Modest proposal to Chris Crane, CEO of Exelon
Dear Mr. Crane:
According to Exelon’s power struggle, your company is searching for a strategy that will restore the glowing prospects that it faced in the period from 2004-2008. That is the period that an Exelon leader called “the boom years for nuclear.”
During that time, Exelon’s stock price reached an all time high of $91.64 and the cash was rolling in as your low marginal cost nuclear plants sold their electricity output into a wholesale market where the selling price for all suppliers was determined by the prices charged by the last generating unit needed to meet projected demand.
As shown in the above graph, natural gas prices charged to electricity producers vary wildly. When natural gas prices were as high as $12.00 per MMBTU the last-in generator needed prices on the order of $120 per megawatt-hour just to pay for the cost of fuel, the wear on the plant, and the minimal cost of operators associated with a natural gas fired power plant.
Your predecessor, Mr. John Rowe, thought he was very smart to be proud owner of a fleet of 17 large nuclear plants that had an average production cost of $20 or less per megawatt-hour selling into such a market. He bragged to investors about his coup.
We have the largest low-cost, low-emission nuclear fleet in the nation, and all 17 of those units operate in competitive markets,” he said. “As gas, coal and capacity prices increase and reserve margins decline, the value of our nuclear fleet increases. We expect that value to increase even further in a carbon-constrained world.
(Note: Above comment slightly edited because the original source seemed to have a typo.)
In other words, Mr. Rowe had created a situation in which Exelon was a nearly pure play on merchant electricity generation under the assumption that a fuel source with a volatile, cycling history would continue rising in a linear fashion. His primary hedge was to hold onto Commonwealth Edison’s regulated distribution business.
Mr. Rowe was taking credit for a major effort of operational improvement led by Oliver Kingsley. That multi-year effort turned Commonwealth Edison’s high cost, unreliable, individual nuclear units into a fleet of exceptionally maintained and operated nuclear plants with one of the highest average capacity factors in the world. You played a major supporting role in that effort.
Rowe was also taking credit for the well-operated units that were added to Exelon’s stable of large nukes through the purchase of PECO, which was headed by one of the best CEO’s the nuclear industry has ever seen, Corbin McNeill.
Exelon’s decision to marry a merchant plant operation with a regulated distribution utility was a choice made by a guy who had grown up in the regulated electricity business as an accountant. He though in straight lines and did not recognize volatility or understand how to operate in a cyclic commodity business. Rowe apparently remembered, however, that one of the keys to increasing profits in a regulated business was to spend a lot of time lobbying the government to establish rules that stacked the deck in the business’s favor.
When Peco and Commonwealth Edison merged, there was a struggle over vision and leadership during a period when there were two CEO’s, Rowe and McNeill. McNeill had an expansionary view of the electricity market, wanted to use the cash flow from the profitable merchant plants to buy even more generating units and believed that nuclear energy had a bright future. He recognized that one of the company’s core competency was its operational excellence and understanding of the principles of operating reliable nuclear plants.
One of the ways he wanted to take advantage of that asset was to diversify Exelon from being just a plant owner/operator into fourth generation nuclear plant design and development. By providing both cash and a strong input from experienced operators and maintainers, he believed that Exelon could become a major player in the business of building new nuclear power plants.
McNeill had a vision and wanted to lead a company that was adding large quantities of clean power to the world’s electricity grids. Rowe’s goal was more focused on short-term gratification. He wanted to lead a company that controlled the largest share of existing nuclear plants in a constrained, high priced market. Here are some of the articles I wrote about McNeill and his vision.
- (November 6, 2000) A Vision for Nuclear Power
- (January 9, 2001) Dear Mr. President, Send in the Nukes
- (February 13, 2001) Exelon goes first with PBMR
As you search for a winning strategy please think more about building than acquiring. Invest some of your profits into marketing your highly-valued product and stop passively complaining that the electricity market is shrinking. Help productive, energy-intensive businesses in your market areas expand and grow their electricity use. Work to capture markets like home heating, water heaters, and appliances back from the natural gas industry. Support efforts to electrify more trains in the dense population areas that you serve.
Encourage Elon Musk and other electric car entrepreneurs.
Invest cash and experience in one or more of the exciting new nuclear plant development projects where there are people full of ideas that could use some of your operational knowledge, planning skills, regulatory expertise and political clout to get past the investment “valley of death” and into actual production.
Stop depending on a strategy that drives up wholesale energy prices and chokes off the growth that your company and the rest of the United States needs in order to finally recover from the Great Recession. Recognize that high energy prices were a major part of the cause of that recession; many people defaulted on their new home mortgages when their commuting and utility bills increased enough to to make it difficult to keep up with the payments.
The business of generating electricity should be a great one to be in. The product is almost infinitely useful; essentially all of your customers are repeat purchasers that buy more unconsciously by flipping a switch, pushing an “on” button or turning a thermostat. When the generating source produces a tiny volume of waste, no air pollution, no CO2 and does not depend on continued supplies from unstable places, you have a real winner that should be effectively marketed.
PS – I am an Exelon stockholder. I like cyclic businesses that offer occasional opportunities to purchase a lot of value “on sale.”
The Valley of Death?
Not too long ago, Excelon was looking to close 3 nukes due to natural gas (& maybe overegulation)
From the link in your article:
“The most important reality is the continued availability of cheap natural gas, brought on by hydraulic fracturing drilling technologies that have unlocked substantial reserves of the fuel. At the same time, demand for electricity is slack, caused in part by a slow economic recovery but, more important, also by energy efficiency improvements that many industry observers expect will intensify, particularly as ultra-efficient LED bulbs become commonplace in home lighting.”
Demand for electricity will recover. Population growth continues and as the economy recovers there will be greater growth in electric usage. How fast will this occur?
Natural gas is cheap. The low price and ample supply is driving increasing demand to increase. How long will this continue?
Is the timing right for a far sighted CEO to be looking at future building? A new plant would last 60 years. This would live beyond the natural gas boom. However, in the past new nuke plants have caused big financial woes to utilities.
From your article:
“One of the ways he wanted to take advantage of that asset was to diversify Exelon from being just a plant owner/operator into fourth generation nuclear plant design and development.”
A little investment in this now may go a long way when the timing is right. It seems to make sense for utilities to sponsor an EPRI project or three into fourth generation reactors. This could include a lengthy report to address licensing concerns and make the path easier when the time for actual building is at hand.
However, in the past new nuke plants have caused big financial woes to utilities.
Not exactly. Competent utilities – Duke, for example – did not experience financial woes from building nuclear plants. I believe Exelon has the management and schedule discipline to be a competent builder.
I disagree about sponsoring an EPRI project. To diversify, Exelon would need to invest directly and obtain equity in the development. Sharing may work in elementary school, but not in competitive enterprises.
It may not be wise to blow off completely the notion of a cooperative venture, especially where FOAK-type things are involved, or maybe even things that have been proven elsewhere but have yet to be licensed and constructed here. We owe it to ourselves to be honest and see it like it is and tell it like it is. This industry, for a variety of reasons, is struggling. Anything that can help right the ship and stop the bleeding may go a long way towards saving our collective necks. If the industry as a whole goes under, there won’t be much left of competitive enterprises, at least in the nuke business.
I will both agree and disagree. As far as success in building new plants. I agree some were managed well and some like WPPS had big time trouble. Part was the time the plants were built. The pre-TMI plants seemed to hit the clock at a better time .Inflation hit some of the later plants like a big hammer and destroyed the projects.
As far as EPRI I disagree. Doing the same task two or more times is rework. Combining resources to eliminate a common task avoids rework. Similar drawings, Tech Specs, FSARs, etc can be a boon to multiple new plants being constructed. Getting some of the common work done by EPRI or others makes sense.
As far as competitive enterprises,…. I’ve not seen nuke plants really competing against one another. The competition has been against other energy sources such as coal and natural gas. It’s a different business than cell phones or toothpaste where manufacturers compete for market share.
Here’s another way to look at it. The argument has been made that new nuclear plants will be better because the components can be made in a factory and take advantage of the factory learning curve. Combining resources to produce standard documentation can also take advantage of this same learning curve. The tenth SAR that is produced should be better and cheaper than the first one.
Near interchangeability of documentation will lower costs. This will enable nuclear plants to compete more effectively with other energy sources.
“A little investment in this now may go a long way when the timing is right. It seems to make sense for utilities to sponsor an EPRI project or three into fourth generation reactors. This could include a lengthy report to address licensing concerns and make the path easier when the time for actual building is at hand.”
Actually, this already happened. Exelon and several other utilities funded a large EPRI and DOE initiative to develop next-gen reactor designs. Google “NuStart Energy LLC” and you will see more about it. The consortium declared victory in June 2012 and disbanded, with their objectives having been met. The current design offerings (AP-600, AP-1000, ABWR, ESBWR, EPR) all got the benefit of detailed reviews & adjustments by the current US Utility experts, before the designs were finalized & submitted.
Unfortunately for nuclear expansion, the same market conditions that made interest rates really low, also made it financially challenging to move ahead. For example, GE Capital’s financial woes meant GE didn’t have much cash to advance the ESBWR very fast, and finalizing it’s design dramatically slowed. Some utilities put in markers (COLAs) for ESBWRs, ABWRs, and EPRs, but they are all moving in slow motion, due to minimal load growth.
Corbin McNeil was visionary in many ways, and he certainly wasn’t afraid to try many things (ex., PBMR), knowing not all of them would succeed, but one or two might. However you also should keep in mind that one of the things he was a big proponent of was the deregulated generation market. The current deregulated market seems to be one of the main things that is holding new nuclear construction back. Industry consolidation likely wouldn’t have happened without deregulation (allowing the most profitable generators to keep their profits and invest by buying other generators), however it also de-emphasizes the sort of long-term system planning that traditional regulated utilities do.
In a deregulated market, it’s much more difficult for the “social” goals to exercise their influence (Carbon reduction, renewable mandate, nuclear priority, etc.). Those must now be interjected via some new influence mechanism (ex., carbon tax, wind/solar subsidies), so that all competing technologies are competing on the same financial field of battle, and have been handicapped in a way that meets the societal goal.
“Work to capture markets like home heating, water heaters, and appliances back from the natural gas industry.”
I agree that nuclear power would benefit from increased electrification, but I have been looking at the math recently, and I don’t think there is a good case for electric heating. Electricity is a rather expensive way to heat anything, whether it’s your stove, your house, your water, or your laundry. $0.12 / kWh is roughly equivalent to $35/mBtu. By comparison, natural gas at $1/therm comes out to $10/mBtu. It’s easy to explain why electricity is a more expensive source of heat when you consider that most electricity is derived from heat in the first place and only converted to electricity at somewhere between 33% to 60% efficiency.
Of course, we can’t keep using natural gas to provide heating in the long term, because its combustion emits greenhouse gases that would not be economic to capture on a widely distributed tiny scale. What few sources of “renewable” natural gas there (such as methane produced by landfills and cows) will not be sufficient to allow everyone to continue using natural gas heating in their homes and businesses.
Given climate change, I think the better alternative to electrification of heating is to gradually replace natural gas with hydrogen. Nuclear power could compete very strongly in hydrogen production markets, since many methods of making hydrogen require very high temperature heat. To be fair, it is an open question whether hydrogen is really a viable carrier fuel of the future, but I think it is worth the consideration of nuclear power advocates because it could another way to deliver nuclear energy to consumers in a wider variety of applications.
Heat pumps are ~ 4X more efficient than direct heating. There is a capital cost. Recently they have improved to the point where they can be used in colder climates. Here in New Hampshire it’s been a good business lately, replacing oil-heating.
I absolutely agree that heat pumps are 3 or 4 times more efficient than direct electric resistance heating (as measured by the COP, coefficient of performance), and therefore are far superior. But you can’t directly compare the energy use of a heat pump with other methods of heating, because the two fuels (electricity and natural gas) have very different prices. I think it’s a little ridiculous that people in the Northeast are just now phasing out the use of oil-heating, considering the absurd price of oil. But natural gas–while not carbon-free–is definitely appealing to a cost-conscious consumer who likes heat on demand. Perhaps a carbon-free synthetic replacement could continue to serve that function.
My objective is to minimize the total cost of energy services to consumers, so I my comment below is a back-of-the-envelope exercise that I undertook without a pre-determined result:
Let’s assume two identical homes with the same air leakage and degrees of insulation. The only difference between these homes is that one uses a heat pump and the other uses, let’s compare the fuel cost of a heat pump with a natural gas heater. An electric heat pump will expend 1 electric mmBtu in order to pump between 3 and 4 free thermal mmBtu’s into your house. At $.12 per kWh, each thermal mmBtu costs you between $8.75 and $11.67. A mmBtu of natural gas delivered will cost you $10 (at least out in the Western U.S.).
The fuel costs between the two systems seem fairly comparable. Assuming the price of electricity remains constant (which it invariably won’t if renewable energy advocates have their way), hydrogen (including the cost of delivery) would have to be at least as cheap as natural gas to be competitive. That is basically impossible with current methods of hydrogen production, which derive hydrogen from methane and other fossil fuels.
But there is also the issue of capital cost, as you mention. A 35k Btu/hr natural gas wall heater retails at Home Depot for $466 dollars. My Google searching can’t seem to nail down the representative cost of a 35k Btu/hr air-source heat-pump, but I see values ranging from $600 to over $7,000. Do you have an idea of a more representative value?
Finally, there is the question of maintenance costs and lifetime. I’m really not an expert here, but I have to imagine that an appliance that simply burns natural gas is lot less maintenance intensive than a heavy duty electric appliance like a heat pump.
I would love to hear your thoughts.
Hydrogen … the fad that won’t quite die. It seemed to take decades for people to realize that hydrogen was not a source of energy, but simply a distribution system. If we ever do go to synthesized fuels, I think it will be methanol (can also be used in a fuel cell), or one of the ethers, or something like that … not hydrogen. Personally, I expect everything to be electric one day.
I think Mr Hargraves suggested ammonia in his book. It was said to be no more dangerous than gasoline and is a substance familiar to many. Ammonia is widely produced for agricultural purposes.
On that topic: sodium amide process for cracking NH3 to hydrogen and nitrogen.
Don’t label me a hydrogen fanatic! I’m not nearly knowledgeable enough to have a strong opinion either in favor or against. I only discussed hydrogen because that is the most commonly talked about synthetic fuel — I didn’t want to waste time in my comment explaining the other synthetic fuel options for those who might not be familiar with them.
As someone who has lived with both electric and natural gas stoves, I do not want to live in an electric-only future. I strongly prefer gas cooking!
From a broader perspective, I think competition between carrier fuels would also be very economically desirable. If one fuel becomes too expensive, the availability of multiple carrier fuel networks would enable people to gradually switch to the cheaper fuel as they replace home appliances and personal vehicles. In an electric-only society, consumers would not have this option and electric utilities would face less pressure to keep prices low.
Sorry ’bout that. The ink will wear off in a few days, and if you wear a ball-cap pulled low nobody will see it anyway.
Rod and friends, please see that this post is read by analysts in the financial industry.
It’s hard to apply the words “deregulated market” to the contorted financial incentives set by feed-in tariffs, renewable-energy credits, production tax credits, renewable portfolio standards, and selective corporate income tax credits. Kill them off to level the playing field and nuclear will thrive.
I don’t know, a lot of people have looked at H2 as a carrier and the challenges are formidable. You have to process something (e.g., water) to get it and with methane you just go get it, already made. I agree that methane is a bad actor in terms of environmental impact, but until the market places a price on that, or it becomes more scarce (either because of supply or transport constraints), its going to be tough to beat.
I took the liberty of forwarding a link to this posting to Amir Shahkarami, who I think either is running for or recently ran for ANS President, and also likely knows Chris.
What effect does age have on the light output of led lights. What about the quality of the light?
Bill – Can you explain how your question relates to the post and the subsequent discussion?
It was mentioned that energy efficiency improvements such as led lights have contributed to slack demand. I wondering if the quality of the light gets worse as the products ages. Making buildings tighter may be more energy efficient but it also has a higher risk of sick building syndrome. Some government actions are not well thought out.
Thank you for making the connection more obvious. Along those lines, it has always confused me when the only ads that electricity providers would run were trying to convince people to stop buying more of their product. They’ve even been known to subsidize purchases of items like LED lights and high efficiency heat pumps that directly result in loss of sales volume.
When traveling on rural roads in Alabama I heard an ad for a far more logical subsidy program. Alabama Power was telling people they would buy them a new water heater if they traded in an old gas model.
You wouldn’t believe the almost shocked response I got from Marv Fertel when I suggested that one way to address the flat electricity market was to spend some time and money encouraging people to buy more of the useful product that NEI members produce.
It may be that the utilities are required to pursue efficiency rather than sales. Selling electric water heaters might be counter to law. Perhaps heat-pump water heaters would be acceptable?
I searched and found some dual-fuel water heaters which run on either gas or electricity. Combined with a tempering valve on the outlet, a gas water heater with an auxiliary electric element could be a useful dump load for the utility. It would directly displace the main fuel. Electric heating elements are very cheap, so this potentially can be done at low capital cost.
Gas at a delivered cost of 80¢/therm is about 2.7¢/kWh(th). A utility with an excess of carbon-free power, such as nuclear or wind, could sell the excess at perhaps 2¢/kWh using the dump loads for regulation. Less gas burned, grid managed nicely, resources exploited to the max, customer gets a break… what’s not to like?
Gas at a delivered cost of 80¢/therm is about 2.7¢/kWh(th).
Good luck depending on a delivered price of $0.80 per therm.
In 2008, the price paid by electric utilities – not a retail price – hit $1.20 per therm for a monthly average and often exceeded $2.00 per therm. Last winter in New England, the Midwest and the Mid-Atlantic, daily prices reached as high as $12.00 per therm ($120 per MMBTU, roughly equivalent to crude oil priced at $660 per barrel.
Since natural gas cannot be stored by a retail customer, regulated gas utilities are required to buffer the customer from seeing prices like that on the coldest days of the year – the very time they need the most heat.
Personal testimony – I own a 100 gallon propane tank. Last winter, we paid as much as $5.50 per gallon. Our filling plan is automatic and I neglected to keep an eye on the pricing of Liquid Petroleum Gas (LPG, aka propane.)
Propane only contains 60% of the heat per gallon as gasoline.
Fortunately, our gas fireplace is not our primary heat source. It is more of a decoration, though it does a good job of heating most of the house because we don’t lose heat out of a chimney.
Maybe I can’t depend on it, but in front of me I have a bill for 160 ccf for a total gas charge (minus the customer charge and sales tax) of $118.21. I make that 73.9¢/therm.
I am quite aware of the fact that natural gas CAN be incredibly cheap. In North Dakota, a good deal of it is still flared at some cost to the extractors, so in some places people that own it are paying to get rid of it.
You have been reading this blog long enough to have also seen some of the price history charts that I’ve posted.
The point is that natural gas is a volatile, difficult to store, difficult to transport fuel. It shares many objective characteristics with other unreliables – its prices are weather dependent, its availability is locationally dependent (I live in a well developed little city but there is no residential gas in my neighborhood) and it is far more dependent on subsidies and tax breaks than its developers like to admit.
It does have many valuable uses, but it is not the magical elixir than the promoters would have us believe it is.
I fear you’ve gone far afield from the subject of my comment. If NG prices rose, what it would do in the dump-load scenario is raise the equivalent electric rate for the substitution. Instead of being paid 2¢/kWh (minus transmission charges), the generator might be getting 3-4¢. The dump load scheme would substitute for the highest-priced energy first. Someone heating with propane at 91,500 BTU and $5.50/gallon ($60/mmBTU) would be happy to pay less than 20¢/kWh for substitute heat, especially if they could put it on a payment plan.
Speaking of natural gas, I recently found out that the current drilling cost for a natural gas well in the US is in the vicinity of $7.5 million. Can’t place the source at this time, but this link
certainly points in that direction, even though it is somewhat out-of-date. Since we know that many more wells will have to be drilled to keep up our current production rate, don’t these facts cause some concern to those who think we have a twenty year supply much less a hundred year supply? Seems like the EROEI for natural gas will heading south fast in the near future unless some dramatic breakthrough in drilling technology is found.
If anybody has more facts that can shed light on this subject, please post.
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