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CE pulls out of Calvert Cliffs-3 leaving EDF & EPR in the lurch

Nuclear Monitor Issue: 

In many ways, Calvert Cliffs-3 was the flagship of the U.S. nuclear renaissance. In the summer of 2007, it became the first reactor to submit even a partial application for a construction/operating license from the NRC in more than 30 years. The company created to build and operate the reactor -UniStar Nuclear- was a combination of giants in the nuclear industry: Constellation Energy (CE) and Electricite de France (EdF), using the most modern reactor design available, the EPR from Areva.

Calvert Cliffs-3 would be built on a site already hosting two reactors and the idea received enthusiastic support from local officials, as well as nearly every statewide public official in Maryland -Democrats and Republicans alike. It would be located in a region with a booming economy that was projecting serious future shortfalls in electricity demand. It had come up with an innovative financing scheme to eliminate financial risk: 100% financing from U.S. and French taxpayers coupled with a protective layer of seven Limited Liability Corporations between the reactor itself and the parent companies.

What could go wrong? As it turned out, just about everything.

When Constellation announced late on Friday, October 8 -through a deliberate leak to the Washington Post- that it was pulling out of the Calvert Cliffs-3 project despite having just been offered only the second taxpayer loan for a new nuclear reactor, the reason given was the conditions attached to that loan. Constellation complained that the upfront cost of the loan -US$880 million for a US$7.5 billion (5,4 billion euro) loan, or less than 12%, was too high. And a second proposal from DOE -to cut the upfront fee to US$300 million if UniStar would simply promise to actually complete the reactor and guarantee it would sell 75% of its electricity, was “onerous.”

Really? The profit margin on a US$10+ billion reactor (UniStar earlier had received a promise of US$2.9 billion from COFACE, the French Export-Import Bank) designed to operate at least 60 years is so narrow that US$300 million would kill the deal? Not likely.

In fact, NIRS had predicted the demise of Calvert Cliffs-3 two months earlier for a bevy of reasons -none related to “onerous” loan conditions- in a lengthy post on DailyKos August 5, 2010. If you want a full explanation of the reasons, you can read the post here.

Briefly, the Calvert Cliffs-3 project collapsed because of a combination of factors, including soaring construction cost estimates; a large drop in electrical demand due to the ongoing recession and the institution of new energy efficiency programs; plummeting natural gas prices; continued revelations of EPR design deficiencies coupled with alarm over the horrific experience of EPR construction in Finland and France; determined opposition from opponents like NIRS; and unforeseen competition from renewable energy sources, especially offshore wind.

Indeed, it may only be coincidence, but almost immediately after Constellation’s announcement, a consortium led by Google announced it would spend US$5 billion to build transmission lines to bring thousands of megawatts of offshore wind power from the mid-Atlantic coast to the mainland. Earlier in the year, a small offshore wind company, Bluewater Wind, which already has received permission to build hundreds of megawatts off the Delaware coast and is seeking approval for larger projects off the coasts of Maryland and New Jersey, was bought by energy giant NRG Energy -bringing a deep-pockets competitor to Constellation’s service area.

Constellation could see the writing on the wall, and began to shift gears. With an option, contained in the contract when EDF purchased 49.9% of Constellation’s five existing reactors to bail out the company from bankruptcy (and Warren Buffett, who almost certainly would have ended the UniStar project) in 2008, to force EDF to buy a handful of ancient coal and gas plants scattered around the U.S. for US$2 billion, Constellation saw another possible future.

Those old plants are worth only about US$500 million combined. Forcing EDF to buy them for US$2 billion would leave US$1 billion plus in profit. Constellation put in a bid to buy a fleet of much more modern gas plants in New England. This would allow it to become a regional electricity powerhouse (three of Constellation’s existing reactors are in the region), and it wouldn’t even have to go into debt to do so. At this writing, Constellation has not yet exercised this “put” option, and is apparently still negotiating with EDF on the issue, but Constellation’s intent is clear.

EDF reacted to Constellation’s announcement it was leaving the project with what appeared to be genuine surprise -although anyone following the investment community’s advice, which was generally consistent in opposing Constellation’s continued involvement in Calvert Cliffs-3, shouldn’t have been shocked. Constellation’s stock went up the first week of trading after its announcement.

In any case, EDF is scrambling to resurrect the project. In an October 13 letter to Constellation, it offered “to shoulder 100% of the risk and burden until construction begins.” Alternatively, the letter said, “EDF is prepared immediately to purchase all of Constellation’s 50% interest in UniStar at fair market value…” But, EDF said Constellation would have to agree not to exercise its US$2 billion “put” option.

Constellation responded immediately, saying it would be happy to sell its share of UniStar -including the land for the reactor- for US$1, plus repayment of US$117 million it has invested in the project. But it said the “put” option was a separate issue.

That should give some idea of the value Constellation believes a new nuclear reactor in a deregulated market like Maryland’s holds -essentially zero.

For EDF to rescue the project, it would have to find another utility to take at least 50% of it -the U.S. Atomic Energy Act prohibits “foreign ownership, control or domination” of a U.S. reactor, and thus EDF could not even get a license to build a reactor. NIRS is already in litigation on this issue in the NRC’s license hearing process; we have charged that the Constellation/EDF UniStar structure is illegal under the Atomic Energy Act, even without additional involvement from EDF. For the moment, at least, that hearing process continues.

And what utility would be crazy enough to take on a US$10 billion+ project in a deregulated electricity market when the largest utility already in that market has been intimately involved with the project for years, and has determined that it is simply far too economically risky to undertake?

Meanwhile, the effects of the Calvert Cliffs case extend far beyond Maryland. Originally, EDF and Constellation had teamed up to build four EPRs in the U.S., with an eye toward additional expansion after that. The collapse of Calvert Cliffs certainly ends the UniStar project to build at Nine Mile Point in New York. An EPR proposed for Missouri, with UniStar involvement, was cancelled last year. And an EPR proposed for Pennsylvania, which even the plant’s owner PPL admits on its website would cost US$13-15 billion for a single reactor -the highest cost acknowledged to date by a U.S. Utility- appears to be on life support.

EDF’s -and the French government’s- dreams of becoming a major player in the U.S. nuclear energy future appear dashed. For its part, Areva now has no orders for reactors in the U.S. and has at least temporarily abandoned plans to build a reactor component plant in Virginia to serve what it once thought would be a growing U.S. market.

But it’s not only EDF, Areva and the French government that are being left behind by the new electricity realities in the U.S. The reactor project that actually got in the first entire application to the NRC -NRG’s South Texas Project- is also in trouble, for many of the same reasons. It too wants a loan from the Department of Energy, and presumably at less cost than offered to Calvert Cliffs. But it too operates in a deregulated market, faces increased cost estimates (one partner, the City of San Antonio, already essentially dropped out of the project due to soaring projected costs), issues of foreign ownership and control, and enormous competition from natural gas and wind power (Texas is already the U.S. leader in wind power). On October 19, NRG CEO David Crane told Associated Press that if natural gas prices are expected to stay low, NRG won’t build South Texas even if they receive a taxpayer loan. And gas prices are expected to stay very low for the foreseeable future.

Source and contact: Michael Marriott at NIRS Washington

Shares and nuclear power. After the news that Constellation Energy Group Inc had cancelled plans to build at third nuclear reactor at Calvert Cliffs in, the companys share price rose by 15 cents to ÚS$32.50. Meanwhile on the other side of the Atlantic, EdF - the largest shareholder in the Constellation Group - saw its share price fall by 3.4 per cent on the news (the share price is down 27 per cent this year).

Source: Greenpeace Nuclear Reaction, 14 October 2010