A November 9, 2011 Platts headline caught my attention this morning New Calvert Cliffs nuke ‘almost inconceivable’: Exelon CEO. I have been following the Calvert Cliffs Unit 3 story for several years. I used to be a Maryland resident and made a couple of trips down to Calvert County for public meetings on the proposal to nearly double the current productive capacity of the station by adding a 1600 MWe Areva designed EPR.
I’ve also been following Exelon and its effort to maximize the current value of its established fleet of 17 large nuclear plants by doing everything it can think of to reduce the supply of electricity that competes with the output of those reactors. Based on the company’s decision to permanently eliminate the already completed, 2100 MWe Zion nuclear power station, I was not surprised to see Rowe proclaiming that Calvert Cliffs Unit 3 would be a dead letter project if his company succeeds in its current attempt to purchase Constellation Energy.
The below quote from the Platts article, contains several statements that deserve close scrutiny and contemplation.
The Calvert Cliffs-3 project is “utterly uneconomic,” Rowe said after a speech at the Bipartisan Policy Center in Washington.
Exelon “operates in a merchant environment. We can’t make a long-term decision that’s uneconomic because we have no regulatory protection for that,” he said.
“At today’s [natural] gas prices, a new nuclear power plant is out of the money by a factor of two,” Rowe said, echoing one of the main points of his speech. “It’s not 20%, it’s not something where you can go sharpen the pencil and play. It’s economically wrong. Gas trumps it,” he said.
Given recent discoveries of enormous shale gas resources, Rowe said, natural gas prices are expected to remain below $6-$8/MMBtu for the foreseeable future.
The first statement is the idea that the power plant is “utterly uneconomic.” If that was true, one would have to believe that the current backers – including EDF, one of the largest electrical power producers in the world – cannot do math and cannot build spreadsheet models.
The second statement that is also important and has wider implications than just this discussion is the assertion that merchant power generators cannot make long-term decisions. Electrical power production is a business where assets are built to last for many decades, perhaps as long as a century in the case of dams and some carefully maintained nuclear power stations. The product those facilities manufacture is not a fad – there is no prospect that we will slow our consumption of electricity for anything longer than a temporary economic recession. Any power company that is structured in such a way as to be unable to make long-term decisions is in the wrong business.
If merchant power producers truly believe that they cannot make long-term decisions, then perhaps we need to rethink the rules that encourage them to exist in the first place. Buying a natural gas power station based on current gas prices is not without risk – when gas prices soared during the period from 2000-2008, there were massive losses and bankruptcies among gas dependent merchant generators who could not afford to operate the facilities that they had purchased with borrowed money. The value of the electricity they could sell was lower than the cost of the fuel required.
In places like California where a large fraction of the generation infrastructure could only burn gas, the result was an inadequate supply of electricity. If merchant generators do not invest in long term assets that reduce their vulnerability to gas price fluctuations, customers might find out that there simply is not enough power to go around. That situation will not be easy to correct since it is hard to invest in construction projects when energy prices are high and power is in short supply.
Of course, Rowe is smart enough to realize that fuel price risk does not apply to a company whose generation source is a fleet of large nuclear power stations that someone else built. I am still waiting for Exelon to prove that gas is a better source of future power by selling off its existing nuclear plants and investing the proceeds in additional gas-fired generation.
The next couple of paragraphs in the above quote really expose the hypocrisy and obfuscation in Rowe’s comments. First he says that new nuclear compared to gas “at today’s prices” is uneconomic by a factor of 2. Then he stated that recent gas discoveries and production from shale will keep prices below $6-8 per million BTU for the foreseeable future. According to Bloomberg, today’s price for natural gas at the New York City gate is $3.81. Even with Rowe’s prediction that gas prices will remain in the range of $6-8 per million BTU, that is already a factor of 2 greater than today’s prices!
What Rowe’s comments ignore, perhaps hoping that his listeners have forgotten recent history or have no desire to check his statements is that the price of natural gas for electric power producers in the US is anything but stable. Here is a graph of the monthly prices that electric power producers have paid for their gas over the past 9 years. Notice the spikes to prices that are nearly 4 times higher than those in effect today. The same pattern has held ever since interstate prices were deregulated; the best prediction of the price of gas in the future is “it depends.”
Rowe is also asking his audience to ignore the international market. Today’s price for natural gas in Europe, Korea and Japan is between $17-20 per million BTU due to a huge increase in the demand for LNG and pipeline gas as a result of silly decisions to shut down nuclear power stations that were not affected by the Great North East Japan earthquake and tsunami that destroyed the Fukushima Daiichi nuclear station. Though there has been some reduction in demand in Japan as a result of the earthquake that mitigated the loss of production somewhat, nearly all of the lost nuclear output has been replaced by burning more gas and more coal.
Not surprisingly, prices have reacted. Also not surprisingly, North American producers are doing everything they can think of to improve their ability to move cargoes to the areas where the prices are higher. That will take supply out of the US market and increase the prices that we pay here.
If you need shade, the best time to plant a tree was twenty years ago. The second best time is now. That analogy holds true with electrical power generation – since we need as much low emission energy production as possible, the best time to have started building the capacity was 20 years ago. The second best time is now.
Rowe is wrong about the need for new nuclear power plants and about the ability that those plants will have to compete against natural gas in the market. His statements are self serving and provide an excellent example of rent-seeking behavior by a “have” who does not care much about the “have-nots” or about the future prosperity of his country.