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High Prices Fuel a Nuclear Power Revival in U.S. Cost-Efficiency Also Attracting Investors

Posted on: Tuesday, 22 November 2005, 12:00 CST

By Tim Gray

If you stand among the pumpkins and purple mums in the gravel parking lot of Anna's Garden & Gift Center, you can glimpse beyond the trees a ghost that haunts the nuclear power industry.

There hulk the twin cooling towers of Three Mile Island Unit 2, the nuclear reactor that had a partial meltdown in 1979. That event, paired with the Chernobyl explosion in Ukraine in 1986, halted the growth of the U.S. nuclear power industry for a generation. No new plant has been ordered in the United States since the Three Mile Island accident. But existing plants have kept operating: The United States has 104 reactors, which make a fifth of its power.

Lately, though, the nuclear power sector has been having a revival, because of its operating-cost advantages over other forms of electricity production. That may prompt investors to bet on its resurgence.

The economic appeal of nuclear power has risen as prices for natural gas and coal have climbed. The price of natural gas, especially, has soared. In October, it touched $14 per million British thermal units, nearly double the price from October 2004.

"There's a big advantage for operating a nuclear plant when gas prices are in the $5 range, much less where they are today," said John Kohli, portfolio manager at Franklin Utilities fund.

Many people, of course, still worry about inadvertent releases of radiation and about the long-term storage of radioactive waste. But some prefer to appreciate the competitive advantages of nuclear power. As concern about global warming has become mainstream, some investors are reminded that nuclear power produces no greenhouse gases. And while nuclear power plants could be vulnerable to a terrorist attack, recent hurricanes have underscored the fragility of fossil-fuel supplies.

Federal lawmakers have given nuclear power a nudge, too, with a raft of subsidies in the Energy Policy Act this year. "The incentives in there were a bold statement that nuclear is going to be an important part of the U.S. electricity supply in the future," said Timothy O'Brien, manager of the Evergreen Utility and Telecommunications fund.

Other countries, especially China and India, are likely to build more nuclear plants and to do so sooner. "People are talking about China building 20 to 21 new reactors," said David Schanzer, a utility analyst at Janney Montgomery Scott. Still, betting on nuclear power entails risks beyond the stock market's usual shimmies and shakes.

U.S. plants have operated without a major accident since Three Mile Island, but another big stumble, in the United States or abroad, could hobble the industry. And many issues remain, including those about waste storage and the spread of nuclear technology, said Ernest Moniz, a physicist at the Massachusetts Institute of Technology. The construction of a long-promised waste repository at Yucca Mountain in Nevada, about 100 miles, or 160 kilometers, northwest of Las Vegas, has been delayed by years of legal arm- wrestling.

If investors choose to go nuclear, perhaps the most conservative approach is to buy shares of utilities with big nuclear operations utilities like Exelon, Entergy, Dominion Resources and FPL Group, said Mark Sadeghian, an analyst at Morningstar.

Exelon, based in Chicago, has made a hefty wager on nuclear generation, he noted. It has 17 reactors at 10 sites. If it completes a pending acquisition of Public Service Enterprise Group, based in Newark, New Jersey, it will have 20 reactors at 12 sites. Exelon's stock is up more than 15 percent this year.

"Several years ago, when the industry started to deregulate, many companies decided to sell off their nuclear plants, and very few companies had the bright idea to buy them, though they were being sold pennies on the dollar," said Judith Saryan, portfolio manager at Eaton Vance Utilities fund. "Exelon was one of the companies that had the good sense to buy."

Operating a bunch of plants helped Exelon to hone its nuclear expertise, Saryan said. "Now its nuclear fleet runs at 95 percent capacity."

Entergy, with 10 reactors, is the second-biggest nuclear operator, after Exelon. Entergy's hometown utility, Entergy New Orleans, had to file for bankruptcy protection after Hurricane Katrina, but that division accounts for less than 5 percent of the parent company's earnings, said Shelby Tucker, a principal at Banc of America Securities.

"About a third of their earnings comes from their large nuclear fleet in the Northeast," he added.

Those plants could soon contribute even more to profit. Entergy sells its power at below-market prices because of risk-hedging contracts, he said. As the hedges expire, "they'll be able to recontract at higher prices."

Eight power companies, including Exelon and Entergy, are trying to prepare the way for the eventual licensing of a new American nuclear plant.

Their coalition, called NuStart Energy, aims to test a streamlined federal licensing process and to develop a design for a new reactor.

A foreign company with a focus on nuclear power is British Energy, which produces about a fifth of Britain's electricity, said Charlie Gaffney of Eaton Vance. It owns eight nuclear plants and one coal-fired one. "So they're basically a pure-play nuclear generator," he said. Ultimately, investors' best hope for nuclear power may be that it comes to be viewed as just another business, rather than the industrial offspring of a perilous technology.

In Londonderry, Anna and Daniel Angelo, owners of Anna's Garden & Gift Center, already seem to see the industry that way. They don't fret much about the past of Three Mile Island Unit 2. Sure, they tell tales about the huge nuclear plant about the iodine tablets, a radiation antidote, handed out at their children's school after Sept. 11, 2001, and about the way the warm-water discharge into the Susquehanna River draws fish and anglers in the winter. Otherwise, they accept the reactor, saying it brings well-paying jobs to their area. "We joke about having glow-in-the dark plants," Daniel Angelo said. "Other than that, people don't talk that much about it. You get so used to it."

Source: International Herald Tribune

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