Will NRG Hit the DOE Jackpot?

By Kennedy Maize

Washington, D.C., 22 February 2011 – NRG Energy’s South Texas two-unit nuclear project, which has been on life support for months, may soon win a loan guarantee from the U.S. Department of Energy, according to several industry sources. But the money for the loan guarantee may get tangled up in Congress’s current budget wrangling.

Nuclear industry supporters are arguing for increasing the energy department’s nuclear loan authority in a continuing spending resolution to keep the federal government from shutting down early next month. They want the federal government to be able to support both the NRG project in Texas and a competing project in South Carolina.

NRG has been shepherding the two-unit, 2,700-MW project located at the site of the existing two-unit South Texas project in Matagorda County, Texas, for a half-decade. NRG applied for a Nuclear Regulatory Commission combined operating and construction license in September of 2007. NRG owns 44% of both the existing plant and the proposed expansion. But the project has recently fallen on hard times, a combination of escalating construction cost estimates, recession-induced declining demand, and natural gas prices that have been falling for over two years. The most recent cost estimate for the two units is $12.7 billion.

NRG recently got sued by the city of San Antonio’s municipal utility, owner of a minority share of the project, and was forced to reach a settlement with the city. Since then, NRG has put spending on the project on ice, pending a decision on a loan guarantee. The project has been in competition with the Scana Corp./Santee Cooper project in South Carolina to expand the V.C. Summer nuclear plant.

What’s working in NRG’s favor, according to my sources, is the international situation. NRG plans to employ Toshiba’s advanced boiling water reactors at the project. Those reactors are already in service in the Tokyo Electric Company. Both Toshiba and the Japanese utility are now equity investors in South Texas, increasing their ownership as San Antonio City Public Service’s share has gone down after the lawsuit settlement. Toshiba and Tepco are seeking loan guarantees from their government, through the Japan Bank for International Cooperation. According to a Washington expert close to the project, JBIC is telling Toshiba and Tepco that it won’t come through with support unless the U.S. agrees to loan guarantees. This is putting pressure on DOE to choose NRG for its second nuclear guarantee.

Last year, DOE agreed to put up $8.3 billion in a guarantee to Southern Co. for an expansion of its Vogtle nuclear plant. But that action ate up nearly half of the $18 billion Congress authorized in the 2005 Energy Policy Act for nuclear loan guarantees. There is only enough left in the authorization for one additional award, and NRG faces strong competition from the South Carolina project.

One factor in NRG’s favor is that South Texas is a merchant generating plant, competing in the wholesale electric market run by the Electric Reliability Council of Texas. The Scana project would be built for a conventional utility environment, with regulated rates and a regulated return on investment and cost recovery during construction. So there is a greater likelihood that the Summer project will go forward even if Washington fails to guarantee 80% of the debt. Without federal support, according to several experts on nuclear finance, South Texas will go south in a hurry.

According to Washington officials, DOE would like to give both NRG and Scana loan guarantees, but would need additional spending authority from Congress to do that. While the Obama administration has proposed $36 billion more in loan guarantee support in both its never-enacted fiscal year 2011 budget and the proposed 2012 spending plan unveiled this month, for a total pot of some $54 billion, the money is not in hand nor are the prospects very good.

As a stop-gap, some in the Congress and the industry have pushed for an additional $10 billion to be added to a continuing resolution so that both NRG and Scana can get funds. The prospects for that are also cloudy, as Congress appears to be averse to any spending increases in the continuing spending resolution, which is coupled to an increase in the federal debt ceiling. The Republican-controlled House of Representatives has slashed $61 billion from the planned interim spending plan for the federal government for the rest of the year. Democratic leaders are working hard just to get existing levels restored, without much attention to increases.

Will NRG get a loan guarantee? “If anybody gets anything,” said one source, “I’d bet on NRG. The factor of the Japanese government saying it will support the project if Washington does looks like a powerful argument.”