Stop-start revival of the nuclear industry

Friday, November 28, 2008

Barely a few days before the collapse of Lehman Brothers, EDF finally clinched its multi-billion pound acquisition of British Energy. At about the same time, the French state-controlled electricity group also tried – and failed – to counter veteran investor Warren Buffett’s bid for control of a US electricity utility, Constellation Energy.

The moves seemed logical for a French champion of nuclear energy. With oil prices hitting record highs of nearly $150 a barrel and climate change pushing governments to promote investments in clean and renewable energy, the nuclear lobby felt confident the industry was about to enjoy a renaissance. The US and the UK, countries that have committed themselves to expand significantly their nuclear power generating capacities, seemed the new promised lands of the nuclear revival.

Now oil prices have fallen sharply and economies have gone into recession, energy industry majors are starting to review – and in some cases scale back – investment projects. Even in the nuclear sector the mood seems to be changing. Areva, the other big French state nuclear champion, has postponed two projects this month. Together with its Canadian partners, for example, it is delaying a project in Saskatchewan that was originally due to start mining uranium in 2010.

Areva, like EDF, remains convinced of the longer-term prospects of the US market for the development of new nuclear plants. But right now they cannot help being somewhat cautious about the future. Barack Obama, the US president-elect, committed himself during the election campaign to clean energy and reducing CO2 emissions as well as making US energy supplies more secure. Nuclear energy would clearly play a role but he never spelled out exactly its extent. In contrast, his defeated rival, John McCain, was far more explicit. He said he wanted the country to be equipped with 45 new nuclear reactors by 2030.

Both Areva and EDF must also be feeling uncomfortable over prospects in the Chinese market after this week’s diplomatic falling-out between Paris and Beijing. Meanwhile, other countries are beginning to have second thoughts.

The Canadian province of Ontario was due to pick the winning candidate to build its planned new power station by the end of this year. It has postponed any decision until the end of March 2009. The South African electricity group Eskom has also delayed giving the go ahead to the construction of two plants by 2016 and a further 10 by 2025.

In these days of tight credit, electricity industry officials concede there is a growing case for utilities across the world to reconsider their nuclear plans and turn to less costly gas and coal options. The average cost of building a gas-powered plant is about 75 per cent lower than a new generation nuclear one. In the case of coal, it is about 40 per cent less. Indeed, many expect technological advances in turning coal into a clean, or at least cleaner fuel will probably re-establish coal’s position in the energy equation.

If some of the markets that had shown the greatest promise for the long-awaited nuclear industry revival now seem to be stalling, the irony is that others that until recently appeared totally closed could start opening up. Italy shut down its nuclear programme in 1986 but the Berlusconi government is now set to start consultations to revive a nuclear strategy for the country. A debate about expanding the role of nuclear energy has also begun in Spain.

After all, a nuclear programme could be as good a way to stimulate the economy and create jobs in a downturn at the same time as reducing a country’s dependence on energy imports.

Even Felipe González seems to agree. He was the Socialist prime minister who decided to run down Spain’s nuclear programme. He now says the time has come to reconsider the role of nuclear energy in Spain.

Moral hazard
Bankers and insurers have welcomed large-scale government intervention to bail out troubled financial institutions to prevent systemic risks spreading. But many are beginning to be worried that some of the beneficiaries of government and taxpayer largesse will now start behaving in an uncompetitive manner.

Henri de Castries, chief executive of insurer Axa, this week said it was crucial to monitor the way institutions that had resorted to government support used the money. If they used these fresh funds to set out on new acquisition binges and steal clients from competitors through effectively state-subsidised pricing, it would constitute a serious distortion of competition.

Giovanni Perissinotto, his opposite number at Italy’s Generali, has similar concerns. Everybody should be alarmed, he says, when they hear, “as we have”, of some of these rescued businesses talking of new found strength and how this frees them to pursue acquisitions. “That is true moral hazard,” he says.

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