• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Exelon's Big Gamble

The company is taking a risk by staying in RTOs -- but that risk may yet pay off.
By GLENN WILLIAMS Dec 21, 2012 | 05:00 PM EST
Stocks quotes in this article: EXC, D

When it comes to energy, there are surprising differences in the views of different stakeholders. Representatives from various energy companies often argue that their source is better and that other sources should be discounted. Within the power sector, pro-nuclear experts often argue against natural gas or coal. Other power producers argue that renewable energy is better than fossil fuels. Still others just love natural gas.

For investors, it can become confusing. They want to understand where the opportunities lurk and where rhetoric obfuscates challenges -- but they may find that the markets provide them with some important clues.

In the power industry, which uses a variety of fuels, most utilities turn on their power plants in some logical order. It doesn't matter if generating assets are regulated or deregulated; power plants are normally turned on ("dispatched") in order of production cost. The lowest-cost unit is dispatched before the next-most-costly unit until enough generation is available to meet the grid's demand.

Of course, there are exceptions. Some plants are designated as "must-run" in order to keep the grid balanced and stable. Other plants, such as large-coal and nuclear, will often run out of economic order because it is too costly for their owners to switch their plants on and off, then back on again.

For investors focused in the power industry, a helpful tool is the "aggregate supply curve." For simplicity, I'm going to call this tool the "price-takers curve."

Price-Takers Curve

The price-takers curve represents what analysts expect see when they look at a regional transmission organizations (RTO) or independent system operators. 10 of these RTOs operate across the U.S.

The curve illustrates the point of view of the market, which tends to be agnostic toward the sources of energy. That is, the market doesn't care if the power source is fueled from natural gas, nuclear, coal or oil. It needs energy, and electricity is fungible -- and, as long as the generator provides the energy, the market is satisfied.

The market usually behaves as expected. As system-wide demand for power increases, more generation is needed to meet that demand -- and, as demand increases, so do prices. In turn, as those prices rise, uneconomic resources become economic, they take the price and they begin generating.

On the generators' side, meanwhile, attempts are made to take the market price only when it's above their production cost. If they produce power below their production cost, they lose cash, having paid more for fuel than they've received for energy. They subsidize the market, and they hurt their competitors by displacing them uneconomically.

The point of view of nuclear-power-plant owners is illustrated by the silver bars. Their production costs vary by owner, but they range between $17.80 and $27.10 per megawatt hour, according to the Nuclear Energy Institute.

In the price-takers curve above, if the grid's demand exceeds 85,000 megawatts, nuclear plants take higher prices, they have enough revenue to cover other costs and they'll perhaps make a profit. But if grid demand falls below 80,000 megawatts, market prices fall below nuclear production costs, and if nuclear plants continue operating, they will lose real money.

In 2012, the average market price for "load-weighted energy" fell almost 30% year over year to $35.02 per megawatt hour, according to PJM Interconnection. While that average price exceeds production costs and provides an average nuclear plant with gross margin, the margin is not enough to cover all its costs.

The challenge for Exelon (EXC) is highlighted by this curve and PJM's report. Most of this company's generating plants are nuclear. It operates in a merchant fleet, it is subject to market prices and it cannot find high enough prices needed to operate profitably. Exelon is gambling that the market and margins will each show improvement.

Dominion Resources (D) decided not to take the gamble -- it looked into the future and decided to exit one RTO and remain in another. The company recently announced its decision to retire and decommission a single-unit nuclear plant, which competes with Exelon plants in the same RTO.

Dominion owns two nuclear facilities in regulated markets. While the dispatching principles are the same, the economics are not. Regulated plants are cost-plus enterprises, and they do not rely on markets for their revenue.

This is why nuclear plants in the southeastern and northwestern states are profitable: They are regulated and they are not price-takers.

My next column will analyze the price-takers curve in more detail. It particular, it will discuss why Exelon's future may be a big gamble, but that the markets could reward risk, particularly if the risk-taker is patient.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Williams had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Energy | Utilities

More from Energy

This Energy Play Should Turn Out A-'OKE'

Bret Jensen
Jul 3, 2022 7:30 AM EDT

Let's learn how to make an enhanced yield trade in Oneok.

Welcome to Second Semester on Wall Street, Here's How to Make the Grade

Jim Collins
Jul 1, 2022 4:36 PM EDT

Think you can own big tech? You might just get an 'F' for that. Here's what will get you on the other side of this year.

The Market, It's Such a Gas!

Helene Meisler
Jul 1, 2022 6:00 AM EDT

Commodities like gas came down and people finally noticed. Let's check on that diesel, 30-year bonds and more.

Want to Save Your Retirement Fund? Tune Out the Talking Heads

Jim Collins
Jun 30, 2022 3:14 PM EDT

The first half of this year has been ugly. But we could have seen what would happen to Netflix, Tesla and Meta...

OPEC+ Opens the Spigot, but Are We Just Repeating Mistakes of 2008?

Maleeha Bengali
Jun 30, 2022 12:26 PM EDT

As we see this increase in oil production get rubberstamped, we must remember that demand never moves in a straight line.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 07:34 AM EDT PAUL PRICE

    A $525,000 Vote of Confidence on Macerich (MAC)

  • 09:49 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Stop Wishing, Hoping, and Praying and Take Control...
  • 07:59 PM EDT PAUL PRICE

    Very Good Quarterly Numbers From Bassett Furniture (BSET)

    Bassett Furniture blew right through analysts es...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login