are swept into a classic asset bubble. As always, governments and taxpayers will foot the final bill.

Mark Cooper, in a report published by the Vermont Law School in Sept 2009 puts it this way:

“The frantic effort of the nuclear industry to increase federal loan guarantees and secure ratepayer funding of construction work in progress from state legislatures is an admission that the technology is so totally uneconomic that the industry will forever be a ward of state, resulting an uniquely American form of nuclear socialism”.

NUCLEAR SOCIALISM-ATOMIC CAPITALISM

What Cooper calls nuclear socialism - a shady, expensive, wasteful and dangerous mixture of political and corporate elite action behind closed doors - is now heavily in action almost anyplace in the world, not only the USA. From the OECD countries, to the Emerging economies, nuclear power is now the N°1 favourite energy choice of political and corporate elites. Their determination to push the nuclear agenda forward is so strong that we are unfortunately obliged to fear the worst, whether we are thinking of nuclear industrial and environment disasters, or nuclear economic and financial disasters.

In the OECD old nuclear countries including the US, tax breaks and subsidies for atomic energy now extend to government loan guarantees enabling reactor building companies and power corporations to play off subsidised loans from the state, against more expensive free market loans, in ever more complex and structured packages. Where the loan guarantees do not cover all the project financing, and trimmings like 100 percent cover for any losses of any kind, the reactor builder and power company consortiums and holding companies will walk away from the project. Blackmailing the State with the threat of brownouts and blackouts, it will be forced back to the negotiating table - and offer more loans that the State, itself, will finance through borrowing. To be sure, longer term, the taxpayer will foot the bill and bail out the damage when these financial strategies collapse at the flip of a coin.

Nuclear ambitions are vast. According to the International Energy Agency, up to 75 000 MW of new nuclear plants could be built - just by China and India - in the next 15 or 20 years at a cost in today's money of about US$ 350 billion. Both countries intend to quickly launch their own overseas reactor building, uranium supply and nuclear service corporations. Individual projects are ever more gigantic: if India's Jaitapur 9 900 MW project is built, it will be the world's biggest single complex, possibly costing more than US$ 50 billion. Financing of these mega projects will use every trick in the book of financial engineering but will entirely depend on the State in final recourse - and depend on continued and fast economic growth, neither of which are certain.

While economic growth holds up, and government largesse stays strong, the semi-private conglomerates which build and operate the reactors will enjoy the Too Big to Fail privilege of total support from the State. The State provides them cheap loans, insures the plants because no private insurer will do so, waives environmental regulations and workplace safety laws, guarantees to pay any losses they incur, and supports their massive overseas sales drive. This is called "free market capitalism" by its defenders and promoters ! Whether nuclear socialist or atomic capitalist, however, the economics of nuclear energy are negative, and the State's permanent presence will ensure this asset bubble grows almost without limit.

AMNESIA AND AMNESTY

General amnesia seems to affect decision makers on the previous nuclear boom, from about 1974 to 1985, and its near total collapse. Costs spiralled upward in a fireball of inflation, reactor orders and building shrank to almost nothing, there were bankruptcies, forced mergers and huge job losses across the industry, resource and infrastructure waste was massive, and the state was forced to pay huge nuclear debts. Today, mired by its own huge debts, the State turns a blind eye to the vast accumulated costs of keeping the nuclear industry in business. Its previous financial and economic disasters are never mentioned but this in no way prevents them from being real: in the US case, previous rounds of federal government aid to nuclear power left bills for taxpayers, due to power company bankruptcies and other ‘stranded costs’, of nearly $100 billion, according to to economist Doug Koplow, the founder of ‘Earthtrack’.

Without public backing, no private company would ever risk its shareholders' cash in nuclear power, but this in no way cools the ardour of the finance sector, for the coming nuclear asset bubble. Drivers for the bubble are multiple and include the need for OECD governments to find ways to reduce, displace in time, or dishonor their debts, renewed fear of high oil prices, the search for big ticket export sales of high tech equipment, and the remaining (but now weak) posturing by some OECD leaders on the need to "fight" climate change and develop low carbon energy.

Unlike the US subprime crisis which started as a domestic economy crisis, the nuclear asset boom-slump of 2010-2020 will be played out across the world from the start. Asset securitization is now a cornerstone of the global economy and will find a large outlet in the combined asset space of government debt, currencies and interest rates - and nuclear assets - in a high gain one way growth process. Leaders of countries with large debts, and large national interests in the nuclear sector such as the USA, France, Germany, Japan and UK are now seeking new facilities for nuclear power expansion financing worldwide, especially targeting IMF action to create and issue new amounts of SDRs to launch a Nuclear Facility similar to the mooted, and failed Green Energy Fund or facility, rejected by an IMF full board meeting in March 2010.

Other initiatives will include increased technical support (and possibly a financial role) from and for the UN IAEA and related agencies and institutions like the OECD NEA. To be sure, the private financial sector, from commercial banks, private investment banks and hedge funds to the widest possible range of other players is now active in nuclear financing, and this activity will soon increase very fast.

Players in this asset levering or bubble-making process will essentially bet on the likelihood or not of a nuclear borrower defaulting on all kinds and classes of debt, linked to reactor building and uranium supply contracts, power transmission development contracts, energy intense industrial project contracts, downstream development contracts for offices, hotels, and commercial construction - and so on. With asset leverage able to surpass 200 times the nominal value of an underlying security - a 900 MW nuclear reactor costing US $ 6 billion, for example - the ballooning of paper assets due to the Nuclear Renaissance can quite quickly make the US subprime asset balloon seem small beer.

PRIVATE ASSETS - SOVEREIGN DEBT

Also unlike the US subprime crisis, the global nuclear asset will start public and have a direct linkage to sovereign debt. Sovereign borrowers in Low income developing countries are being drawn into nuclear power at a time when the nearly 20-year-long Third world debt crisis has been replaced and superceded. Today, it is the OECD countries which wallow in unpayable debt and forced austerity programs, currency devaluation "wars", and are seeking debt relief. Recycling new wealth from the South to North, using the nuclear asset boom as the pump, will soon feature in the minds of OECD strategists if not in public statements by leading politicians.

The risk of nuclear loan default (and even their national integrity) for countries like Ghana, Indonesia, Sudan, Bangladesh, Algeria, Kazakhstan, Mongolia or Egypt will however remain high on loan programs stretching 30 years or more. We could of course say the risk is no higher than loan default risk for US subprime home loan borrowers, where the bet can be summarized as wagering if low income home buyers provided with huge loans at so-called variable rates - that is rising rates of interest - will default. The question was not "if", but "when", to the supposed surprise of the financial players involved and to political leaders governing the economy.

Typical nuclear loan arrangements will be syndicated loans with linked credit default , currency and interest rate swaps. They will increasingly generate SIVs (structured investment vehicles), which can have nominal values easily exceeding 200 times the loan amount actually needed for buying the "underlying asset" of the reactor and its initial load of uranium fuels. Government debt will also be rapidly "packaged" into nuclear financing vehicles and facilities, as the asset growth process extends into the multi trillion dollar range.

Unsurprisingly, positive feedback is already acting in the shape of fast rising inflation inside the nuclear sector, and this will grow until the nuclear asset mutates into a simple betting chip. Cost inflation is now running at about 25 percent a year, and the explanation offered for this by the nuclear industry is "rising raw material costs", and sometimes "more sophisticated designs", for example safety features able to resist wide-body airplane crashes (in the case of French EPRs), more efficient utilisation of uranium, reduced cooling water needs, and so on. This can be contrasted with industry claims of falling unit costs due to bigger reactors, modular design, industry standardized components - and enthusiastic support from the financial industry supposedly driving down the price of loans for nuclear power projects.

Nominal values for the mix of government, semi-private and private debt cranked up could likely attain US$ 200 000 billion ($ 200 trillion), equal to more that 3 years of world total GDP using IMF estimates for world GDP. Implosion of this asset bubble will therefore be a lot more menacing for national finances of all player governments, than the implosion of the US subprime asset bubble - which itself radically increased the national public or sovereign debts of nearly all OECD countries, and has led to "currency wars" of competitive currency devaluation ever since.

For these reasons, over and above the environmental, industrial and technology issues, radiation pollution, weapons proliferation (including DU weapons and Dirty Bombs), and so on, the true size of the risks of nuclear financial disaster should be taken seriously, discussed, and acted on before this financial weapon of mass destruction goes critical.

About the Author

Author & Consultant
xtran9 [at] gmail [dot] com ()
randomness