John Rowe, the soon to be retired CEO of Exelon, the largest nuclear plant operator in the United States, said the following during a talk at the American Nuclear Society Utility Working Conference and Vendor Technology Expo in Hollywood, FL.
The Colorado School of Mines estimates that the total potential of U.S. gas supply increased by 71 percent from 2000 to 2010.
And they are not alone; CERA, MIT and others believe that the U.S. is flush with natural gas.
The process of getting to this shale gas is raising some environmental concerns. We believe, as many experts do, that additional environmental regulations will increase the price of extracting shale gas but will not destroy its cost.
This new supply has caused natural gas prices to plummet from their historic highs. It is the most affordable fuel for at least one, perhaps two decades.
When I was trying to sell investors on the idea of building small modular reactors in the 1990s, people told me that natural gas was cheap and would be cheap forever. The EIA projections backed up those assertions. In 1996, when I put Adams Atomic Engines, Inc. to sleep for the first time, natural gas was selling for $1.60 per million BTU in the US.
In the summer of 2008, after a long climb, natural gas topped out at about $14 per million BTU in the US. The rate of increase over that period of time was “slightly” higher than the EIA’s 1996 projection of 2-3 percent per year. Elevated energy prices played a larger than acknowledged role in the collapse of the world economy. The substantial reduction in demand, not the 10% increase in natural gas production since 2005, led to the sharp fall in natural gas prices.
Though it has not yet affected the US, the price of natural gas in Western Europe has already increased by about 15% – 30% in the aftermath of Fukushima. Shutting down German and Japanese nuclear plants has not increased the world’s output from wind or solar systems; it has increased the demand for natural gas. At current prices, natural gas in the UK costs more than 3 times as much as it does in the US or Canada, making suppliers consider the idea of shipping gas via LNG tankers. If that happens, the price differential will narrow considerably. I do not expect the narrowing to come from lower prices in Europe.
John Rowe is a lawyer by training who has a fiduciary responsibility to maximize short term profits for his company’s shareholders. He is not a nuke. He is willing to destroy a 2200 MWe formerly licensed and fully completed nuclear plant in order to constrain the supply of electricity.
He is also willing to allow the state of New Jersey to force another 620 MWe from the Oyster Creek nuclear plant off of the grid in the relatively near future. He has repeatedly told his investors that high gas prices are good for Exelon because the company leaders have skillfully maneuvered to be in a position where the selling price for their output is driven by the “last-in” generator. They profit most when that generator is burning natural gas. The higher the price of gas, the higher the selling price for the output of Exelon plants and the higher their profit margins. Their generating costs do not change when the price of gas goes up. Here is how Rowe described that situation during his talk at the ANS meeting:
I have also known the boom years for nuclear – the middle of the last decade when gas prices were high and our plants were performing superbly due to the efforts of Oliver (Kingsley) and Chris (Crane). In those years our nuclear fleet was worth nearly $50 billion.
The fleet drives our very attractive profits, and about three-quarters of our $28 billion market cap. It gives us more upside than any other utility. But the average age of the plants is 31 years.
I am apparently a lousy businessman. I believe that high-priced electricity is bad for the economy and for the public, especially when it is electricity from sources like gas and coal that pollute the environment.
In my fantasy world, there will be visionary leaders who recognize that cheap atomic electricity enables other economic benefits that will drive up the market demand for clean electricity high enough so that even some power suppliers can benefit. In my evaluation, a large part of the downward spiral of the American economy can be traced to the notion – agreed to by certain ideologically driven people AND certain energy suppliers – that continued dependence on high-priced fossil fuel energy is better than allowing cheap atomic energy to flourish.
I admit it. I am a child of the 1950s (just barely) who thinks that producing useful products that require a substantial energy and raw material input is a better foundation for an economy than producing paper or serving hamburgers. I like looking at the trend in electricity prices from the 1920s to the early 1970s compared to the trend in economic output.
In addition to being confident that we can do better than even “the cleanest fossil fuel”, I am not a fan of energy conservation. We have a proven, cleaner, safer source of energy that can get cheaper as people use more of it.
Paraphrasing Jay Leno from a 1980s vintage Doritos commercial:
“Use all you want. We’ll make more.”
PS (Posted on August 18, 2011) There are some people who have determined that Rowe’s speech to the ANS Utility Working Group was right on the money. Here is the link from Investing Daily John Rowe’s Last Speech on Nuclear Power: Bright Future By Necessity. A better way to describe the reason that Jim Fink liked Rowe’s message is that he thinks it will improve the profitability of his natural gas investments and his belief in Exelon’s ability to grow its profits and share price without producing any more electricity.
Update: (Posted on August 25, 2011) Bloomberg.com has reported that the US Geological Survey has estimated that the Marcellus Shale formation contains approximately 80 trillion cubic feet of natural gas. That is only 1/5th of the amount that the Energy Information Agency had been using in its estimates of the US natural gas reserve. It is less than four years worth of the annual demand for natural gas in the US, which is approximately 23 trillion cubic feet per year. Meredith Angwin at Yes Vermont Yankee has written about the implications of this reduced optimism in the extent of the US natural gas resource base at Money and the Future of Vermont Yankee: Decommissioning and the Marcellus Shale