Bonds

Debt-laden nuclear sector poised for revival with federal subsidies

The Inflation Reduction Act offers a crutch, if not exactly a lifeline, to operating nuclear plants, a sector long plagued with high debt and fixed costs that may now be poised for a rebound thanks to national clean-energy goals.

The IRA, which President Biden signed into law Aug. 16, provides $30 billion in production tax credits to existing nuclear power plants from 2024 through 2032. The tax credits, which can be taken in the form of direct payments from Treasury, are designed to preserve existing nuclear infrastructure and are on top of $6 billion the Infrastructure Investment and Jobs Act provided for nuclear units that might otherwise be set to retire.  

Despite the influx of federal subsidies, nuclear facilities, many of which are backed by municipal bonds, may not enjoy a long-term credit boost in light of larger industry pressures, analysts said.

Cost overruns and delays at the under-construction Vogtle units 3 and 4 in Georgia underscore challenges facing the nuclear power industry in the U.S.

Georgia Power

The renewed focus on nuclear is driven partly by the Biden administration’s goal of reaching 100% clean energy electricity by 2035 and net-zero emissions by 2050. The Russia-Ukraine war is also spotlighting the power source, as Ukraine’s Zaporizhzhya plant, which is Europe’s largest, is caught in military crossfire as Europe works to reduce its dependence on Russian energy.

The U.S. has 93 operating commercial nuclear reactors at 55 nuclear power plants located in 28 states, according to the Energy Information Administration. The average plant age is almost 40 years. Most reactors are located east of the Mississippi, and Illinois has the most, with 11 reactors at six plants, according to the EIA.

Nuclear power accounts for about 20% of total U.S. electricity generation, though generation has declined slightly over the last few years, and more than 50% of clean electricity. Six units have retired since 2017 and three more were on track to retire, but at least two of those, in California, recently won extensions.

Public power utilities own about 8% of the nation’s nuclear power capacity and cooperatives own another 3%, according to the American Public Power Association.

For investors and owners, “this kind of legislation creates a much clearer long-term signal about how to value your nuclear assets as part of your portfolio,” said Matt Crozat, executive director of policy development at the Nuclear Energy Institute. “From the point of view of those looking at the debt, there are some big federal incentives here that are trying to encourage the expanded use of carbon-free power.”

Utilities and other owners have floated billions of municipal bonds to build nuclear facilities, but it’s difficult to determine how much nuclear-related muni debt is outstanding, as utilities often don’t break down their borrowings by project, said S&P Global Ratings analyst David Bodek.

From a credit perspective, Bodek predicted the IRA will be helpful to existing nuclear facilities and their owners, but said it remains to be seen if it’s enough to offset the pressures facing the industry as a whole as it shifts to a carbon-free future.

“The tax credits are advantageous at a time when utilities are going through an energy transition and any financial benefit that they can gain provides a cushion against the added costs,” he said. “The provisions [in the IRA] appear to be beneficial but I think overall that they’re credit neutral at a time when the industry is facing other cost pressures tied to decarbonization.”

Financial pressures from competitive wholesale power markets are the primary driver of retiring nuclear units, according to the EIA.

The IRA’s zero-emission nuclear power production credit is as high as $15 per megawatt-hour for electricity produced by the plants assuming that certain criteria, like prevailing wage, are met, and as low as $3/MWh if the criteria is not met. The credit gradually declines as power prices rise above $25/MWh.  

The Inflation Reduction Act “creates a much clearer long-term signal about how to value your nuclear assets as part of your portfolio,” said Matt Crozat, executive director of policy development at the Nuclear Energy Institute.

Nuclear Energy Institute

“As the IRA is quite complicated, our staff, bond counsel and tax counsel are still digesting it,” said a spokesperson for the Massachusetts Municipal Wholesale Electric Company, which is a joint owner in two nuclear power plants. The company is “encouraged” by the $15/MWh tax credit, the spokesperson said, but “it’s unclear how much we can take advantage of this, as power prices are often above $25/MWh. Also, since we are not the majority owner, we can’t comment on whether the majority owner meets prevailing wage requirements, etc.”

The oldest operating reactor is Nine Mile Point Unit 1 in New York, and the newest reactor to enter service is the Tennessee Valley Authority’s Watts Bar Unit 2, which came online in 2016.

It’s too early to say how the new law will impact the TVA, said public information officer Jim Hopson. The federal authority operates the largest public power system in the U.S. and has three nuclear plants and seven active units. Between 2010 and 2020 it sold over $11 billion of federally taxable bonds backed by power revenue.

“There is some language in the act that would seem to allow TVA to potentially take advantage of these types of programs but because the actual mechanism is not defined, it’s too early to speculate,” Hopson said.

The country’s only active construction of a new nuclear plant is at Georgia’s Vogtle Units 3 and 4, partly owned by the Municipal Electric Authority of Georgia. They won’t be able to take advantage of the PTC, which is reserved for facilities that are already in operation, though NEI’s Crozat said the project is eligible for other, future credits.

After years of cost overruns and delays, and with a price tag that has doubled to $30 billion, the two units are projected to come online in early and mid-2023. The cost has climbed to more than $30 billion, up from original estimates of $14 billion. MEAG declined to comment for the story.

South Carolina’s plan to build two new reactors at its V.C. Summer Nuclear Station halted in 2017 amid cost overruns and delays. The South Carolina Public Service Authority’s Santee Cooper, which was a 45% stakeholder, opted out of the project after spending $4.7 billion, saying it had become uneconomical.

In California, the state’s last operating nuclear plant, Diablo Canyon on the Pacific Ocean, whose two units been on track to be phased out, will now remain open after the General Assembly on Aug. 31 passed a bill to extend its life by five to 10 years. Diablo generates 9% of the state’s electricity and is California’s largest power source.

With the IRA credits set to expire in 2032, it’s unclear how much of a difference they will make over the long term, said Great Plains Institute vice president of strategic initiatives Doug Scott.

“I can’t say it’s going to be the silver bullet for all of them, but it’s a huge lift,” Scott said. “The question becomes, because this is fairly time-limited, does this mean that plants that were going to retire will try to extend their licenses? I don’t think we know that yet.”

Beyond the existing nuclear fleet, the law provides tax credits for new projects that may spark development, said market participants.  

The IRA means a “meaningfully improved story for the nuclear industry,” said BofA in a Sept. 8 report, detailing ways in which the new law could benefit existing and new nuclear plants, though the struggles in Georgia and South Carolina may cast a shadow over investor interest in new nuclear, BofA analysts said.

“We expect the Street to be quite cautious given the legacies of Vogtle and V.C. Summer,” analysts said, while adding that generous credits for new projects, including a 50% investment tax credit, “could be a real driver.”

In light of the struggles of the large, costly nuclear plants, the future may lay in smaller, modular units of the type already being built in Washington, Wyoming and Idaho, experts said.

Investors and developers “will see what happened with Vogtle and Summer and there may not be a lot of appetite for building that, but there may be for the small modular reactors,” Scott said.   

The smaller units are more affordable, Crozat said.  ”The future is small modular units,” he said. “The ability to build them with a capital investment more in line with other fossil generation makes them easier to fit on balance sheets. We’re going to see a lot of those.”

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