Governments in costly quest for electricity's holy grail

By Paul Betts
Published: June 17 2009 03:00

In the decades of economic reconstruction following the second world war, governments launched massive reindustrialisation projects in economically distressed regions that were later ironically dubbed building cathedrals in the desert. These big industrial complexes - whether petrochemical plants, steel factories or shipyards - were rarely integrated into the local economies and have since endured repeated and painful restructurings.
At the same time, governments invested heavily in groundbreaking technological projects, some of which have befallen the same fate. This was the case of France's so-called "Plan Calcul" to create a comprehensive domestic information technology industry to secure the country's strategic independence in this key sector.
The French high-speed TGV trains have been another breakthrough, as has the development of a new generation of EPR nuclear reactors. These projects would never have got off the ground without substantial government financial backing and all have ended up costing far more than originally envisaged.
Now the cathedral builders are grappling with the problems of their latest grand project. After years of haggling, the European Union, together with the US, Russia and Japan, agreed four years ago to build in southern France a huge research and engineering project called ITER (International Thermonuclear Experimental Reactor).
China, South Korea and India have also joined the project to create an experimental nuclear fusion reactor to replicate the energy of the sun.
If successful, this would create an environmentally friendly and inexhaustible source of electricity with virtually zero nuclear waste. In other words, this would be the energy equivalent of the holy grail. Construction on the vast experimental plant in Provence has started and the original budget has been exceeded.
The partner governments are due to meet in Japan today and the discussion promises to be lively. The project's construction costs have already doubled from the original €5bn ($7bn) to about €10bn. It will take about 10 years to complete the construction phase, so the final costs risk being even higher. The facility is then expected to operate for 20 years at a cost of another €5bn. This figure too risks being much higher.
Europe will carry 45 per cent of these costs, while the other partner countries will have to bear just under 10 per cent each. No one is keen to commit to the project's fast-rising funding needs, let alone honour their existing agreements. All the more so given the body of opinion that is opposed to the entire project, which argues that these funds could be spent far more effectively to develop other renewable energy sources such as wind, tidal or solar power.
Until ITER is tried and tested no one will know whether nuclear fusion reactors could become a viable and compellingly attractive economic alternative to existing power-generating systems. It may not work, but if it does the €20bn or more it will have cost will seem like loose change.
Nuclear bond
On the other hand, ordinary investors are grappling with questions of their own about investing in the nuclear sector.
EDF, the French electricity behemoth and operator of the country's 58 nuclear reactors, today launches its first bond for retail investors in about two decades. The apparent return to favour of nuclear power is likely to fuel great interest in the €1bn issue, as will the fact that few investments are safer than this high-yielding bond from a utility guaranteed by the government.
Yet for equity investors there is no concrete evidence that the longer-term financial model for nuclear power is as solid as its promoters suggest. The skyrocketing costs of building new-generation plants, while maintaining the ageing facilities that exist, are all putting pressure on the balance sheets of nuclear operators.
An academic report commissioned by Greenpeace analyses the risks of investing in France's two nuclear champions, Areva, the nuclear engineering group, and EDF. It highlights how deeply the fate of one affects the other.
So far both have benefited from generous state support. But competition is entering the French market, and electricity prices are on hold, making life more difficult for EDF in particular. This is an industry where massive investment has to be committed upfront before generating a guaranteed income stream 10-15 years down the line. And the report concludes that what is bad for EDF cannot be good for Areva.
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Copyright The Financial Times Limited 2009