POWER September 2016 - 24

Can Anything Save
Merchant Nuclear?
Thomas W. Overton, JD
I
n an industry as slow-moving as power generation, where
planning horizons are measured in decades and assets can
remain in operation for the better part of a century, it's rare
that things happen fast enough to catch anyone by surprise. But
that's exactly what's happened to the U.S. merchant nuclear business
over the past four years.
In 2012, the U.S. had 104 operating reactors. One, New Jersey's
single-unit Oyster Creek Station, was set for retirement in
2019, but as this was one of the oldest in the country and the
state was pressuring owner Exelon to install cooling towers, it
surprised no one that the company would shutter it a few years
early rather than undertake an expensive upgrade.
But something happened that spring that continues to reverberate.
Driven by a tidal wave of new production from hydraulic fracturing,
natural gas prices collapsed to under $2/MMBtu. Wholesale
power prices naturally fell with them, to levels few had anticipated.
Shock Wave
For nuclear plants in regulated markets, where profits were already
locked in, this was of little concern. But for the many in
competitive markets, where firms like Exelon and Entergy had
snapped up older facilities in hopes of leveraging their low operating
costs against higher gas prices in the 2000s, and for
utility-owned plants that had transitioned to life after deregulation,
this was a serious problem.
One by one, nuclear plants in deregulated markets like PJM,
NYISO, and MISO began finding their once-competitive operating
costs suddenly very uncompetitive, so much so that continued
operation no longer made economic sense. Dominion retired Kewaunee
in Wisconsin in 2013. Entergy retired Vermont Yankee in
2014, and then, in short order, announced the pending retirements
of Pilgrim in Massachusetts and FitzPatrick in New York.
This past summer, Exelon, after fighting for years for some kind
of regulatory support, gave up on Quad Cities and Clinton in Illinois
and warned that Three Mile Island and Byron were at risk
as well. Shortly thereafter, the Omaha Public Power District said
it would shutter Fort Calhoun, and Pacific Gas & Electric said it
would allow the license for Diablo Canyon to expire rather than
continue operations past 2025.
In every case, the primary factor was economics: The onceviable
plants could simply not compete against cheap gas-fired
power. Fort Calhoun, for example, was struggling with operating
costs above $70/MWh in a market where power prices are typically
around $20/MWh. Subsidized wind generation hasn't helped
either, but the main driver is cheap gas. The economic losses on
some of these plants, if their owners are to be believed, ran into
hundreds of millions of dollars.
Is There a Lifeline?
If existing markets can't support these plants, could some sort of
regulatory reform save them?
24
Exelon has lobbied for economic support for its Illinois plants
from the state legislature, and it raised the stakes by announcing
the closure of those plants after the legislature failed to pass a
subsidy plan the company requested. There was so little support
for it that the plan never even came up for a vote.
Things may be different in upstate New York, where FitzPatrick
has been marching toward retirement and R.E. Ginna and Nine
Mile Point are both struggling. The potential loss of generation
from these plants has state officials alarmed, because replacement
power would be expensive. A study by the Brattle Group
estimated that customers would pay an average of $1.7 billion
more per year without the three plants-a roughly 7.2% rate increase
for all consumers. Because that replacement power would
be mostly gas-fired, annual carbon emissions would also jump by
15 million tons. Finally, around 2,600 jobs and substantial tax
revenue would be lost.
That's a scenario the state wants to avoid, and in July, the New
York Public Service Commission (PSC) released a proposed plan to
subsidize generation at the upstate nuclear plants (Indian Point
near New York City, where the economic and political issues are very
different, would not be included). As part of New York's new Clean
Energy Standard (CES), the plan would subsidize zero-emission generation
where there is a " public necessity " for preserving it.
According to the PSC staff report (see http://bit.ly/29FyG6d),
" Payments for zero-emissions attributes would be based upon the
U.S. Interagency Working Group's projected social cost of carbon. "
Support would be extended in two-year tranches through
2029, and estimated support over the first two years (capped
at $482 million annually) would be just under $1 billion. That's
well below what the PSC projects as $5 billion in economic and
social benefits.
Could this plan save upstate New York's nukes? Judging by the
announcement in early August that Exelon agreed to buy FitzPatrick
from Entergy for $110 million and call off its retirement, the
answer appears to be a qualified " yes. "
Murky Waters Ahead
There's a great deal that still has to happen before the subsidy
plan goes into effect, and it's certain to be challenged in court.
Recent state attempts to support failing generation assets have
not fared well (see " The Perils of Second-Guessing FERC " in the
June 2016 issue), but since payments under the CES are tied to
carbon prices rather than wholesale power prices, they might
avoid the legal problems that torpedoed similar plans in Ohio,
Maryland, and New Jersey.
The circumstances in upstate New York obviously cannot be
replicated everywhere, for example in California, where there is
an abundance of renewable generation in the pipe to replace Diablo
Canyon. Still, for some struggling merchant nuclear plants,
this provides some badly needed hope. ■
-Thomas W. Overton, JD is a POWER associate editor.
www.powermag.com
POWER | September 2016
http://www.bit.ly/29FyG6d http://www.powermag.com
POWER September 2016

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