BREAKINGVIEWS-Nuclear mega-deal illuminates AI’s glowing gap

By Robert Cyran

NEW YORK, Oct 28 (Reuters Breakingviews) - Artificial intelligence has sparked a nuclear reaction. Japan is backing an $80 billion plan to build nuclear power plants alongside the U.S. government using technology from Westinghouse Electric, the storied company now jointly owned by Brookfield Asset Management BAM.TO and Cameco CCO.TO. The complex and contingent nature of the deal illuminates a glowing gap.

Giants including Microsoft MSFT.O and Amazon.com AMZN.O started erecting data centers using existing cash flow, while utilities borrowed prudently to supply power. The sums are mounting too quickly to keep up, however. More than $5 trillion of investment will be needed in AI by 2030, according to consultancy McKinsey. These funding strains have prompted Nvidia NVDA.O, OpenAI and others to use ouroboros-like structures. Fewer U.S. electric utilities are retaining top-notch credit ratings.

Nuclear plants, however, are among the costliest and most unpredictable ventures, which helps explain the general reluctance to pursue them. The most recent project, finished last year, came in years late and at more than twice the initial $14 billion estimate.

For now, there's no getting around AI energy demands. Data centers accounted for about 4% of electricity usage in 2023, a figure that could jump to as high as 12% in 2028, the U.S. Department of Energy estimates. Solar will shoulder much of the burden. Utility behemoth NextEra Energy NEE.N said this summer that sun power firmed up with batteries is ready to deploy immediately, and costs about $35 to $75 per megawatt hour. A new nuclear reactor costs three times as much, according to Lazard, and takes longer to build.

There is nevertheless a place for nuclear, especially if advances can be made. As part of a trade partnership unveiled on Tuesday, Japan will provisionally finance $550 billion of U.S. infrastructure projects, with both countries expressing interest in nuclear power. The implication from the various announcements is that $80 billion of it will go to nuclear initiatives spearheaded by Brookfield and Cameco, with the U.S. government potentially helping expedite related permitting and providing loan guarantees.

If everything goes smoothly, the agreement might lead to eight 1 gigawatt plants. Proof that plants can be built fast and on-budget could lead to more orders. Even U.S. taxpayers would reap financial benefits if Westinghouse delivers beyond a certain threshold and later goes public.

The plan represents the best chance for nuclear in decades, but history also suggests the power source can lose support quickly. Westinghouse, after all, went bankrupt under Toshiba's ownership in 2017, because of cost overruns. Combined with the haze of AI hype, generating sufficient electricity will be as hard as splitting the atom.

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CONTEXT NEWS

Westinghouse Electric, Cameco and Brookfield Asset Management said on October 28 that they had entered a partnership with the U.S. government to build nuclear reactors in a provisional deal that coincided with President Donald Trump's visit to Japan.

Under terms of the arrangement, the U.S. government will receive 20% of any cash distributions made by Westinghouse beyond $17.5 billion. The provision kicks in following a final investment decision and definitive agreements to complete $80 billion of new Westinghouse reactors.

The government also can force Westinghouse to go public by January 2029 if the company is expected to be worth at least $30 billion. In the event of an initial public offering, U.S. taxpayers would receive a five-year warrant equal to 20% of the value of the company, less $17.5 billion, from the government stake.

The United States and Japan also published a joint fact sheet listing companies from both countries they said had expressed interest in participating in various projects, including nuclear reactors, with their estimated associated costs.

Brookfield Renewable and Cameco agreed to buy Westinghouse in 2022 for $7.9 billion, including debt, from Brookfield Business Partners, which had acquired the company in 2018 after it filed for bankruptcy in 2017.