The Other Shoe Just Dropped, Dooming the U.S. Nuclear Revival

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Metals

On February 9, 2012, the Nuclear Regulatory Commission (NRC) issued Southern Company (NYSE: SO) a construction permit and operating license for its two newest nuclear power plants. When completed, Vogtle units 3 and 4 will produce a total of 2,234 megawatts of power.

But investors who expected big returns were in for a big surprise… This nuclear white elephant was doomed from the start.

Over the last five years, Southern Company shares have appreciated a measly 7.62%.

And after you read this, you’ll understand why the next five years could be much worse for the entire nuclear industry.

Nuclear power plants continue to get more expensive over time. Saddled with massive cost overruns and huge delays, nuclear has a “negative learning curve.”

As the Pennsylvania Dutch say, “The further we go, the behinder we get.” It’s nuclear power’s cost escalation curse.

The Vogtle power plant is a classic example. Construction began on Vogtle units 1 and 2 in 1971.

The project took 18 years to complete and was a decade behind schedule. The final price was $9 billion for the two plants. That was 10 times the estimated price.

But it gets even better…

Construction began on units 3 and 4 in 2009. Unit 3 was originally scheduled for operation in 2016. Unit 4 was scheduled for this year.

Now unit 3 is scheduled for completion in 2019, and unit 4 is set for 2020.

The original cost for units 3 and 4 was $14 billion.

That’s now ballooned to $21 billion. This is the nuclear cost escalation curse in action.

And the U.S. nuclear power revival? It was doomed almost before it got started.

John Rowe, the former CEO of the largest nuclear power operator in the U.S., said that Vogtle units 3 and 4 will be uneconomical when – or if – they are completed.

I’m with Rowe on this one.

I don’t think these nuclear power plants will ever produce any power. In light of Obama’s efforts to reduce carbon, you would think that there would be a stack of permit and construction applications on the NRC’s desktops.

But there isn’t. Including Vogtle units 3 and 4, there are only five reactors under construction in the U.S.

Two are under construction in South Carolina. And the Tennessee Valley Authority’s Watts Bar unit 2 just received its operating permit.

The TVA unit took 40 years from permitting to operating status. You could blame the Fukushima disaster, but that’s not the real reason.

Cheap shale gas, abundant here in the U.S., is slowly spelling the end for nuclear power. Nuclear power plants can take a decade to permit and another decade or two to build.

There’s not a utility in business that can plan with numbers like that… Especially when huge cost overruns are the norm rather than the exception.

In contrast, the permitting and construction time for a natural gas-fired power plant is as little as 18 months. And you can build five to 10 natural gas-fired plants for the cost of one nuclear plant.

Uranium Investors, Pay Attention

Given what’s happening to the nuclear power plant base in the U.S. (it’s shrinking due to plant closings) and the lack of any future for nuclear here, I’m reluctant to recommend any uranium miners as short-term investments.

All you have to do is look at a five-year chart of Cameco Corp. (NYSE: CCJ) and uranium prices.

Over the last five years, the spot price for uranium has dropped 63.2%. Over that same period, the price of the world’s largest uranium miner declined 51.2%.

If you’re a long-term investor (emphasis on LONG), a few shares of Cameco might be just the ticket. With 66 reactors under construction, 158 more planned and as many as 330 more proposed, the demand for uranium could grow by 48% between now and 2030.

Of course, I don’t believe utilities will build even 25% of those reactors. Solar and wind, along with cheap battery storage and natural gas, trump the cost of nuclear by orders of magnitude.

A few shares of Cameco could be a great way to play the eventual uptick in uranium demand. But for the foreseeable future, I’m betting big on shale gas and alternative energy sources.

Good investing,

Dave