Entergy's Domino Effect in Nuke Closings

 | Sep 06, 2013 | 5:00 PM EDT
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Either Entergy's (ETR) press release is incorrect or the company is warning that another nuclear power plant is about to be retired.

Last week, Entergy announced its decision to retire Vermont Yankee Nuclear Power Station or Vermont Yankee for short. This decision came after company spent years and millions of dollars to win a 20-year license extension from the Nuclear Regulatory Commission.  

Vermont Yankee was unable to compete in New England's power markets. No additional capital investments or cost controls could improve the plant's economics. Entergy's only prudent decision was to cut its losses and protect shareholders.

Entergy's announcement made it clear the decision was about economics. The decision to close Vermont Yankee was based on a number of factors, including:

"A natural gas market that has undergone a transformational shift in supply due to the impacts of shale gas, resulting in sustained low natural gas prices and wholesale energy prices."

  • "A high cost structure for this single unit plant. In addition, the financial impact of cumulative regulation is especially challenging to a small plant in these market conditions."
  • "Wholesale market design flaws that continue to result in artificially low energy and capacity prices in the region, and do not provide adequate compensation for the fuel diversity benefits they provide."
  • Entergy was impacted by the deregulated power market where Vermont Yankee sells its wholesale power. The market, called ISO New England, is governed by the Federal Energy Regulatory Commission.

Entergy claimed ISO New England's market prices were too low. They also argued Vermont Yankee's production costs were too high. Low market prices and high production costs erodes Vermont Yankee's margins.

Nevertheless, Entergy's discussion of natural gas is a distraction. According to the Energy Information Administration, utilities have been paying an average price of approximately $5.00 per mmBtu for fuel, which is approximately 70% higher than last year. The trend is for higher prices. Using Entergy's argument, higher gas prices should improve market prices for their power.

Their argument is more puzzling considering New England utilities pay higher than average prices for natural gas. The culprit is constrained pipelines, which limit gas supplies into New England. When national prices are at $4.00, New England's hub prices frequently migrate above $10.00 and $20.00. In fact, New England imports costly Liquefied Natural Gas to supplement pipeline supplies.

Most shale gas cannot reach New England's markets. Consequently, shale gas has not overwhelmed New England with excessive supplies. Shale gas is not the primary issue.

Entergy's real issue is buried in its press release. It is their third factor: structural flaws in ISO New England's market design. Their third factor is really their primary factor.

FERC's market design is flawed. Entergy, Exelon (EXC), American Electric Power (AEP), FirstEnergy (FE) and other power suppliers have been complaining that FERC's market design ignores fuel diversity and punishes capital investment. To fix the flaw, suppliers like Entergy need guaranteed fixed monthly payments over extended periods.

Specifically, utilities dislike a single payment structure used by some markets. They need a range of capacity payments, which are economically linked to fuel sources. For example, nuclear would earn one level of capacity payment. Coal would earn a different level. Natural gas would earn different levels, depending on capital costs.

Entergy's real issue is the structural flaws found in FERC-regulated energy markets. Unfortunately, their message is lost when they introduce unrelated issues, such as shale gas prices.

Their explanations about retiring Vermont Yankee raise new concerns about its other nuclear facilities. It turns out that Entergy operates two nuclear plants in ISO New England's market. Entergy also owns Pilgrim Nuclear Power Station, and Pilgrim looks a lot like Vermont Yankee.

Not only do they operate in the same market, Pilgrim and Vermont Yankee look like twins. Vermont Yankee and Pilgrim are single unit plants. Vermont Yankee and Pilgrim are General Electric (GE) Mark I designs. Both Vermont Yankee and Pilgrim produce approximately the same amount of power. Vermont Yankee and Pilgrim are 41 years old. Vermont Yankee and Pilgrim recently earned NRC license extensions to operate an additional 20 years.

Like Vermont Yankee, Pilgrim has had its share of financial challenges. Pilgrim is experiencing an unusual number of shutdowns: Five shutdowns in the past 15 months, which lowers its capacity factor and increases operating costs.

If Vermont Yankee and Pilgrim profiles are near equal, and if Entergy's press release is accurate, then Pilgrim should be one of the next nuclear plants to retire. Of course, this could be stopped if critical flaws in FERC-regulated markets are addressed and corrected.



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