A couple of weeks ago, Exelon announced that it was going to begin taking action to close the Clinton and Quad Cities nuclear power stations. According to the company, those stations have lost a combined total of $800 million during the past seven years. Both facilities are well run and reliable, and their ongoing operating costs are modest.
The total electrical generating capacity of the three reactors–Quad Cities is a two-unit site–is approximately 2800 MWe. All three reactors have been operating with capacity factors in excess of 90%, so the loss of all three would reduce America’s clean electricity production by approximately 22 billion kilowatt hours per year.
That is roughly equal to the 23 billion kilowatt hours produced by all of the solar photovoltaic panels in the U.S. during 2015.
During the past week, there were two more announcements.
The board of directors for the Omaha Public Power District (OPPD) confirmed that it will close the Ft. Calhoun (479 MWe) nuclear plant by the end of 2016.
Exelon has formerly notified the New York Public Service Commission that it will begin actions to close Nine-Mile Point Unit 1 (640 MWe), Unit 2 (1,205 MWe) and Ginna (597 MWe) if the commission doesn’t approve a proposal originating from the Department of Public Service that involves a Zero-Emission Credit requirement for all electricity retailers before the end of September.
That brings the potential loss of clean electricity production announced in the past three weeks to 55 billion kilowatt-hours/year.
This is not the direction that will slow the increase in CO2 concentration in the atmosphere or avert the consequences of the associated increase in global temperatures. It is the direction that will add more demand to the natural gas market at a time when exports are increasing, new industrial users are coming on line to take advantage of cheap gas and more than $1 trillion in near-term investments has been cut from oil and gas company capital expenditure budgets.
As Dr. Steven Chu quoted at the 7th annual Clean Energy Ministerial Meeting (CEM7), there is a Chinese proverb that says, “If you do not change direction, you will end up where you are heading.”
Revenue Challenges For All Electricity Suppliers
The economic challenge facing nuclear power plants like Clinton and Quad Cities that operate in restructured markets is coming from both sides of an income statement – revenues and costs.
It wasn’t that long ago that well run nuclear plants like those in the Exelon fleet were considered cash cows. Their operating costs were averaging about 2 cents per kilowatt hour ($20/MW-hr); they ran reliably and the market price of electricity in wholesale markets was established by the highest cost generator needed to supply the demand. In 2008, that high cost generator was burning natural gas costing $12/MMBTU.
Just purchasing fuel for that plant cost 9-10 cents per kilowatt hour, even in an efficient combined cycle plant.
Against that competition, nuclear plants did very well, producing net profits in the neighborhood of half a billion dollars/year for every 1000 MWe of capacity.
The era that former Exelon CEO John Rowe called the “golden age of nuclear” lasted from 2004-2008. It came to an abrupt halt when the Great Recession reduced the demand for natural gas just as production from hydraulic fracturing and horizontal drilling began to come online.
The resulting imbalance between supply and demand produced an oversupply that was enough to crash the price by about 75% to about $3/MMBTU. In succeeding years, continued increases in production have helped maintain the oversupply. There are numerous reasons why oil and gas companies kept drilling, even when market prices were telling them there was little current demand for their product. That explanation is beyond the scope of this article.
Another factor that has made natural gas seem so abundant to traders is that electricity generation from wind has increased from 55 billion kw-hrs/year in 2008 to 190 billion kw-hrs/year in 2015. Solar generation has also increased from about 0.5 billion kw-hrs/yr in 2008 to 23 billion kw-hrs/yr in 2015. That 160 billion kw-hr/yr increase in clean power generation has been good for our atmosphere and has reduced the need to burn both natural gas and coal.
Every billion kilowatt-hours of solar, wind or nuclear electricity reduces gas burn by about 6 billion cubic feet (assuming CCGT with 6,000 BTU/kW-hr heat rate). The increase in annual solar and wind generation since 2008 has been the equivalent of adding almost a trillion cubic feet of natural gas per year to the market.
The increase in wind and solar generation capacity hasn’t come cheaply. For example, under the section 1603 grant program that was part of the Recovery Act, taxpayers have provided $25 billion to renewable energy developers since 2009. About 95% of that money went to wind and solar projects.
There are other federal and state subsidy programs and renewable energy mandates (all of which exclude nuclear energy) that have helped wind and solar production grow so rapidly.
Low gas prices aren’t primarily a result of increasingly cheap production; they’re a result of the way that markets establish a price that balances supply and demand. Current gas prices, along with a sharp drop in the oil prices that had been propping up exploration companies producing both gas and oil from the same hole in the ground, have led to a rapidly increasing number of bankruptcy filings among independent drilling companies.
If the prices were a result of reductions in production costs, companies wouldn’t be failing.
Yesterday, depending on the specific location, U.S. natural gas for electricity production could be purchased for $1.80-$3.00 per MMBTU.
Aside: In the two weeks since the original version of this article was published on Forbes.com, the bottom end of that range has increased to $2.60/MMBTU. End Aside.
Wholesale electricity prices in the specific segments of the power grid where the plants tie in has been in the range of $10-$30 per MW-hr. At Quad-Cities prices on the grid have occasionally dropped below zero, requiring either a reduction in output or a payment to the grid operator for the service of carrying away unwanted electricity.
If Revenues Are Low For Everyone, Why Are Nuclear Plants Closing First?
At current market prices, no upper Midwest power generators are actually making much money.
Natural gas plants, which have low construction costs and only employ about 1/10th as many people as a nuclear plant, have the option of temporarily closing down and sending workers home during periods when prices are too low.
The carrying costs of an idle gas plant are almost zero; even at today’s gas prices, fuel represents about 70% of the levelized cost of electricity. Plants don’t burn fuel if they are not operating; few merchant plants bother with the kind of long term fuel contracts that come with guaranteed delivery and “take or pay” provisions.
Due to the regulatory requirements for security and monitoring, along with some operational characteristics unique to nuclear power plants, there is no real difference between the cost of owning a plant that is operating at 100% power and one that is temporarily shut down, waiting for a change in the market price. Under the rules that are currently in place, the only way for a nuclear plant operator to substantially reduce the ongoing cost of ownership is to decommission the plant. There is no “mothball” option.
Nuclear plant operators have also been hit with new capital investment requirements plus new operations and maintenance expenditures as a result of regulatory overreactions to 911, tritium leaks and Fukushima. The magnitude of these increases is difficult to pin down, but plant workers have reported expenditures of $50 M to $100 M at their facility solely due to Fukushima-related modifications. Many of those investments have already been made, but the experience has taught board members that the next event that can cause a ratchet in nuclear costs can occur at any time and in any place around the globe.
After including the $23 per MW-hr production tax credit (PTC) given to wind generators by taxpayers for their first ten years of operation, the owners are apparently making enough money to continue building more wind farms. Those new units will be pushing their output into an already congested and oversupplied areas of the grid. That tax credit, indexed for inflation, was extended for another five years as part of the Omnibus Appropriations Act passed at the end of the 2015 pre-holiday session of Congress.
Wind developers also have the option of getting the equivalent of ten years of production tax credits in a lump sum by opting for a 30% investment tax credit (ITC) in lieu of the production tax credit. The ITC is the standard credit for solar systems; their credit has been extended through 2022.
What Can Be Done To Stop Plant Closures?
This is the multibillion dollar question. The combination of market signals, incentive structures, regulatory ratcheting and public perceptions are leading companies that own nuclear plants as part of a larger fleet of generating assets to believe that closing the plant is the correct economic choice.
Over the short term, they might be right. No one knows what the price of natural gas will be in the future; in the past week alone, it has increased by 11%, but that gain could be erased just as quickly. My personal read is that a long period of low prices has established the conditions that will lead to a sharp and sustained increase in prices, but other market players have made different projections.
The wind and solar tax credits passed with no apparent harm to the reelection prospects of anyone who voted in favor of them, so those sources will probably continue growing in spite of market signals.
Given where we are today, I believe that a phased-in, revenue-neutral substantial carbon tax is the policy that is most likely to be politically acceptable and also provide the right signal to plant owners that their clean power is valuable.
As Shultz described it, the fee would be collected on fuel at the production source or point of entry. All revenues would be given to the Social Security Administration and then sent out as a check marked “Your Carbon Fee Dividend” in equal amounts to everyone with a Social Security Card.
The fee would send the signal that burning fossil fuel isn’t evil, but that there is a cost associated with using our common atmosphere as a waste dump. The dividend would help to popularize the fee and solidify it into policy. Since there is a huge range of energy use among citizens and businesses, most individuals will receive a check whose amount is greater than the added expense from increased energy costs.
People who live abundantly with large homes, boats, RV’s and jet travel will see checks that are far lower than their increased costs. Energy intensive businesses will see higher energy costs but they generally have control over their fuel choices.
The difference probably won’t change lifestyles or business operations, but if the fee is substantial and predictable, it might encourage customers to chose power sources that have a cheaper, more environmentally sound waste storage solution.
Note: A version of the above was first published on Forbes.com under the headline How Can We Stem The Accelerating Loss Of Clean Power Generation?. It has been modified with new information revealed since June 3, 2016 and republished with permission.
The new headline is an allusion to the halcyon days of the Great Bandwagon Market in nuclear when each week seemed to bring the announcement of a new nuclear power plant order.