Nuclear Energy Debate Is Central to the Duke-Progress Merger
The pending mega-merger between Duke Energy Corp. (NYSE:DUK) and Progress Energy Inc. (NYSE:PGN) is going to change some basic assumptions about the power generation sector. This new union will create the largest utility in the U.S., and that is going to have an impact on how electricity is generated and transmitted.
For one thing, there is likely to be a renewed move to develop nuclear energy capacity and to make it a utility-friendly option.
Both companies currently have reactors. Both are based in North Carolina and have a heavy presence in the region. That means the Carolinas will almost certainly see additional development in the sector from the newly formed company.
That is going to place the renewed nuclear debate squarely in the middle of this year-long merging process.
Increasing Nuclear Reliance Cuts Both Ways
Nuclear power is returning to favor, but it also has been the laggard sourcing for electricity. The renewable and non-fossil-fuel base is attractive, but there are major drawbacks, too, like the inordinate time and expense needed to bring a reactor on-line.
Both DUK and PGN are infrastructure majors. As such, they are not into the micro nuclear applications (see “This Mini Energy Revolution Is A Giant Profit Opportunity,” April 19, 2010). These are mainframe players.
While the size element provides substantial improvements to efficiency (to say nothing of the corporate financing advantages), it will also mean higher utility bills for consumers during the decade-long process of building reactors, bringing them into service, and recouping the significant front-loaded expenses.
Both CEOs – flamboyant Jim Rogers at Duke and Bill Johnson at Progress – have said the new giant will have no choice but to expand on the nuclear front. Even the sites are already known. Further, the CEOs are committed to changing North Carolina law, thereby allowing power companies rate increases without having to go through a lengthy series of public hearings and oversight proceedings.
The legislative obstacle is a significant concern for both the proponents and opponents of increasing the reliance upon nuclear power.
Currently, in North Carolina, utilities can request a rate increase to cover expenses for each year a facility is under construction. Yet this often leads to nasty public hearings and considerable public relations concerns.
A company could opt to wait until the plant is operating to start to recoup costs, but that is hardly possible in the 10 years or more it takes for a reactor to begin a return on investment. It would mean having to carry heavy interest payments throughout the construction process.
Critics maintain that allowing a streamlined process for annual recovery would prompt utilities to pass on the risk of nuclear expansion to their consumers. They also happen to have some history on their side…
A Problematic Past
The two sites where the new reactors would be built are themselves part of the controversy.
Each site was initially set to have several reactors each. They both ended up being primary examples of the costly mistakes that plagued the industry over 20 years ago.
Progress’ Shearon Harris site, southwest of Raleigh, was originally designed to house four reactors at a projected total cost of $1.1 billion. It ended up with just one reactor at a cost of $3.9 billion.
Duke’s William Lee site is in Gaffney, South Carolina, 50 miles west of Charlotte. It was designed for three reactors, but never developed, apparently due to a severe miscalculation in cost estimate – it started at $6 billion and was revised up to $11 billion after less than a year. Yet Duke later raised rates to recover about one-third of the $600 million it had spent – despite customers receiving no advantage from the project.
Then again, both Duke and Progress have less-than-stellar records with the reactors they do have. According to data compiled by the U.S. Nuclear Regulatory Commission, both companies fall into the “average” category nationwide.
Duke’s Catawba nuclear plant south of Charlotte is one of the best-performing anywhere. But its Oconee plant in South Carolina has the worst performance scores of any reactor in the country, spending upwards of 70% of the time over the last decade dealing with performance problems. And PGN reactors have had consistent problems.
Making Nuclear Power More Utility-Friendly
Nonetheless, Duke and Progress are likely to meet a receptive North Carolina state legislature in their drive to make nuclear procedures more utility-friendly.
South Carolina has already obliged, with provisions for faster rate increases for nuclear expansion, while Progress is also benefiting from a similar move in Florida.
Progress CEO Johnson has made it very clear how important these legal changes are to the projects. He was blunt last week during a meeting of newspaper editors: no regulatory changes, no ability to raise capital; no capital, no projects. (Johnson will be the CEO of the new Duke after the merger.)
Yet even success on the legislative front may not be enough.
Projected costs are so high to develop the two sites (well in excess of $20 billion) that Duke would need to bring in a new outside partner just to fund it. Additionally, both companies acknowledge that a difficulty in estimating future electricity needs will create another problem in justifying the huge expense of nuclear projects.
However, one element working in their favor is the rapid aging of the power production infrastructure in the Carolinas. Much of this is coal-fired and has about 20 years left (at best). With new regulations on emissions coming next year, some of the plants are slated for ever-earlier retirement. (See “Two Non-Carbon Regulations About to Rock the Coal Sector,” October 29, 2010).
This state of affairs demands attention to replacement capacity well in advance of most coal-fired plants coming off-line.
And nuclear is the preferred option for the new mega-Duke.
What happens in the Carolinas, therefore, will tell us much about how genuine a nuclear response to a rising power issue is likely to be elsewhere.