While the nation has been focused on new sources of natural gas and shale oil, few noticed the slow decline of an older energy source: nuclear power. Today, commercial nuclear power is struggling to stay in the game.
The power markets are hammering the nation's nukes. Over a decade ago, several regions decided to create Regional Transmission Organizations (or Independent System Operators) and use the market to set power prices. Today, North America has ten independent RTOs/ISOs, where wholesale power is auctioned every few minutes.
Power auctions are about energy, not power plants. Auctions don't care how power plants produce energy; they only care about the bid. The primary focus is on the last bid that clears the auction; it sets the price for all participants. That's why the last bid is called the market-clearing price.
The difference between the market-clearing price and the generator's production cost is the gross margin. The last bid is technically on the margin and it earns little to no gross margin. But every dollar above production costs contributes to the generator's fixed costs.
Most nuclear units are "must-run plants" and they will produce power even if market-clearing prices fall below production costs. Recently, some nuclear plants have been booking negative gross margins. They hope they can make up losses with subsequent gains and average a gross margin.
But a gross margin is not always enough. Nuclear units must pay all their bills and leave something for shareholders. Recently, some nuclear units have been achieving modest gross margins, but without enough left to pay all the bills or achieve any earnings.
Just ask Dominion Resources. The company recently announced that its Wisconsin nuclear plant would be retired twenty years early. Dominion claims it sought buyers for its Kewaunee Power Station. None could be found. It appears that not only did Dominion conclude that its nuclear plant would remain unprofitable, but that Dominion's competitors also concurred.
It turns out that Kewaunee is located near NextEra Energy's Point Beach Nuclear Plant. Point Beach operates in the same market and shares a similar design. It would seem that Point Beach must be as economically challenged as Kewaunee.
It's likely because the nation's largest fleet of nuclear power plants is operating nearby and they are financially challenged. Exelon owns ten generating stations and seventeen reactors, which are located in Illinois, Pennsylvania and New Jersey. As a group, these power plants are struggling to provide their owners with earnings to the point where Exelon's management warned shareholders they might be forced to cut dividends.
A Different Picture in Regulated States, But Challenges Remain
Nuclear plants operating in regulated states are faring better. While consumers' demand for electric power is down, nuclear power plants are safely embedded in states' rate bases. Owners of regulated nuclear assets are protected, up to a point.
Two nuclear power stations are finding their state regulators are losing patience. One is Duke Energy's Crystal River Nuclear Generating Plant operating near Tampa, Florida. The other is Edison International's San Onofre Nuclear Generating Station operating in Southern California.
Both stations are experiencing unusual and costly maintenance expenses. Crystal River's containment repairs could exceed $2 billion, a price that state regulators may find excessive.
San Onofre also incurred unexpected and costly maintenance challenges. But San Onofre's 2,350-megawatt capacity is a critical resource for Southern California, and without that resource, California could see rolling blackouts. Nevertheless, San Onofre's problems provide new opportunities for opposition groups to pressure regulators and political leaders. San Onofre could survive, but it is at risk of early retirement.
Entergy is at war with two states at the same time. Vermont wants Vermont Yankee Nuclear Power Station to retire twenty years early. Politicians and regulators are fighting with everything they have to prevent Entergy from continuing nuclear operations.
The State of New York wants Entergy's Indian Point to retire twenty years early and it is vowing a fight to prevent further operations. Governor Cuomo believes the state can import enough power from Canada to provide it with enough power to assure regional reliability. But in the case of New York City, existing transmission lines are inadequate. New lines will be needed to deliver Canadian power to the energy-hungry city.
New Jersey regulators already negotiated the early retirement of Exelon's Oyster Creek Nuclear Generating Station. Oyster Creek is 630-megawatt facility and it will go on the scrap heap ten years early in 2019.
A pattern is developing. It may take a few years, but it appears small nuclear plants will face increasing pressure to retire early. They cannot compete, particularly in soft markets. Some plants will find their costs consistently exceed any benefits they earn and their owners will be forced to retire and dismember plants.
Natural gas may replace retiring nuclear plants. New turbine technologies and low fuel costs allow some gas turbines to outperform nuclear power plants. But it is unlikely fuel prices will remain low for the next 60 years, which is the design life of a new nuclear unit.
Glenn Williams worked in the nuclear power industry for over 20 years. At the time of publication, he had no position in any of the stocks mentioned.