Wednesday, October 24, 2012

Stunning Fact: Competitive Power Markets & Low Power Prices Close An Operationally Excellent Nuclear Plant In Wisconsin

The canary in the nuclear industry just croaked.  The announced closure in 2013 of the 556 megawatt Kewaunee nuclear plant in Wisconsin indicates that perhaps one-quarter of the nation's merchant nuclear plants are losing money on many days that they operate in competitive power markets.  And so, the Kewaunee nuclear plant closing becomes one of the most important energy stories of 2012.

The closing of Kewaunee is made much more telling by the fact that it's not one of the nation's 5 most troubled nuclear plants.  Nor close to that level of distress. It is operationally excellent, had just been relicensed in 2011 for an additional 20-year period, and had been bought in 2005, when it was understandably judged to be an attractive asset.

Kewaunee is a reminder that even a well run nuclear plant has high and annual capital costs of up to $70 million.  Kewaunee is proof that some merchant nuclear plants lose money when power prices are at 5 cents per kilowatt-hour. The NYT article that is an excellent piece of reporting says that a quarter of nuclear plants spend up to the equivalent of 5.1 cents per kilowatt-hour just to produce a kilowatt-hour. Ouch! Ouch! Ouch since many power markets have been below 5 cents per kilowatt-hour for the last 18 months or more.

Kewaunee is another indicator that it is not chiefly EPA rules that are stalking old power plants across America but Adam Smith and market forces. Let's remember that this nuclear plant emits no air pollution and complies obviously with all EPA proposed air rules.  It's closure will almost certainly mean more not less air pollution.

Low-power prices created by the shale gas boom, booming renewable energy supply, slack electricity demand and competitive power markets are closing Kewaunee.  For sure Kewaunee would not be closing but for two things--the shale gas boom that has cut as much as 5 cents per kilowatt-hour off wholesale market prices since 2008 and the establishment of competitive power markets in which merchant plants compete daily to be dispatched.

The Kewaunee nuclear plant must compete each day for its revenue.  It is not comfortably lodged in a monopoly utility's rate base, where captured ratepayers are forced to pay for the plant, no matter how its costs compare to competitive market prices.  Instead Kewaunne gets the market price and not a rate that recovers all its costs plus adds on top of those costs about a 10% after tax return.  Kewaunee were it in the rate base of a monopoly utility would not be closing.

Competitive power markets are strict disciplinarians, and Kewaunne just could not compete. This is a stunning change of fortune for the nuclear industry, since the assumption that a well-run nuclear plant could always keep its production costs below the market price is now proven false.

Low-power prices are not only blocking expensive new nuclear projects but also now closing operationally excellent plants that have substantial sunk costs. That is a very big energy story, indeed!

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