After a number of discussions with people in positions close to the decision to destroy the Kewaunee nuclear power station, I am now about 98% sure that it will be shut down as currently scheduled in May of 2013. I am also about 95% sure that the decision will cost electricity customers in the Midwest Independent System Operator (MISO) grid a substantial quantity of money during the 20 years that the plant could have remained in operation.
About the only thing that can save the plant at this point is the arrival of a well-capitalized white knight who recognizes the value of a licensed nuclear power plant, 900 acres of surrounding land, and the potential for finding electricity customers that will pay a premium for predictable energy prices more than 1 year into the future. It might also help if the white knight is an out of the box thinker who realizes that nuclear reactors can do more than just produce electricity.
Here are some of the things that I have learned in the past week, some of which I find rather disturbing.
- Kewaunee has enough fuel remaining to operate into the fall of 2013.
- In 2012, Kewaunee operated with an average capacity factor above 90% and produced 4.5 billion kilowatt hours of emission-free electricity.
- Entergy, Exelon and Next Era did not make offers, despite having performed some due diligence.
- A Wall Street mergers and acquisition (M&A) specialist stated that if those companies could not make the numbers work, no one could.
- No one I spoke to put any value on the emission-free nature of the power output.
- Everyone I spoke to was concerned only about current electricity market prices.
- No one recognized the opportunity associated with future market price increases.
- At least one decision maker at a major provider of cloud based services is firmly opposed to the use of nuclear energy.
- The employees at the facility have mixed perspectives on the closure.
- Some have few ties to the local area and have already found other jobs.
- Some are nearing retirement and see the buyouts as an unexpected windfall.
- Some are in the middle of their careers, are active in the community and have children in school. This is the group that is most unhappy about losing their job or the prospects for finding a new one in a different location
- Many people in the nuclear industry are happy about the immediate jobs associated with decommissioning the plant.
My contacts with the Nuclear Energy Institute have not responded to my emails asking if there is anything that the rest of the industry can do to change the situation. (I hope that is because my email got lost in a stack, not because they have no interest.)
One of the things that became abundantly clear is that many of the people I talked to are quite sanguine about shutting down a uranium fueled plant and replacing its output with either coal or natural gas. Some of the people talked about the low price and low risk associated with burning natural gas compared to the fixed costs of operating a nuclear plant and the liability risk associated with nuclear energy.
I have a difficult time understanding how anyone can consider increased dependence on natural gas to be a less risky choice, especially given the history of price volatility. Here is the chart from the Energy Information Agency of the monthly prices paid for natural gas by electric power producers.
After reading Mark Cooper’s paper criticizing the economic prospects of VC Summer and the Levy project, I contacted Geoff Styles, publisher of Energy Outlook. Geoff has professional experience in the fuel commodity futures trading market. One of Cooper’s assumptions is that it is possible for electric power companies to lock in natural gas prices on long term contracts at a favorable price.
I asked Geoff if it really was possible to purchase natural gas futures more than a few years into the future. He responded with some very useful information about the structure of the futures market.
It’s been a while since I was directly involved in the futures markets, but I still watch them fairly closely. It’s true that the NYMEX futures
contracts for gas extend out the ten years that Mr. Cooper claims–currently
through March 2023. See:
However, if you take a look at the column labeled “volume”, you can see that
there’s very little activity out that far. (You can pull up volume graphs
for each contract by clicking on the chart icon in the column next to the
month column.) It’s not always zero, but whenever I’ve checked this in the
last few years, the volume typically falls off rapidly beyond year 2 or 3.
That means two things for anyone seeking to lock in a 10-year gas price:
- In order to entice someone to sell any significant volume in the out years, they’d likely have to bid well above the most recent settlement prices for those distant contracts.
- Just as importantly, the lack of liquidity, even if they could find a willing seller up front, means that it could be very difficult to unwind any of those distant contracts before they have advanced to within a year or two of delivery, except at a large loss by enticing a buyer via a very low offer price.
In practice, I assume that anyone actually interested in lining up a
sizeable volume over a ten year period or longer would avoid the futures
exchange and either try to deal directly with a large, stable producer, or
find a “market maker” like a big investment bank or trading house to do an
over-the-counter swap to lock in the price. In my experience those don’t
I checked the link that Geoff provided and found out that the situation is even less predictable than Geoff remembered. The most distant futures contract that has any reported volume is Jan 2014, less than one year from now. Combined with the recent price history since the market bottom last spring, that does not bode well for the stability of future gas prices.
My guess is that sellers are demanding a higher price than buyers want to pay. That often happens in a commodity market when the sellers know there are factors driving up the price and buyers look over recent history and believe they can comfortably just keep buying short term contracts.
I remain comfortable with my bet that there will be at least one month before the end of 2014 in which prices at Henry Hub will exceed $10 per MMBTU. I suspect that the natural gas price for electric power customers will exceed that number by several dollars during the same time period. I suspect that there will be plenty of customers who are not happy with the choices made for them during the temporary period of low natural gas prices.
On the other hand, I also suspect that there will be people who trade natural gas or who own substantial stakes in natural gas production, storage and transportation assets that gain a financial edge from the decision to remove 550 MWe (equivalent to about 100 million cubic feet of natural gas per day or 33 billion cubic feet per year at 90% capacity factor) of competitive supply from the electric power grid.