PEST(EL) in the Nuclear Industry – The Economic (part 4)

The first “E” in PESTEL is for economics. In a classic PESTEL analysis of the macro environment (in this case the Nuclear Industry) one is supposed to be looking at the effects of interest rates, economic growth, inflation and exchange rates.

Let’s try to take these things and review them through the nuclear lens. What makes this interesting in context of the nuclear industry is that the analysis changes whether you are looking at the current fleet or evaluating potential new build. It’s important to be clear about which one is being evaluated and what the impact might be.

Interest rates

Interest rates for what might be the first question. The Federal Reserve has announced historic lows for interest rates and made a public commitment to keep them that low for the next two years. Pressure in the opposite direction is the recent announcement by Standard and Poors to downgrade the quality of the US debt. It is not clear how this will affect interest rates, but in general a downgrade works to increase rates on the debt instruments of that entity. Depending on what debt one is purchasing either the Fed or the bond rating could have impact on the interest rate.

Current operating fleet generally runs in 2 year cycles in the US. Even in the rest of the world cycle length is at least annual. The primary impact of interest rates in the current fleet comes in the affect on fuel cycle costs. Low interest rates means that the time between purchase of uranium (ore, conversion, enrichment) and the actual use in reactor costs less. This time value, when interest rates are high tends to drive utilities to delay fuel purchasing decisions and push final deliver to latest possible time to avoid as much interest as possible. When each bundle can cost between $250,000 and $1,000,000 (depending on the type of reactor and the amount of enrichment), small variations in interest rate can have more significant impacts on actual costs. Fuel purchases are most impacted the the Fed’s interest rate rather than the US government bond rating.

In new build, low interest rates are even more appealing. A single new reactor is currently estimated to be between $5 and $6 billion dollars. From first shovel to operation is estimated to be between 4-10 years. So the interest rate can have a profound impact on the total project cost. This is, in part, why the industry requested loan guarantees from the government. The uncertainty over timing (especially within the NRC) and the high cost of the project make interest rates of significant concern to the utilities. However, it is possible that the current downgrade of the US government’s debt could adversely impact the rate at with the federal government will guarantee the loans for new plant build.

Economic Growth (or lack thereof)

The growth of electricity demand tends to track the economic growth of the country. With the past several years of limited growth and gloomy forecasts, electricity demand has also slowed.

The primary effect on the current fleet is to delay the push to upgrade the current plants to provide more power. Nuclear plants general operate as baseload power and modifying the current plants to generate more power is generally perceived as an inexpensive way to get more benefit out of an existing asset. However, these costs are not trivial and if electricity demand is soft, the push for further power uprates tends to be delayed.

The real impact of slowed economic growth is in the new plant build. Soft demand makes companies leery of these huge investments toward new nuclear power plants. Such investments require significant confidence in the long term growth of demand. Where new build has continued to push forward is in the SouthEast of the US where growth in demand has remained strong. A similar pheonomena regarding the cancellation of new plants occurred in the 1970’s when oil embargos caused the economy to suffer and electricity demands to slow.


The nuclear industry is relatively inflation proof. Although high inflation can affect the costs of goods and raw materials involved in the construction of a power plant, once the plant is built, the main costs for production of electricity is fuel and operation and maintenance. Uranium has been relatively immune to inflation and in any case constitutes only about 1/3 of the cost per MWH. Operation and Maintenance costs are more contingent on inflation as one of the only variables is worker costs for operating the plant. In periods of high inflation, this can provoke a rise in the cost per MWH. However, because nuclear costs are very low compared to other generation sources, this is still a minor impact on the existing fleet

New build can be more affected by the rising costs of goods and raw materials. The significant amounts of steel and concrete required, make the capital costs highly sensitive to inflation.

Exchange Rates

A weak US dollar increases the costs of certain imported raw materials. Although the US has significant Uranium assets in country, today the vast majority of uranium is imported from a variety of international sources. However, as pointed out under inflation, fuel costs are quite low and a small fraction of the total costs even of the current operating fleet. However, these costs are one of the few variables that can be controlled, so watching exchange rates and hedging against significant swings in currency value is an activity that many utilities participate in

In new construction, much of the domestic capability no longer exists to manufacture key critical power plant systems. In particular, no US manufacturing capability for Reactor Pressure Vessels exists today. Thus a weak US dollar can force significant cost increases on nuclear energy facility construction. This has added significant uncertainty in trying to estimate total construction costs.


Today, with the slow economic growth and weak US dollar, several utilities have indicated a slowdown in their new plant build. While some have attributed the slowdown to impacts of Fukushima, it appears to me that the real driver for slowdown is a lowered demand growth, as well as interest rate and exchange rate uncertainty. When the economy begins to recover, we will see renewed growth in electricity demand. Further, as the drive to end our reliance on fossil fuels continues, nuclear energy will become an increasingly obvious choice to replace coal and natural gas for electricity production.