On Friday (September 20th) Baltimore-based Constellation Energy and Microsoft jointly announced an agreement to reopen the shuttered 835 mw Three Mile Island Unit 1 nuclear plant located near Harrisburg, PA. Its more famous twin, unit 2, has been closed since its partial core meltdown in 1979–the single worst accident in US commercial nuclear operating history. Unit 2 is presently being decommissioned. Unit 1 was unscathed by the accident and continued operating until its 1999 closure for economic reasons.

Constellation estimates it will cost about $1.6 billion to refurbish the mothballed nuclear plant. Microsoft for its part has agreed to purchase the plant's entire output for twenty years at a price of $800 million per year. Constellation’s management expects the refurbished nuclear plant to reopen in 2028 following approvals from both the US Nuclear Regulatory Commission and the PJM grid manager for transmission access. The nuclear facility will also receive a new name, the Crane Energy Center. The plant’s operating license would be extended to 2053.

This seems like an excellent deal for both parties, CEG’s shareholders get a 3% boost to projected earnings growth, from 10-13%, and Microsoft gets a lot of electricity at a fixed price for twenty years. We should point out that the connection between Microsoft and the rebuilt Crane Energy Center is purely financial and not physical. There will be no wires literally connecting this nuclear plant to a data center. It is Microsoft’s financial guarantee, the so-called purchase power agreement, that permits Constellation to engage in a multibillion dollar refurbishment.

Does this signal a major change for nuclear development in the US? Yes and no. Yes, in that our national reluctance to reconsider new nuclear seems to be ending after a forty year period. But no in that the cost to return this one aging nuke to service is less than one tenth of what Southern Company spent on a new reactor at Plant Vogtle. One tenth. And yes we realize TMI 1 is a smaller facility on a per mw basis, but still.

In a way, the real breakthrough here does not involve nuclear at all but finance. Unlike typical regulated utility investments where the public ultimately pays, this transaction involves no public funds or support at all. This is a transaction solely between Constellation’s non-regulated energy subsidiary and Microsoft. And if Constellation’s refurbishment happens mostly on time and within budget, it is a relatively small price to pay to return a large power-generating facility to service at a time of burgeoning demand. Our only quibble here is why didn’t anyone offer utility customers in Pennsylvania this deal? After all, it was their money that built the plants. But whatever. And who knows, perhaps even the Germans, with their recently shuttered nuclear units, will take notice.

By Leonard Hyman and William Tilles for Oilprice.com

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and has provided advice on industry organization, regulation, privatization, risk management  and finance to  investment bankers,  governments and private firms, including one effort to place nuclear fusion reactors on the moon. He is a Chartered Financial Analyst and author, co-author or editor of six books including  America’s Electric Utilities: Past, Present and Future and  Energy Risk Management: A Primer for the Utility Industry. 

William I. Tilles is a senior industry advisor and speaker on energy and finance. After starting his career at a bond rating agency, he turned to equities and headed utility equity research at two major brokerage houses and then became a portfolio manager investing in long/short global utility equities. For a time he ran the largest long/short utilities equity book in the world. Before going into finance, Mr. Tilles taught political science .

oilprice.com