Betting on Nuclear

Skyrocketing gas prices, looming legislation on carbon dioxide emissions, unprecedented demand for renewable energy-powerful changes portend interesting times for the [...]

June 2 2008 by Jennifer Pellet


Skyrocketing gas prices, looming legislation on carbon dioxide emissions, unprecedented demand for renewable energy-powerful changes portend interesting times for the power business. Complicating the landscape for companies like PPL Corporation, an energy and utility holding company based in Allentown, Pa., are regulations that cap prices in some markets-making the power-price squeeze invisible to consumers while simultaneously disincenting power companies to invest in increasing capacity.

“The price of power in Pennsylvania-one of our regions-has been constrained for 13 years,” says Jim Miller, chairman and CEO of PPL. The company controls more than 11,000 megawatts of generating capacity in the U.S., sells energy in key U.S. markets, and delivers electricity to about 4 million customers in Pennsylvania and the United Kingdom. “Meanwhile, in the last six years, uranium prices have moved from $7 a pound to $80 a pound. Coal has moved from $22 a ton delivered at the plant to $55 a ton, and natural gas has gone from $2 per million BTUs to $12 per million BTUs. So, immense fuel prices coupled with the lack of new building are creating demand on the system, [pushing] prices up.”

The price of electricity has already seen significant hikes in unregulated markets-jumping by 70 percent in Baltimore. PPL’s own prices are likely to climb by as much as 35 percent when the Pennsylvania rate caps expire in 2010. Miller can look forward to a margin bump from the boost, but will also face the corresponding wrath of customers accustomed to cheap power. “We’ve been blessed with cheap electricity in this country for many years,” he points out. “People are having a tough time understanding that energy is not an entitlement-it is a commodity and it comes at a cost.”

On the upside, he’s hopeful that the eventual price jumps will enable power companies to invest in new plants and serve as a wakeup call to consumers. “Let those prices send a signal for new [generators] to be built, where appropriate,” he says. “And let them send a signal to the consumer that you just cannot go forward without thinking about conservation of energy.”

Conservation, Miller is quick to add, will only be a small part of the solution to the current energy crisis. Meeting current and future energy needs will require an increase in base-load generation, he notes, pointing out that the question is not whether the nation will need more power, but where that power will come from. To Miller, nuclear power is the clear answer. “New nuclear has to be a component in solving the greenhouse gas issue,” he asserts. “Twenty percent of the power in the U.S. right now is nuclear. If we sit around and let those plants reach the end of their lives and shut down, we’re going to have a very serious problem.”

He’s far from alone in that thinking. While no company has opened a new nuclear plant on American soil in 30 years, more than a dozen companies have filed or signaled intent to file for permits to build plants. PPL, which already runs two nuclear generators in Susquehanna, Pa., is among them. The company is seeking U.S. Nuclear Regulatory Commission approval to construct and operate a new generating unit near its Susquehanna plant-a move that will position it for the option to seek federal credits and nuclear loan guarantees and begin a 4.5-year construction process.

To Miller, the nation’s reliance on coal and the likelihood of legislation that limits carbon emissions make the nuclear bet a no-brainer. But, he concedes, it’s a big bet. “The cost of new nuclear construction, including financing costs, will run on the order of $10 billion,” says Miller, who has shepherded PPL’s growth from a market cap of $12 billion when he joined the company in 2001 to its current $18 billion. “So it’s critically important to the future of nuclear energy that the federal government continues the availability of loan guarantees so that these projects can be financed and leveraged at 80 percent debt and 20 percent equity. Without that, these projects are too large for any utility in the U.S. to tackle.”

In the meantime, PPL has also applied for a license to more than double the amount of renewable electricity produced at its hydroelectric plant in Holtwood, Pa. “Licensing a new hydro plant is next to impossible,” notes Miller, who was named CEO of PPL in 2006. “This is an expansion of an existing plant out of the Susquehanna River in Pennsylvania.”

The new generation plans represent a redirection of resources for the company, which divested itself of its regulated electricity delivery operations in Latin America in 2007. The move positioned the company to weather its last two years of rate caps and to invest in growth opportunities, notes Miller. “2007 was an exceptionally strong year for us because we sold operations in [Chile, El Salvador and Bolivia] at a huge profit,” he says. “We have long anticipated that 2008 and 2009, the last two years in our rate cap period, will be tough years. But we’ve been able to reduce our costs and increase output of some plants to offset some of the negatives. Our plan now is to grow our business, but at the same time stay focused on supplying reliable service at the most reasonable cost we can.”