Nuclear reactors that light New York City and Chicago with carbon-free electricity face possible extinction before they can reap the benefits of President Barack Obama’s proposed climate rules.
Entergy Corp. (ETR:US)’s Indian Point power plant in New York and Exelon Corp. (EXC:US)’s Clinton facility in Illinois are among nuclear generators that may be shut down from either political or financial pressure on an industry that generates as much as $50 billion in U.S. electricity sales each year.
Obama’s stricter emission plan that would penalize dirty operators and make cleaner generation like nuclear more competitive probably won’t kick in until after the end of this decade. That leaves operators of reactors at least six years to survive the lower prices and higher costs of the current market.
“Any major unexpected operational problem or costs for some of these plants could serve to be a trip to the morgue,” said Paul Patterson, a utility analyst for Glenrock Associates LLC in New York. “I don’t think one should be holding a candle out for carbon rules to come to the rescue,” he said.
A slump in power prices, increasing maintenance expense as plants age and stricter safety regulations following Japan’s 2011 Fukushima nuclear disaster may prompt the industry to retire as many as five plants before the end of the decade, according to research firm UBS Securities LLC. That would eliminate enough generating capacity to power 2.4 million U.S. homes.
“If aging reactors are in need of significant repair, it may not be worthwhile to do so,” Mark Cooper, a scholar at the University of Vermont, wrote in a July 18 report. Cooper identified 10 plants that face a “particularly intense challenge” to keep operating.
Reactors such as Indian Point are combating critics that want to shut them down over safety concerns. New York, for example, has solicited bids to replace the plant with natural gas-fired generators and authorized a transmission line to deliver hydropower from Quebec.
Retired nuclear units would likely be replaced by gas plants built by operators such as NRG Energy Inc. (NRG:US), which would have the result of increasing overall greenhouse gas emissions. That may complicate Obama’s longstanding goal of slashing U.S. emissions 17 percent from 2005 levels by 2020, and echo challenges faced by countries such as Japan and Germany as they phase out nuclear power, said Chris Gadomski, an analyst for Bloomberg New Energy Finance.
“Both countries have rising greenhouse gas emissions as a result of shuttering nuclear plants,” Gadomski said.
In the U.S., four reactors already have been permanently closed this year, the highest-ever annual total, according to U.S. Nuclear Regulatory Commission data. A glut of shale gas, government-subsidized wind power and slack demand has slashed power prices more than 40 percent since 2008, making it harder to justify costly-repairs or continued operation of aging nuclear units.
“Given the current economics with natural gas prices, it is very hard for nuclear to compete,” said Philip Smyth, a power analyst with Fitch Ratings.
Exelon, the largest competitive U.S. nuclear power producer, and Entergy, the second largest, have both underperformed the S&P 500 Utility Index in the past five years. Chicago-based Exelon and New Orleans-based Entergy have seen their stock prices fall since July 2008 by 62 percent and 35 percent, respectively.
Exelon rose 0.8 percent to $32.31 at the close in New York. Entergy rose 0.6 percent to $72.35.
This year, Exelon was forced to cut its quarterly dividend for the first time amid falling electricity prices and expiring long-term contracts that have reduced profit.
Meanwhile, Exelon and Entergy have projected about $900 million in additional costs for their reactors from new Fukushima-related safety rules over the next six years, according to regulatory filings. The two companies said they have no plans to close any nuclear units.
Costs to run a reactor could climb by 5 percent annually through 2015, according to a Feb. 19 research report from Credit Suisse Group AG.
New carbon regulation for existing plants probably won’t take effect until about 2020, according to Julien Dumoulin-Smith, a New York-based analyst for UBS Securities.
Smaller and older single-unit facilities that sell power in competitive markets are the most vulnerable because they feel a proportionately larger impact from rising maintenance and other expenses, said Patterson.
Units most at risk include Exelon’s 1,078 megawatt Clinton plant in Illinois and Entergy’s 838-megawatt Fitzpatrick plant in New York, according to a July research note by Tudor Pickering Holt & Co. UBS projects the Clinton reactor, which serves Chicago, will lose money through 2016, while the Fitzpatrick plant may start losing money next year.
Exelon doesn’t provide financial data for specific units, including its Clinton facility, company spokesman Paul Elsberg said. Entergy’s Fitzpatrick plant operates in a market where depressed power prices threaten the unit’s profits, said Bill Mohl, president of Entergy’s Wholesale Commodities unit.
“There are no current plans to shut down any of our nuclear facilities at this point in time, but we are constantly evaluating all of our assets,” Mohl said.
Entergy expects to cut jobs at its Vermont Yankee nuclear power plant as part of a company-wide initiative to “increase efficiencies in all parts of our business,” company spokesman Michael Burns said today in an e-mail statement.
The 650-megawatt reactor in Vermont, which gained federal permission to operate for another 20 years, is among the units at greatest risk for early retirement due to the state’s attempts to close it, according to UBS.
Exelon’s Chief Executive Officer Chris Crane said in May that some of its nuclear generators in Illinois have to pay customers to take its power about 8 percent of the time due to a glut of electricity provided by new wind turbine farms.
Nuclear plants typically run round-the-clock and can’t quickly shut down overnight when the wind blows harder and generates additional power that leads prices to drop to unprofitable levels, said Ron Norman, a Boston-based energy analyst for PA Consulting Group.
In New York, Governor Andrew Cuomo has called for the shuttering of Entergy’s two Indian Point reactors after their licenses expire this year and in 2015. The plant sits about 24 miles (38 kilometers) north of New York City and provides about one-fourth of the metropolitan area’s electricity needs.
The state is developing plans to replace the 2,069 megawatt facility with new gas generators and transmission lines.
Entergy’s application with the U.S. Nuclear Regulatory Commission to extend Indian Point’s operating license for another 20 years is being contested by anti-nuclear and environmental groups. The company also is in negotiations with New York regulators over whether it needs to install environmental upgrades that may cost more than $1 billion.
Under federal rules, Entergy can continue to operate the facility until the NRC provides a final ruling on its license renewal, which may not occur until 2018, said Entergy’s Mohl. Indian Point operates safely, Mohl said. Replacing it would be more expensive and result in more greenhouse gas emissions than keeping it running, he said.
“If we are going to start seeing merchant plants have to shut down because they cannot be supported economically, that will have adverse impacts not only from an emissions perspective, but from a fuel diversity and reliability perspective,” Mohl said.
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