It is fascinating to watch the re-arrangement of the power levers in American business as the credit squeeze separates those who have been wise stewards of capital from those who have been foolish - and transfers decisions into the hands of the wise.  Who says capitalism is not working?   A handful of institutions and individuals such as Jamie Dimon of J. P. Morgan are emerging as controlling players and foremost among them is Warren Buffett. 

The Wall Street Journal report posted below tells the story of Buffett’s new role as decision-maker in America’s energy future.  Specifically, his fire sale purchase last week (rescue, really) of Constellation Energy, a large electric utility complex, has given him green-lighting authority over new nuclear power plants of which Constellation has been a leading proponent.  The issue is cost.   Always the pragmatist, Mr. Buffett apparently has held the position that the costs of new nuclear power plants are simply too high to justify their construction.  

Buffett may be watching the declining cost curve of concentrating thermal solar.  He may be recognizing that new electrical demand for plug in hybrid cars will not overly strain existing electrical capacity for decades since re-charging will be done at night when there is plenty of spare generating capacity.  Whatever facts are influencing his thinking this excellent report suggests that the ultimate future of nuclear (and for that matter all other) generating capacity will be very heavily influenced if not definitively determined by the judgements of Mr. Buffett.  Why does that make me feel more confident?

• SEPTEMBER 26, 2008

Buffett Could Reshape Nuclear Power Industry

By REBECCA SMITH

Warren Buffett’s decision to rescue Constellation Energy Group Inc. gives one of the nuclear power industry’s biggest skeptics some important clout in deciding its future.

In agreeing to a $4.7-billion cash deal for Baltimore-based Constellation, Mr. Buffett’s Berkshire Hathaway Inc. will gain control of three nuclear power plants. In addition, it will own half of a prominent nuclear-plant development company, UniStar Nuclear Energy LLC, which is trying to accelerate construction of the next generation of nuclear plants in the U.S.

Agence France-Presse/Newscom

Berkshire Hathaway CEO Warren Buffett

Mr. Buffett, who has sizable investments in electric utilities and gas pipelines through Berkshire’s energy firm, MidAmerican Energy Holding Co., has previously argued nuclear plants are too costly to build.

On Thursday, MidAmerican chief executive Greg Abel sounded more enthusiastic about the technology, saying “we’re committed to new nuclear.” But he acknowledged that construction costs still have to be right. Mr. Buffett may still decide costs are too high, which could send a shudder through the rest of the nuclear industry.

The UniStar consortium brings together some of the most sophisticated players in the nuclear sector, including Electricité de France SA, the world’s largest operator of nuclear plants; Areva SA, the world’s largest nuclear engineering firm by revenue; equipment maker Alstom SA; and engineering, procurement and construction firm Bechtel Corp.

Executives at both EDF and Areva said they are worried that Mr. Buffett will order Constellation to ditch its nuclear plans over fears of soaring costs, and possibly pull out of UniStar altogether. Both invested in UniStar as a way of extending their reach into the U.S. market.

The deal to acquire Constellation still faces regulatory and shareholder scrutiny, and it is possible that competing bids could emerge.

Mr. Buffett’s sudden emergence raises questions about whether nuclear development, in general, has viability, according to Paul Patterson, head of Glenrock Associates LLC in New York, a research firm. “It’s a very cloudy picture,” Mr. Patterson says, “And, so far, we don’t have anyone making a firm decision to go forward.”

The uncertainty is another sign of how the credit crisis is impacting industries beyond Wall Street. Until recently, the U.S. appeared to be on the verge of a nuclear power revival. Rising prices of fossil fuels and the growing efforts to limit emissions of greenhouse gases had rekindled interest in zero-emission nuclear power plants. Developers have presented 18 applications to the Nuclear Regulatory Commission seeking permission to build new plants. Several companies also are seeking U.S. certification of new reactor designs.

But Mr. Patterson notes that those plans now face higher hurdles. The estimated costs for nuclear plants have skyrocketed lately. The availability of financing for the projects could be in jeopardy and electricity demand could decline if the nation falls into recession.

For Mr. Buffett, price has always been the major sticking point. His energy company, MidAmerican, formed a special unit last December to explore possible construction of a nuclear plant at a site in Idaho. That created a flurry of excitement as people in the industry believed that Mr. Buffett might finally throw his weight behind the technology. But MidAmerican pulled the plug seven weeks later, saying it was too costly.

MidAmerican’s Mr. Abel said last week nuclear plants “have to be priced such that they can bring power into the market at prices customers can afford.” He said the Idaho project didn’t have the right balance of “cost and risk…so we just sort of put it on hold.”

Mr. Abel, in an interview Thursday, said that experience makes the UniStar consortium approach more valuable. “We’d like to revisit the Idaho site with EDF, at some point, because the West is going to need new nuclear.”

The Constellation purchase, if completed, will give MidAmerican control of five reactors and many more fossil-fuel units, plus an energy-trading unit, a retail energy sales unit, and utility Baltimore Gas and Electric Co — all for $4.7 billion, about half the cost of a single new nuclear plant.

EDF and Areva have a lot riding on UniStar, their sole vehicle for U.S. development. Areva has applied to the Nuclear Regulatory Commission for certification of its evolutionary power reactor, a next-generation reactor that it hopes to build at sites in the U.S.

Once the NRC certifies a new reactor, it designates a “reference plant” which typically is the first project built with that reactor. All the engineering work done for that plant must be shared with subsequent projects to save time and expense for developers and the NRC. The reference plant for the Areva reactor is Constellation’s Calvert Cliffs plant in Maryland.

If Berkshire pulled the plug on the additional reactor at Calvert Cliffs, it would be a set back Areva, as well as other companies planning on using Areva’s design, such as Missouri-based Ameren Corp., and Pennsylvania-based utility, PPL Corp.

Mike Wallace, Constellation’s generation group president, said that if “Calvert doesn’t pencil out, none of the others will, either.” He said he worries most about getting financing for big, expensive projects without clarity on how federal loan guarantees or subsidies will play out. Until that’s known, “a decision isn’t possible,” he said Thursday.

Constellation chief executive Mayo Shattuck III said last week his firm was thrown into the arms of MidAmerican after a “classic run on the bank,” as investors dumped shares fearing it would be unable to secure a $2 billion bank credit facility needed for its energy-trading operation.

“We engaged in discussions,” Mr. Shattuck said, as “we perceived we might not be in commercial operations for long.” He said Mr. Buffett moved quickly to an agreement and injected $1 billion in capital a day later. Mr. Shattuck said he was forced to act because credit-rating agencies were “spooked.” A downgrade to less than investment grade could have increased Constellation’s collateral requirements by $3 billion, more money than it had.

—David Gauthier-Villars in Paris contributed to this article.

Tags: peak oil energy investments

This entry was posted on Friday, September 26th, 2008 at 3:57 am and is filed under electrical generation, nuclear. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.