Nuclear's Tangled Economics

To power America's future, Senator John McCain (R-Ariz.) has an energy plan with a distinctly French accent. "The French are able to generate 80% of their electricity with nuclear power," the presumptive Republican Presidential nominee points out. "There's no reason why America shouldn't."

In a mid-June speech, part of a continuing blitz on energy issues, McCain laid out his vision for 100 new nuclear plants—45 of them to be built by 2030. They would help meet America's energy needs, and because nukes don't emit greenhouse gases, they would fight global warming as well. McCain also wants to borrow from the French playbook by reprocessing and reusing spent nuclear fuel and by providing government incentives to get all this done. Nukes now produce 20% of U.S. electricity, says McCain senior policy adviser Douglas J. Holtz-Eakin: "To move north of that, we have to be aggressive."

BUDGET BUSTERS

But McCain may not want to follow the French example too closely. While France's existing 59 atomic plants are relatively trouble-free, its largest nuclear company, Areva, has run into difficulties building next-generation reactors in France and Finland. The Finnish project is two years behind schedule and more than $1.5 billion over budget, while construction of the other plant, in Normandy, was temporarily halted in late May because of quality concerns. And while France has the world's biggest fuel-reprocessing program, it still hasn't found a permanent home for a growing pile of highly radioactive waste that's left over. The waste sits in heavily guarded storage at Areva's La Hague reprocessing plant.

The U.S. nuclear industry believes that delays and cost overruns, which helped kill new plant construction in the late 1970s, are less likely today, thanks to now-standardized reactor designs and a streamlined U.S. government licensing process. That process has yet to be tested, though, and costs for new plants are climbing. Two years ago, the price of a 1,500-megawatt reactor was pegged at $2 billion to $3 billion. Now it's up to $7 billion and rising, as the cost of concrete, steel, and other materials and labor soars. MidAmerican Energy Holdings (BRK), a gas and electric utility owned by Warren Buffett's Berkshire Hathaway (BRK), shelved its own nuke plan earlier this year, saying it no longer made economic sense. "The country badly needs new nuclear plants to deal with the climate issue," says John W. Rowe, chief executive officer of Exelon (EXC), currently the largest nuke operator, and chairman of the Nuclear Energy Institute, the industry's trade group. "But they are very expensive, very high-risk projects."

So risky and expensive, in fact, that building new ones won't happen without hefty government support. NRG Energy (NRG), Dominion (D), Duke Energy (DUK), and six other companies have already leaped to file applications to construct and operate new plants largely because of incentives Congress has put in place. The subsidies include a 1.8 cents tax credit for each kilowatt hour of electricity produced, which could be worth more than $140 million per reactor per year; a $500 million payout for each of the first two plants built (and $250 million each for the next four) if there are delays for reasons outside company control; and a total of $18.5 billion in loan guarantees. The latter is crucial, since it shifts the risk onto the federal government, making it possible to raise capital from skittish banks. "Without the loan guarantees, I think it would be very difficult for the first wave of plants to move forward," says David W. Crane, CEO of NRG.

Job One for McCain or Obama: Jobs