French-Am French-American Foundation – erican Foundation – France rance U.S. Mission to the OECD U.S. Mission to the OECD Remarks of William F. Henze II Partner, Jones Day October 20, 2010 Paris NYI-4317441v2
Part I – Part I – The Nuclear Pow er Business Today The Nuclear Pow er Business Today 2
Climate Change – A Climate Change – As If We Needed s If We Needed More Proof? More Proof? • Environmental Consequences of Energy Consumption � World CO2e emissions: forty-five (45) gigatons (Gt) in 2007. Global absorption rate is ten (10) Gt/year. � Under BAU, CO2e emissions rise at 1.5% per year. Global temperature increases up to 4 o centigrade by 2030. � Energy and environmental policy challenge: reduce GHGs sufficiently over the next fifteen years to prevent global warming in excess of 2 o centigrade. – National Intelligence Council (November 2008) � Energy use is responsible for 60 percent of total GHG production. – U.N. Dept. of Economic and Social Affairs (June 2009) • August 17, 2010 – The New York Times reports 20% of Pakistan is under water. Two months later, the price of cotton (Pakistan’s main commercial crop) is 80% higher than a year ago. 3
Global Drivers: Demand Grow th and Global Drivers: Demand Grow th and Environment Environment • Demand Growth � Global electricity consumption: 18 trillion kilowatt hours in 2006; projected to increase to 31.8 trillion kilowatt hours by the year 2030. – U.S. Energy Information Administration (May 2009) � Rise of middle-class purchasing power in emerging economies such as the BRIC countries and the Middle East. The size of the global middle class is expected to increase by 2 billion people by 2030 (reaching 50% of the World’s total population). – Goldman Sachs (July 2009) • Environment � China is now the largest energy consumer. � And the world’s largest polluter. 4
NEA/IEA Technology Roadmap ’ s Key Findings (June 2010) • To achieve a 50% cut in CO2 emissions, nuclear capacity increases to 1,200 GW by 2050, providing around 24% of global electricity (up from 370 GW providing 14% of electricity at present). Nuclear power becomes the single largest source of electricity. • Total global investment required to achieve 1,200 GW by 2050 is almost $4 trillion (2008 $), or 19% of estimated total spend on generation capacity in the period. • Construction of 1200 GW by 2050 will require about 20 large new nuclear units to be constructed each year. • Global industrial capacity to construct nuclear power plants will need to double by 2020. • Though most of the supply chain can be ramped up within a few years, that cannot be said for very large steel forgings. � Global heavy forgings capacity is already in short supply and expansion will require large investment in the near term. Investors in heavy forging capacity are potential big winners over this 40 year cycle. 5
Nuclear Nuclear – Why the Resurgence? Why the Resurgence? Nuclear power is our “only existing, proven and scalable low carbon baseload generation technology.” - Business Roundtable (June 2009) 6
The Global Opportunity The Global Opportunity • Large � $4 trillion of spend just to build global needs • Long-term � Minimum of 20 years, likely 40 • Not Just Reactors � Fuel Cycle � Supply Chain • Global � U.S.: Technology; construction � Japan: Reactors and large forgings � France: Technology and reactors � Germany: Reactors � China and India: Largest buyers; reactors � Russia: Reactors 7
Part II – In the U.S. Part II – n the U.S. 8
Nuclear – W Nuclear – Why the Resurgence? hy the Resurgence? • U.S. Drivers: Age/mix of existing U.S. Generation Fleet and Environment � 104 operating nuclear units produce 20% of power consumed - 40 years old on average - 2/3 on license extensions; balance overwhelmingly expected to be � Installed coal fleet produces 50% of power consumed - Same age or older - Political challenges facing new coal plants • U.S. Needs � Federal and State support through one construction cycle � Credit crisis and specter of low gas prices in the long term are significant hurdles for U.S. utilities, which are significantly smaller companies than their European counterparts. – S+P, The Economics of U.S. Nuclear Power: Natural Gas Prices and Loan Guarantees Are Key to Viability (August 16, 2010) . � To replace the 104 existing nuclear and some/all of the retiring coal units by 2030, while maintaining baseload reliability to support economic growth. 9
Nuclear Pow er is Reliable and Safe Nuclear Pow er is Reliable and Safe • Nuclear power is increasingly reliable. U.S. Nuclear industry capacity factors have moved from slightly less than 50% in 1971 to 90.5% in 2009. – U.S. Energy Information Administration (May 2009) . • It is also one of the safest sources of energy. An OECD report notes: � the likelihood of an accident and a radiological release at a new nuclear plant is 1,600 times lower than when the first reactors were bought; and � the estimated total long-term death rate from Chernobyl is less than the number of immediate deaths from the largest non-OECD hydro electric dam failure. � Comparing Nuclear Accident Risks with those from Other Energy Sources, OECD (September, 2010) . 10
Emerging Schizophrenia in the Emerging Schizophrenia in the Obama Administration Obama Administration • In January Barack Obama pledged to build a “new generation of safe, clean nuclear-power plants”. On February 1st he followed that up in his proposed budget for 2011 by tripling to $54 billion the value of loans for new nuclear plants the government is offering to guarantee. – The Economist (October 18, 2010). • After Congress agreed in 2007 to fund loan guarantees, 28 applications were filed to build nuclear plants. – The Economist (October 18, 2010). • Until the summer, the consensus was that four to eight new nuclear plants would come on line in the U.S. between 2016 and 2018. Now, no one will be shocked if it is only two by 2020. Meanwhile, some 55 plants are under construction around the world. More than 20 are in China, which is forecast to surpass America and have the most nuclear reactors by 2030. – The Economist (October 18, 2010). 11
Emerging Schizophrenia in the Emerging Schizophrenia in the Obama Administration Obama Administration (cont’d) (cont’d) • It is NEI’s understanding that the Executive Branch employs a recovery rate of 55 percent across the board for all energy technologies and projects being considered for DOE loan guarantees. • The 55-percent recovery rate is well below the recovery rates observed historically for regulated utility debt and project finance debt. According to historical data from Moody’s Investors Service and Standard and Poor’s, ultimate recovery rates for regulated utility debt range from 87 percent to 99 percent. Recovery rates for project finance debt are comparable, in the range of 90 percent to 100 percent, because project finance transactions employ structural features designed specifically to maximize recoveries in the event of default. - Nuclear Energy Institute President Marvin Fertel, testifying before the Senate Committee on Natural Resources (September 23, 2010). 12
Curr Current Economic Analysis i ent Economic Analysis is Dominated by Dominated by Low Gas Price Effect Low Gas Price Effect • Importance of Gas and Carbon Prices � The economics of new nuclear power are sensitive to environmental policies and gas prices. � CO2 costs − Political reality points towards zero price for carbon in the near term. Levelized Cost ¢/kWh Base Case w/Carbon Charge $25/t Co 2 Nuclear 8.4 Coal 6.2 8.3 Gas 6.5 7.4 � Update of the MIT 2003 Future of Nuclear Power Study, Table 1 (MIT, 2009) . 13
Recent Dow nw ard Change in Recent Dow nw ard Change in Gas Price Outlook Gas Price Outlook • The MIT Study assumes average gas price of $7.00/mmBtu. • Shale gas discoveries have dramatically altered the gas price outlook, flattening the back end of the forward curve. NYMEX Natural Gas October 2016 Contract Closing Prices ($/ MM btu) June 1, 2008 $11.210 June 1, 2009 $ 7.485 October 1, 2010 $ 5.799 14
S& P’s S& P’s Breakeven Analysis Breakeven Analysis • Standard & Poor’s breakeven analysis shows the natural gas price at which a new nuclear unit can achieve the same levelized cost of electricity (LCOE) as a new natural gas combined cycle unit. • Assuming a zero carbon price environment, new nuclear requires governmental support in the form of loan guarantees or other subsidies to be economically viable. Carbon Price = $0 Breakeven Natural Nuclear Capital Cost Debt-Equity Gas Price Ratio ($/ kw) ($ / MM Btu) 50/50 6,500 $8.20 Rate Base Case Loan Guarantee Case 80/20 6,500 $6.00 Other Subsidies Case 80/20 6,500 $5.00 � Standard & Poor’s, The Economics of US Nuclear Power: Natural Gas Prices and Loan Guarantees Are Key to Viability (August 16, 2010) . 15
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