Investors are being whipsawed by news in the nuclear patch. In one part of the country, the operator of the nation's largest fleet of nuclear power plants reported a horrible quarter and talks of shutting down plants. In another part of the country, different nuclear operators announce construction of four new nuclear power plants. It actually has a lot to do with government regulation, or non-regulation, and it's probably not the government you would expect. Don't blow a fuse trying to figure it out, let me explain what's going on.
As I previously reported, Exelon's (EXC) nuclear fleet had a horrible quarter. Revenue was up due largely to the effect of the Polar vortex, yet the company reported negative cash flow and a net loss at earnings before interest, taxes, depreciation and amortization. Exelon's results confirmed the company's warnings management was considering shutting down (and writing down) several perfectly good nuclear assets because they were costing shareholders.
That was last week. This week, Exelon CEO Christopher Crane changed his mind. In a speech before Resources for the Future, Crane provided a happier outlook. As reported in Electric Light & Power, "Crane had said in February that the company might have to make a decision by year's end on whether to retire certain reactors. Crane said the situation had improved somewhat and no announcement on any unit retirements is imminent."
Apparently, Crane is gambling that wholesale power prices will drift upward. If true, that will help make his nuclear fleet more profitable. He believes two important events will drive prices higher. One is the demise of old coal power plants. The other is the prevention of new wind power. He wants both to occur quickly so his nuclear fleet will recover.
Regarding coal, Crane suggests the "retirement of what we call the Eisenhower era coal plants will help improve the economics of not only the nuclear fleet but also the clean, large coal units. Some of the old fossil plants have a marginal price of $20 per megawatt-hour."
Regarding wind power, Crane and Exelon have been critical of the federal production tax credit (PTC). The Chicago Tribune reported Crane argued, "The PTC has been in place since 1992. I think that's enough time to jump-start an industry, 20 years. So we've made it known that it should be stopped."
Apparently, coal and wind power are not the only threats to Exelon's nuclear fleet. Crane and the Nuclear Energy Institute also complained about "cheap [natural] gas."
It is not clear what they mean by cheap gas. With a hub prices around $4.50 per million British thermal units (mmBtu), natural gas is not cheap. It is at normal levels.
Electric Light & Power provides a clue reporting Crane's comment, "Just competing with natural gas, without a carbon levy, you need a "longrun" $13 per mmBtu natural gas price to justify building a new nuclear plant in most situations."
Apparently, Southern Company (SO) and SCANA (SCG) have a different perspective. They are in the process of building four new nuclear power plants at a total cost of approximately $30 billion. Natural gas prices are not a concern for them.
Here is a big surprise. The same week Exelon complained about cheap natural gas prices, NextEra Energy (NEE) announced plans to build two new nuclear units. According to Power Engineering, NextEra got the green light from Florida to build two new nuclear reactors at the Turkey Point power plant. They will be replicas of Southern and SCANA units.
The difference between Exelon's old units and NextEra's new units is regulation. Exelon's fleet is deregulated. They must earn top line revenue from the power markets.
The Southern, SCANA and NextEra new units are regulated and will earn guaranteed revenue from their respective states. With guaranteed revenue, regulated assets incur minimal economic risk for their shareholders.
Exelon, NextEra, Southern, SCANA and most all utility executives agree on one point. Regulated or unregulated, the nation's grids need diversity. Resource diversity ensures long-term reliability. It also helps keep costs low.
More important, Crane and Exelon need to find a way to prevent the retirements they described. The nation needs the existing nuclear fleet. Nuclear power is a critical resource needed to assure system reliability. It is also a cost leader some of the time, just not all of the time.
While it may appear confusing at the national level, at the state level it is crystal clear. It turns out the federal government has only a limited role. Most of the nation's energy policies are formulated at the state level. This is particularly true when it comes to nuclear power.
