The Nation's Nuclear Plants Are Nuked
Published: December 18, 2012
While the
nation has been focused on
new sources of natural gas and shale oil, few noticed the slow
decline of an older energy source, nuclear power. Today,
commercial nuclear power is struggling to stay in the game.
The power markets are hammering the nation's nukes. Over a decade ago,
several regions decided to create Regional Transmission Organizations
(or Independent System Operators) and use the market to set power
prices. Today, North America has ten independent RTOs/ISOs, where
wholesale power is auctioned every few minutes.
Power auctions are about energy, not power plants. Auctions don't care
how power plants produce energy; they only care about the bid. The
primary focus is on the last bid that clears the auction; it sets the
price for all participants. That's why the last bid is called the
market-clearing price.
The difference between the market-clearing price and the generator's
production cost is the gross margin. The last bid is technically on the
margin and it earns little to no gross margin. But every dollar above
production costs contributes towards the generator's fixed costs.
Most nuclear units are "must run plants" and they will produce power
even if market-clearing prices fall below production costs. Recently,
some nuclear plants have been booking negative gross margins. They hope
they can make up losses with subsequent gains and average a gross
margin.
A gross margin is not always enough. Nuclear units must pay all their
bills and leave something for shareholders. Recently, some nuclear units
are achieving modest gross margins, but not enough left to pay all the
bills or achieve any earnings.
Just ask
Dominion
Resources. They recently announced the retirement of their Wisconsin
nuclear plant 20 years early. Dominion claims they sought buyers for
their Kewaunee Power Station. None could be found. It appears that not
only did Dominion conclude their nuclear plant would remain
unprofitable; Dominion's competitors concurred.
It turns out that Kewaunee is located near
NextEra Energy's
Point Beach Nuclear Plant. Point Beach operates in the same market and
shares a similar design. It would seem that Point Beach must be as
economically challenged as Kewaunee.
It's likely because the nation's largest fleet of nuclear power plants
is operating nearby and they are financially challenged.
Exelon owns 10
generating stations and 17 reactors, which are located in Illinois,
Pennsylvania and New Jersey. Altogether, these power plants are
struggling to provide their owners with earnings to the point where
Exelon's management warned shareholders they might be forced to cut
dividends.
A Different Picture in Regulated States, but Challenges Remain
Nuclear plants operating in regulated states are faring better. While
consumers' demand for electric power is down, nuclear power plants are
safely embedded in states' rate bases. Owners of regulated nuclear
assets are protected, up to a point.
Two nuclear power stations are finding their state regulators are losing
patience. One is Duke Energy's Crystal River Nuclear Generating Plant
operating near Tampa, Florida. The other is Edison International's San
Onofre Nuclear Generating Station operating in Southern California.
Both stations are experiencing unusual and costly maintenance expenses.
Crystal River's containment repairs could exceed $2 billion, a price
that state regulators may find excessive.
San Onofre also incurred unexpected and costly maintenance challenges.
But San Onofre's 2,350 megawatts is a critical resource for Southern
California and without that resources California could see rolling
blackouts. Nevertheless, San Onofre's headaches provide new
opportunities for opposition groups to pressure regulators and political
leaders. San Onofre could survive, but it is at risk of early
retirement.
Entergy is at war with
two states at the same time. Vermont wants Vermont Yankee Nuclear Power
Station to retire 20 years early. Politicians and regulators are
fighting with everything they have to prevent Entergy from continuing
nuclear operations.
The State of New York wants Entergy's
Indian Point to retire 20 years early and they are vowing a fight to
prevent further operations. Governor Cuomo believes the state can import
enough power from Canada to provide them with enough power to assure
regional reliability. But in the case of New York City, existing
transmission lines are inadequate and they are constrained. New lines
will be needed to deliver Canadian power to the energy hungry city.
New Jersey regulators already negotiated the early retirement of
Exelon's Oyster Creek Nuclear Generating Station. Oyster Creek is
630-megawatt facility and it will go on the scrap heap ten years early
in 2019.
A pattern is developing. It may take a few years, but it appears small
nuclear plants will face increasing pressure to retire early. They
cannot compete, particularly in soft markets. Some plants will find
their costs consistently exceed any benefits they earn and their owners
will be forced to retire and dismember plants.
Natural gas may replace retiring nuclear plants.
New turbine technologies and low fuel costs allow some gas turbines
to outperform nuclear power plants. But it is
unlikely fuel prices will remain low for the next 60 years, the
design life of a new nuclear unit.
Glenn Williams worked in the nuclear power industry for over 20
years. At the time of publication, he had no position in any of the
stocks mentioned.
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