A Nuke Plant Is a Hard Thing to Replace

 | Oct 01, 2012 | 5:00 PM EDT
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Indian Point Energy Center, in Buchanan, N.Y., on the banks of the Hudson River, is a two-unit nuclear power plant owned by Entergy (ETR). It was originally built by Con Edison (ED) to serve an energy-starved market, which included New York City. Today, Indian Point provides enough power to meet about 30% of the city's needs. However, some state officials want it retired and replaced with alternative sources. But those sources are impractical and elusive.

Indian Point is almost 30 years old. It will soon need to earn a license extension from the Nuclear Regulatory Commission (NRC) or else permanently retire. A license extension means the facility meets or exceeds all nuclear safety regulations. Since the facility's owners have been diligently updating and maintaining the plant's equipment, the NRC is likely to grant an extension.

Typically, the NRC is the safety regulator, and the state is the economic regulator. Decades ago, New York State determined that it was in its best interest to build Indian Point, so it gave approval to construct the facility. When the state gave permission to build, it also put the utility's facility into its rate base, and that provided plant owners a fair return on their costs.

Building Indian Point was a joint decision by the state and the utility. In fact, one of the original co-owners of the facility was New York Power Authority, a state-owned municipal utility.

Twenty-five years after giving approval, New York decided to restructure its electric utilities. The state wanted Indian Point and other power generators to become independent power producers. The state no longer guaranteed gross margins; the power markets would determine winners and losers.

The markets found a winner. With production costs averaging around 2.2 cents per kilowatt-hour, Indian Point provides the grid with 2,045 megawatts of continuous power at bargain-basement costs. With low production costs, Indian Point's operations have the effect of lowering market-clearing prices and saving consumers billions of dollars.

Nevertheless, some remain concerned about nuclear safety. They want the federal or state government to force Indian Point's owners to retire their facility prematurely. They believe they can replace Indian Point with gas turbines.

It is not that simple. The challenge will be to find private-sector investors who are willing to invest billions to speculate in deregulated power markets and wait more than 30 years for an uncertain payback.

Even if the state were able to find a speculator, finding enough fuel to operate 2,000 megawatts of new gas turbines is the larger challenge. According to the Manhattan Institute, turbines of this size would need at least 400 million cubic feet per day of natural gas.

But southeastern New York is currently short pipeline capacity. To replace Indian Point with gas turbines would require building new pipelines, and they are expensive. The Energy Information Administration (EIA) estimates that constructing a 30-inch pipeline in high-consequence areas would cost more than $3 million per mile, not including the $25 million compressor stations. This assumes that state and local governments will approve the pipeline's routing and will issue timely permits.

The other alternative is to build new transmission lines and import power from Canada. This option also has a critical assumption: It assumes that Canada is willing to export its power at reasonable prices. If Canada is willing, it will require financial guarantees from New York State or New York City. Ironically, this is the same guarantee that the state and city have refused to provide to local independent power producers.

Even if Canada were willing to provide enough power, building new interstate transmission lines would be cost-prohibitive and time-consuming. As with a pipeline, the costs for constructing new transmission lines must be borne by consumers.

Keep in mind that any new pipeline or transmission line is not necessary if Indian Point remains operational. The investment would be redundant, and it would add billions in unnecessary costs to consumers in order to achieve one goal: to provide comfort to those who do not trust nuclear power.

To permit, finance and construct new pipelines or transmission lines would take years. For gas turbines, this would include securing additional air permits for new emission sources. In the meantime, Indian Point's licenses would need to be retired or renewed within months.

If Indian Point is not allowed to operate, New York State and New York City will have serious energy problems. It is not just about electric power; it is also about natural gas.

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