Exelon (EXC), the owner of the nation's largest fleet of nuclear power plants, is having a tirade about wind power. According to The New York Times, Exelon claims the federal production tax credit (PTC) is distorting energy markets because the credit can be larger than the average value of electricity produced. Surges of wind energy during periods of low demand can drive the market price of electricity below zero.
Exelon complains that when market prices are negative, its nuclear plants lose revenue and the comapny has to pay grid operators to accept their electricity. Wind farms and other generators are no different, but Exelon claims wind plants could remain profitable under negative pricing conditions because wind power earns a PTC of approximately $22 per megawatt-hour.
Exelon is right when it claims the nation's power markets can produce negative pricing. But Exelon misleads policymakers when it suggests the root cause of negative pricing is the PTC.
To understand the issue, look carefully at PJM Interconnection. PJM is one of two grids that Exelon uses to move energy from their remote nuclear power plants to the power markets.
One of the most useful resources to review is PJM's "heat map." This live map shows locational marginal prices. It is updated every few minutes.
A snapshot of an old map is below. This image is important because it helps make one of Exelon's points: There are times and places where negative prices are presented within the power markets. In fact, this heat map also shows surprising price disparities between close geographic locations.
Here is how to look at the map: The purple areas represent locations where negative prices were posted in the range of negative $20 to negative $40 per megawatt-hour. Purple areas also represent locations of surplus power; these areas have way too much power, notwithstanding the source (wind, nuclear or natural gas).
The orange areas show locational prices in the range of $100 to $300 per megawatt-hour. Orange areas represent locations with inadequate generating resources to meet excessive demand.
How can locational prices be so different? Exelon blames wind power, but the heat map reveals a different story. The map suggests energy cannot reach its markets.
The villain is congestion, not wind plants. Like our nation's highways, the power grid's transmission lines occasionally reach capacity and the result is a traffic jam. If transmission lines were congestion free, power could reach the market and Exelon's concerns would evaporate.
Exelon claims wind power has an unfair economic advantage because it earns a production tax credit (PTC) of up to $22 per megawatt-hour. This non-cash tax credit is only available for profitable companies and only for the first 10 years of production.
In making that claim, Exelon ignores the subsidies their nuclear plants receive. PJM and other Regional Transmission Organizations (RTO) pay nuclear plants daily fees just to maintain their fleet. It is generically called a capacity payment and it is paid to power plant owners even if those owners produce no electricity; it is simply a rent payment.
All of Exelon's 24,000 megawatts of nuclear plants are located either in PJM or in the Midwest ISO. Both RTOs offer capacity payments. If all of Exelon's nuclear plants earned PJM rates, in 2015, it will book approximately $136 per megawatt-day, or $1.19 billion per year for essentially doing nothing. While annual payments may change, Exelon can count on these subsidies for the life of their nuclear plants.
Wind power is also entitled to capacity payments. But in PJM, their payment is much lower. Instead of earning $136 per megawatt-day as Exelon will earn, wind is only entitled to 13%, or $17.68 per megawatt day.
Finally, Exelon claims the PTC incentive for new wind power is no longer necessary. The company is joining others and lobbying Congress not to extend the PTC beyond 2012.
The market disagrees. For example, NextEra Energy (NEE), the nation's largest wind owner, suspended all new wind investments beyond 2012 because the PTC is in doubt. General Electric (GE) and Siemens (SI), the nation's largest manufacturers of wind turbine equipment, are finding domestic orders have fallen off a fiscal cliff. Some experts claim that if the PTC is not renewed soon, the industry could see job losses exceeding 30,000.
Despite distortions, Exelon remains an excellent company. Its nuclear plants are needed to provide the nation with economic and reliable power. But from management's point of view, the company would make better margin if fewer sources of renewable energy were in the mix.