The U.S. Inflation Reduction Act (the act) directs billions of dollars in federal funding to clean and reliable energy, with the goal of significantly improving resiliency of the grid, increasing onshore dependence, and lowering carbon emissions by the end of this decade. The act provides for funds delivered through a variety of tax incentives, grants, and loan guarantees for the production of clean and firm electricity, including nuclear energy, which has been largely neglected by past initiatives. The act unequivocally recognized nuclear as an integral part of the carbon-free energy taxonomy.

This report is the second of two related S&P Global Ratings' commentaries on U.S. unregulated nuclear power generation (see also "U.S. Unregulated Nuclear Power Update--There And Back Again," published April 3, 2023). Here, we update our views on nuclear distressed and going-concern valuations.

What Has Changed?

We see the production tax credits (PTCs) provisions in the Inflation Reduction Act as a gamechanger for unregulated nuclear power. The PTCs change the model for unregulated nuclear power generators from a merchant business to a nine-year contracted business, with floor pricing of $40/megawatts per hour (MWh) to $44/MWh.

We're still awaiting final terms of legislation (e.g., whether hedges are included in gross receipts revenues). If those are the nuclear generators' actual receipts, the credit would be a function of hedged and market power and capacity prices. But if they're based on prevailing market prices, then the credit would be lower, or zero, if market prices are higher than the $40/MWh to $44/MWh floor.

The math gets a bit involved in later years. Starting in 2025, the maximum PTC and gross receipts threshold are subject to an inflation adjustment based on the GDP price deflator for the preceding calendar year. Also, the maximum PTC is rounded to the nearest $2.5/MWh and gross receipts threshold is rounded to the nearest $1.0/MWh.

We won't wade too much into the weeds except to note the phase-out can change significantly depending on the assumed inflation rate. In particular, the rounding off to the nearest $2.5/MWh can change the phase-out price significantly.

Table 1

Given The Sector's Tailwinds, We Expected Assets To Come To Market

Given the environment for nuclear generation was incrementally weaker for most of the past decade, we didn't see assets trading much, if at all (the last asset sale was in 2006, albeit consolidations and acquisitions of companies owning nuclear units happened through March 2012). Recently, there was speculation about a number of potential transactions---the PSEG Power LLC portfolio, Dominion Energy Inc.'s Millstone, and Talen Energy Supply LLC's Susquehanna. Each of these owners have decided to retain their assets for a variety of reasons but mostly because of the approval of the federal PTC's in Inflation Reduction Act.

One sale that actually went through was Energy Harbor Corp.'s (EH) sale to Vistra Corp. This example is particularly relevant because EH's fleet didn't benefit from any government support and was fully exposed to the forward curve before the implementation of the PTCs. We've used that transaction to simulate our exercise for modeling distressed and going-concern valuations under a mix of power-pricing and discount-rate scenarios. In an effort to be transparent about our recovery estimates, we are also listing some of our major assumptions.

Major Assumptions

EH is a portfolio of four reactors across three sites. Perry Nuclear and Davis-Besse are two single units in Ohio, while Beaver Valley is dual-unit in Pennsylvania. Together, they represent about 4,048 MW of generation capacity. Table 2 lists some of the major assumptions we made in our assessment (including a hypothetically different long-term capital structure, half financed with debt).

Table 2

Input Costs Initially Increased But Have Since Moderated

Costs of producing nuclear power initially rose in the aftermath of the Fukushima accident as regulatory requirements increased. Since then, lessons learned have been incorporated and overall costs have started trending downward. According to the Nuclear Energy Institute (NEI), U.S. plants' total average generating costs increased 52% over 10 years to $47 per MWh in 2012 in the aftermath of Fukushima (or a compound annual growth rate of 4.3%). Among the biggest factors making nuclear power more expensive is capital spending, which soared 200% from 2002 to 2012 (compound annual growth rate; CAGR of 11.6%), according to the NEI, compared with a 35% increase for fuel costs and 25% for operating costs (see table 2).

The U.S. fleet has undertaken cost initiatives for the past decade in response to the increasingly adverse market climate. Since 2012, operating costs have decreased nearly 40%. Even as the industry has become leaner, we think capital costs will increase somewhat and fuel costs could also increase in a post Russia-dependent world. According to the NEI, capital costs of unregulated units in 2021 ($2.64/MWh) were significantly lower than those of rate-regulated plants ($7.8/MWh). We expect that difference to narrow as unregulated plants take on uprates now that nuclear generation economics are more attractive. Some capital spending will also involve preparations to take facilities beyond the standard 60 years of operation to up to 80 years, and that goal will likely require significant investment to deal with aging components.

We note there is also a small difference in the average costs for fleet operators ($28.56/MWh) compared with single-unit owners ($31.28/MWh), but a larger one between plant sizes. A single-unit plant averaged $37.43/MWh compared to a multi-unit plant, which averaged $27.18/MWh. To inform our estimates, we relied on industry data but also region-specific data, given the Midwest and Mid-Atlantic have lower operating costs than fleets in the east.

Table 3

Federal PTCs Result In Revised Asset Values For Recovery Estimates

Power prices in the PJM (west)/ATSI region tend to be volatile. As of year-end 2021, prices were in the $40/MWh area for calendar years 2024 and 2025; they were about $55MWh-$58/MWh around the time the bids were due in December 2022, and are around $48MWh-$52/MWh in March 2023.

Instead of attempting to forecast a forward power price curve and suffering the vicissitudes of volatile commodity markets, we calculated the value for the portfolio under various power price levels, and used a range of discount rates. Based on those assumptions, we arrived at the values presented in table 4. A separate analysis using the adjusted present value method (that isolates the impact of leverage, valuing equity, and debt cash flow streams separately) resulted in slightly higher values.

Table 4

We made three significant assumptions that may affect valuations:

• We did not round off the PTC to the nearest $2.5/MWh, or the reference price to $1.0/MWh. This inflation adder could be a powerful driver of value;
• We did not assume pairing of nuclear generation with other technologies such as hydrogen; and
• In the post PTC period starting 2034-2050, we assumed realized power prices will decline and remain rangebound in the $43/MWh (2023) area. Pricing could be lower if the promise of storage and renewable is realized more efficiently.

Our going-concern valuations are merely illustrative but we have identified the range of outcomes we see as more likely). However, we're mostly interested in the distressed asset values because we use those to inform our recovery estimates.

We note the floor provided by the federal PTC raises our distressed valuation for nuclear units significantly. As noted previously, the PTCs change the model for unregulated nuclear power generators from a merchant business to a nine-year contracted business, with floor pricing of $40/MWh to $44/MWh.

We have therefore raised our distressed asset valuation for nuclear power units to $900 kilowatts (KW)-$1,100/KW.

Related Research

• Sector And Industry Variables | Criteria | Corporates | Recovery: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, April 13, 2023