Wall Street Journal (pg. B1)  [Printer-friendly version]
September 25, 2007

NUCLEAR ENERGY'S SECOND ACT?

Bid to Build Two New Reactors In Texas May Mark Resurgence; NRC Gears
Up for Many More

By Rebecca Smith

In a move that could mark the beginning of a nuclear-power revival, a
New Jersey-based energy company today plans to submit an application
to build and operate two new reactors. The request, the first
submitted to the Nuclear Regulatory Commission in 31 years, comes from
an unlikely source: NRG Energy Inc., a company that has never before
built a nuclear plant.

The application -- for a two-reactor addition to the company's
existing South Texas nuclear station -- could offer the first full
test of the nuclear agency's new licensing process, which has been
under development since the 1980s. The new process allows companies to
submit a single application for a construction permit and conditional
operating license, eliminating the risk that a firm could build a
plant but not be allowed to run it.

The nuclear agency has geared up for an expected flood of applications
over the next 15 months, which could cover as many as 29 new reactors
at 20 sites and represent a possible investment by the U.S. power
industry of $60 billion to $90 billion. Companies are rushing to get
their applications in quickly, hoping to qualify for potentially
billions of dollars in federal incentives and loan guarantees offered
in the Energy Policy Act of 2005.

NUCLEAR ACTIVITY

Take a look at the current nuclear-power landscape across the
U.S.Barring an unexpected move on the part of Congress, a decision by
the commission could clear the path for NRG to go ahead with its
plans. Congress has mostly encouraged the revival of nuclear energy,
concluding the nation's aging nuclear fleet needs refreshing, though
opposition could surface now that the industry appears to have
momentum.

The NRG application likely will revive debate about the wisdom of
building more nuclear reactors, especially since the industry still
doesn't have a federal repository for the radioactive waste from an
existing U.S. fleet of 104 operating reactors. Efforts to license a
waste repository at Nevada's Yucca Mountain, have been opposed by
Nevada officials and Senate Majority Leader Harry Reid.

Still, the renewed optimism within the industry is noteworthy, given
that it was virtually left for dead a decade ago, in the wake of
safety worries stemming from the 1979 accident at the Three Mile
Island plant, huge cost overruns and disappointing operating
performance. In the late 1990s, plants were practically being given
away by frustrated operators. A handful of consolidators started
picking them up and the industry dramatically improved its
productivity, often spurred by the profits available in deregulated
electricity markets like Texas.

More recently, the industry has regained momentum, partly because
other forms of power generation have continued to show significant
flaws. Coal-fired plants undermine efforts to combat global warming.
Many natural-gas-fired plants rely on a fuel with volatile prices. And
renewable energy mostly comes from intermittent forces like wind, rain
and sunlight.

This first application comes from a somewhat unlikely source; NRG is a
so-called "merchant generator," a company that makes electricity and
sells it on the open market. NRG has never built a nuclear plant, and
because it doesn't own a utility, has no ratepayers to whom it could
bill the estimated $5.5 billion to $6 billion expense.

"We're like the uncola," says David Crane, NRG chief executive in
Princeton, N.J.

In December 2003, NRG exited federal bankruptcy protection, the result
of overly aggressive expansion in the 1990s. Recently, it announced
plans to spend about $16 billion adding 10,350 megawatts of new
generation to its existing fleet. It has a 44% ownership interest in
the existing South Texas nuclear station and intends to bring in other
investors to share in the cost of the additional plants, if approved.

Under the new application process, nuclear regulators are pushing
standardization -- both in plant design and in applications seeking
licenses. For those companies that satisfy the nuclear agency's
requirements, the agency is promising a 42-month review period,
culminating in a license decision. But the level of scrutiny will be
strict and demanding, the agency says.

NRG says it hopes to have approvals in hand by 2010, though the
nuclear agency hasn't promised that the review will be that quick.
NRG's ultimate aim: to install two new 1,350-megawatt units, designed
by General Electric Co., with Toshiba Corp. taking the lead on
construction. The company hopes to have them ready for commercial
operation in 2014 and 2015.

In order to speed the process, NRG is using a reactor design that the
nuclear agency already has certified for U.S. use and which has been
in use in Japan for more than a decade. It is the only reactor design
being considered in the U.S. that can make both claims.

Both the power industry and the agency face significant risks going
forward. The industry risks spending billions on designs not built
here before. The agency's challenge: to stick to timelines promised
and maintain high safety standards with a work force facing large
numbers of retirements.

To date, most of the companies that have expressed an interest in
building nuclear units have been traditional utilities that built
plants in the past, such as Southern Co., Dominion Resources Inc. and
Duke Energy Corp. Regulated utilities expect to put new investments
"in ratebase," meaning they are allowed to charge ratepayers for the
expense and book a profit.

But a few merchant operators, such as NRG, Exelon Corp., Constellation
Energy Group Inc. and TXU Corp., are now jumping in, proposing to
build plants without traditional rate protections. Because they have
no one to whom to pass along the costs; the merchant operators must
cover expenses and make a profit as a result of open-market power
sales. If they guess wrong, shareholders will be hurt. NRG's Mr. Crane
thinks merchant operators, with so much at risk, will provide the
truest test of the financial viability of nuclear power.

Mr. Crane says his firm has arranged for Toshiba to build the nuclear
reactors because "the Japanese have built four of these already, on
time and on budget."

Andrew White, president of GE-Hitachi Nuclear Energy, a joint venture
of General Electric and Hitachi Ltd., said both firms participated in
construction of GE advanced boiling water reactors in Japan and Taiwan
and he said GE helped NRG prepare its license application. Due to the
U.S.'s long period of dormancy in nuclear-reactor construction, many
U.S. companies are playing catch-up with Japanese and European
outfits.

The GE design selected by NRG was certified by the regulatory
commission in 1997. Mr. Crane said he looked at other reactor designs,
including the Westinghouse AP 1000 reactor, the only other design
currently certified by the safety commission. But in the end, Mr.
Crane decided against "building something that's never been built
before. [That] creates a risk I can't quantify."

Contract terms also were a factor. Mr. Crane said Toshiba "understood
we would need a fixed-price, fixed-schedule contract...where, if
you're late, you bear the cost" and was able to offer more cost
certainty because it's built the plant before. Other vendors, he said,
offered less protection. He said Toshiba is offering units with a
blended price of $2,000 to $2,250 per kilowatt of capacity,
substantially less than the $3,000 per unit of capacity that other
utilities have cited as a ballpark estimate of cost.

So far, it appears merchant generators think Texas provides the most
promising market. Deregulation in that state has resulted in a sharp
run up in wholesale power prices since 2004. A recent decision by
Dallas-based TXU to abandon efforts to build eight coal-fired plants
could result in shrinking electricity reserves in the coming years,
creating an environment receptive to operators looking to bring large
units online and sell such units' full output.

Write to Rebecca Smith at rebecca.smith@wsj.com1

Copyright 2007 Dow Jones & Company, Inc.