Constellation pulls out of Calvert Cliffs 3 (at least for now)

Written by dkoplow Posted: 10/12/2010 1:12 PM EDT

Constellation Energy has announced it will not be continuing its effort to build a third nuclear reactor at its Calvert Cliffs site in Maryland. I looked at the structure of this project, and the associated subsidies, in detail last year in this paper for the Nonproliferation Policy Education Center.

The firm has blamed the US Department of Energy for unreasonably high credit-subsidy payments associated with a $7.5 billion conditional loan guarantee committment to build the new facility.

According to Platt's:

In a letter addressed to DOE Deputy Secretary Daniel Poneman dated  Friday, Constellation Vice Chairman Michael Wallace said the US government's $880 million fee -- 11.6% -- for a loan guarantee to support the $10 billion project was too high.

"Such a sum would clearly destroy the project's economics (or the economics of any nuclear project for that matter), and was dramatically out of line with both our own and independent assessments of what the figure should reasonably be," Wallace wrote.

DOE agreed to cut the credit subsidy amount to 5 percent, in return for $300 million in additional equity from Constellation and power purchase guarantees.  Constellation said no, and thought a credit subsidy on the order of only 1-2% was appropriate.   Christine Tezak, an analyst at Robert W. Baird & Co. in Milwaukee said DOE's terms were no better than those on offer from private funders.  Her claim does not seem credible.   Private funders willing to do 80% debt financing at the risk-free rate in return for an up-front 11.6% payment?  Absent names and details, a good deal of skepticism about these other financing options seems warranted.

Color me skeptical as well on Constellation's claim that the high credit subsidy payment was the main reason for pulling out.  Constellation's own cost models (via presentations done by Constellation Senior VP Joe Turnage in 2008) estimated that the loan guarantees would reduce their cost of power production by 3.7 c/kWh levelized.  Again, using their own operating assumptions for the new reactor, this would have resulted in financing savings of nearly $500 million per reactor per year.  The payback on the "dramatically out of line" loan guarantee fee?  Less than two years.  And that was before rising reactor costs and the credit meltdown made the value of risk-free borrowing even larger than before.

There are two other explanations for Constellation's change of heart that are far more likely:

  • Poor and worsening economics for nuclear new-build.  There is much wider agreement than a few years ago that the economics of nuclear power are just really.  The combination of worsening credit conditions, falling power prices due to the economic recession, the surge in low cost natural gas from fracking, inaction on carbon pricing, and a rather less than stellar delivery schedule on Areva reactors in Europe all suggest caution is greatly needed for an investment of this size.  The Baltimore Sun has a good summary of many of these issues. 
  • Bargaining strategy.  Constellation may be playing project subsidy chicken with partners on both sides of the Atlantic -- with DOE and OMB to get the credit subsidies down to one or two percent; and with the government of France (through their export credit agency Coface) to come forward with the sovereign guarantees that were supposedly pending at earlier stages in the project. 

Hopefully the Obama administration will not intervene here to once again give out the dessert before making sure the spinach has been eaten.  The Administration ought to be indifferent to which low carbon energy options win in the marketplace, and the marketplace seems to have spoken on this project.  However, Platt's indicates DOE is still trying to woo the firm to take the federal billions -- not a great sign for the taxpayers who will ultimately bear the burden of any default.  In contrast, shareholders seemed happy with the change:  Constellation's stock price rose following the announcement and is expected to rise further as a result of the cancellation.

Westinghouse, on the other hand, is still signaling full speed ahead. Time will tell.  It is always so much easier to stay in the game when you are betting other people's money.

Update, 18 October 2010:  It looks like the poor economics may be the leading rationale for Constellation's recent actions, rather than a bargaining strategy to get more favorable terms on loan guarantees.  The firm offered to sell its stake in the nuclear project for $1 plus reimbursement of $117 million in incurred project development costs.