Constellation Energy Exits Calvert Cliffs Unit 3, Stunning Industry and Potentially Slowing Nuclear Renaissance

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Plans to revive nuclear power in the United States were jolted earlier this month, when Constellation Energy Group Incorporated (NYSE:CEG) (Baltimore, Maryland) withdrew from the Calvert Cliffs Nuclear Power Station Unit 3 project, citing unacceptably high costs and unfavorable terms attached to a federal construction loan guarantee. The surprise move left Maryland lawmakers and French utility Electricite de France SA (EPA:EDF) (Paris), Constellation's partner in Calvert Cliffs Unit 3, scrambling to keep the project alive.

The project, located in Lusby, Maryland, could employ up to 4,000 people during its construction phase. The owners of Calvert Cliffs Unit 3 estimates the project cost to be $7.2 billion to $9.6 billion; Industrial Info lists the project's total investment value (TIV) as $12 billion.

After the initial round of news stories raised questions about whether the Calvert Cliffs Unit 3 project itself was being terminated, Constellation Energy issued a statement saying that UniStar Nuclear Energy, its 50:50 joint venture partnership with EDF, "has not withdrawn its application for a federal loan guarantee and no decisions have been made regarding the future of Calvert Cliffs 3." UniStar applied for a federal loan guarantee in mid-2007. To date, the owners have invested a reported $600 million on the project, mainly for environmental studies and licensing.

In a statement, EDF said it was "extremely disappointed and shocked to learn that Constellation has unilaterally decided to withdraw from the Calvert Cliffs 3 project." It added, "We were at the finish line with the Department of Energy and were making significant progress." Senior officials in the Obama administration told The Washington Post that they were "surprised" by Constellation's decision. The Post and The New York Times published stories on Constellation's decision on October 9.

Calvert Cliffs Unit 3 plans to use a new 1,600-megawatt (MW) light water Evolutionary Power Reactor (EPR) reactor design from Areva. Bechtel Group Incorporated (San Francisco, California) is the engineering, procurement and construction (EPC) firm for the project. The project was proposed as a merchant power plant: It would sell its output on the open market and would not be part of the regulated ratebase of Constellation's Baltimore Gas and Electric utility subsidiary.

Because Calvert Cliffs Unit 3 does not yet have a final environmental impact statement from the U.S. Nuclear Regulatory Commission (NRC) (Rockville, Maryland), no preconstruction work is being done on the site, UniStar spokesperson Kelly Biemer said.

Constellation's decision to withdraw from the project came after the Office of Management and Budget (OMB), an executive-level federal agency, estimated the cost of a federal construction loan guarantee at $880 million, which Constellation calculated as being 11.6% of the project cost. Calling that estimate "shockingly high," Michael Wallace, Constellation's vice chairman and chief operating officer said: "Such a sum would clearly destroy the project's economics--or the economics of any other nuclear project, for that matter--and is dramatically out of line with both our own and independent assessments of what the figure should reasonably be." Constellation Energy officials reportedly expected to pay a 1% to 2% fee on its loan guarantee, a small fraction of what the OMB proposed.

Wallace said the project's owners had identified a methodological flaw in the OMB's calculations, but that no one at the agency seemed to be interested in engaging with them or correcting the flaw. In walking away from Calvert Cliffs Unit 3, Wallace wrote to the U.S. Department of Energy, "While it may be that our partner EDF is able to proceed in the face of such uncertainty, Constellation Energy is unable to do so." Wallace reiterated that Constellation Energy "has been and will continue to be a dedicated and steadfast proponent of the need for new nuclear energy in America. ... But we could only sustain such an effort for so long in the face of such unrelenting uncertainty."

David Knox, a spokesperson for NRG Energy Incorporated (NYSE:NRG) (Princeton, New Jersey), which is also waiting on federal loan guarantees to build South Texas Project (STP) units 3 and 4, told Industrial Info that upon learning the news, NRG CEO David Crane told NRG employees, "This is not good news for our nation. We were very disappointed to learn about Constellation's decision, and if Calvert Cliffs Unit 3 is shelved, the nuclear renaissance will not be as strong."

Knox told Industrial Info that NRG was not yet at the point of working with the OMB on the terms for a federal loan guarantee. "We don't know what terms OMB may propose. We expect our loan application to get to OMB very soon," said Knox. STP units 3 and 4 have a price tag of $10 billion, and a federal loan guarantee of about $8 billion is being sought, said Knox.

Located in Bay City, Texas, STP units 3 and 4 are a 2,700-megawatt (MW) expansion of the existing South Texas Nuclear Project. The expansion is scheduled to kick off in 2012, assuming all regulatory approvals are received and the expansion receives billions of dollars of federal construction loan guarantees. The expansion project is owned by NRG Energy, Toshiba Corporation (TYO:6502) (Tokyo, Japan) and Tokyo Electric Power Company Incorporated (TYO:9501) (TEPCO) (Tokyo). The facility will use two 1,350-MW advanced boiling water reactors supplied by Toshiba.

Toshiba is the EPC firm for STP units 3 and 4. Subcontractors include Fluor Corporation (NYSE:FLR) (Irving, Texas), Sargent & Lundy LLC (Chicago, Illinois), Bechtel, and Westinghouse Electric Company LLC (Monroeville, Pennsylvania).

"As of last November, we had memoranda of understanding (MoU) with parties who committed to taking 60% of the electricity produced by STP 3 and 4," Knox said in an interview. "We're working on turning those MoUs into PPAs (purchase-power agreements)." Knox declined to name the companies that had signed the MoUs. Nor would he provide a more current status of the MoU-to-PPA negotiation process.

Knox did stress that STP units 3 and 4 were very different from Calvert Cliffs Unit 3: "Our design is the only one certified by the NRC, and it is the only one that has been built four times around the world on time and on budget," he said. "Our EPC firm, Toshiba, has built these projects." For more on STP Units 3 and 4, see articles from July 14, 2010 - South Texas Project Units 3 and 4 to Drive Soaring Demand for Skilled Craft Labor in Greater Houston Area and February 24, 2010, article - Nuclear Developer Seeks New Partners for South Texas Project as Split with CPS Energy Nears Finalization.

J. Scott Peterson, a spokesman for the Nuclear Energy Institute (Washington, D.C.) told The New York Times that the "pause" in building new nuclear plants mirrors delays in other industrial projects. "It's principally because of the economic situation," said Peterson.

Building a nuclear reactor, not easy in the best of times, has become more difficult in recent years. The weak U.S. economy has shuttered manufacturing plants and led to a declining demand for electricity. Low natural gas prices and the inability of the federal government to place a price on carbon via legislation have increased the risks and costs of building a reactor.

After Constellation withdrew from Calvert Cliffs 3, officials from EDF met with Maryland Governor Martin O'Malley in an effort to keep the project alive. Constellation Energy officials did not participate in the meeting, but the governor has reportedly been in contact with Constellation officials after its decision to withdraw.

Financial analysts and observers began speculating immediately on what Constellation's decision would do to the "nuclear renaissance," and even the landscape of nuclear utilities. An unnamed source told Bloomberg that EDF was open to selling its share in UniStar Nuclear Energy after Constellation's decision.

In a story reported by the Baltimore Business Journal, Dot Matthews, an analyst with CreditInsights Incorporated, said a number of nuclear utilities could be interested in buying EDF's share, including :

• MidAmerican Energy Company (Des Moines, Iowa), a unit of Berkshire Hathaway (NYSE:BRK.A)
• Dominion Resources (NYSE:D) (Richmond, Virginia)
Duke Energy (NYSE:DUK) (Charlotte, North Carolina)
• Entergy Corporation (NYSE:ETR) (New Orleans, Louisiana)
• Exelon Corporation (NYSE:EXC) (Chicago, Illinois)
• NextEra Energy (NYSE:NEE) (Juno Beach, Florida)
• NRG Energy Incorporated
• Public Service Enterprise Group Incorporated (NYSE:PEG) (PSEG) (Newark, New Jersey)
• Sempra Energy (NYSE:SRE) (San Diego, California)

"There is certainly a desire for M&A in this current environment, and thus we believe interest in EDF's portion of the [joint venture] will be robust, especially for those that see earnings declining in the next few years," Matthews wrote. Officials from EDF and Constellation declined to comment on the speculation.

Besides Calvert Cliffs 3, UniStar has three other U.S. nuclear projects under development: Callaway Unit 2 in Fulton, Missouri, Bell Bend Unit 1 near Berwick, Pennsylvania; and Nine Mile Point Unit 3 near Oswego, New York.

Prior to Constellation's decision, UniStar officials had said that if the Calvert Cliffs Unit 3 receives a combined construction and operating license (COL) from the NRC in mid-2012, as it hopes, the unit should be ready to produce electricity by the end of 2017. It is not clear if the NRC review of the COL application would be affected by Constellation's decision.

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