By Glenn Williams
Power prices are too low. That's what utility executives believe. They need prices to increase for their generators to return healthy earnings. Otherwise, they will have to retire plants and exit the market.
Dominion Resources decided not to wait. They recently announced plans to retire their Wisconsin-based Kewaunee Nuclear Power Station 21 years early. Dominion concluded they would not be able to achieve any earnings for their 556-megawatt unit, they might even lose money and they could not find anyone to buy it. They had no choice but to shutter and decommission Kewaunee.
A few miles south is NextEra Energy's Point Beach Nuclear Plant. It's operating in the same power market as Kewaunee. At approximately 512-megawatts, it is roughly the same size and it's about the same age. The only difference is Point Beach has two nearly identical units, operating side-by-side.
The issue is economics. According to the Nuclear Energy Institute, in 2011, the average nuclear power plant had a production cost of $21.90 per megawatt-hour. The difference between the production cost and the market price for power is the unit's gross margin. But gross margin is not profit. There are a whole lot of additional expenses beyond gross margin before a utility can book a profit.
Struggling to Make a Buck
For many independent power producers, many times a generator's expenses exceed their revenues. Power markets frequently post market-clearing prices so low that the gross margin for the hour is upside down. In many other cases, the generator can achieve a gross margin but cannot achieve any earnings.
With average market-clearing prices trending so low, most nuclear plant owners cannot always recover their costs. A good example is the Midwest power markets; they are posting some of the lowest market-clearing prices in the nation. In many cases, market-clear prices for energy temporarily dip below zero. That's right; the generator has to pay the grid to take the power, not the other way around.
It turns out Dominion and NextEra's nuclear plants are in that market. They are both located in the Midwest Independent Transmission System Operator (MISO), which manages power markets for Wisconsin and several other states.
Last February, MISO's system-wide market price for power averaged approximately $25.57. Last March it was $23.89. April it was $24.18. May it was $28.73. At these levels, Dominion cannot sustain profitable operations for long. No wonder they couldn't find a buyer for Kewaunee.
Either NextEra has a secret sauce for their Point Beach nuclear units, or they are losing money. If they are losing money, expect another early retirement announcement or ongoing drain on consolidated earnings.
The problem is spreading to other nuclear utilities. It turns out Exelon, the owner of the nation's largest fleet of nuclear power plants, is also struggling to achieve earnings. According to their website, Exelon Nuclear operates 10 power plants and 17 reactors, located in three separate power markets, and produce enough electricity to power 17 million American homes. In addition, they have ownership interests in four additional nuclear plants and six reactors. In the aggregate, Exelon Nuclear is losing money and they claim they need higher market-clearing prices to sustain their dividends.
According to their quarterly statements filed with the Securities and Exchange Commission, Exelon Generation lost $98 million in the second quarter and they made $91 million in their third quarter. But here's the rub: Exelon's third quarter is the time when peak demand and prices were expected and as such, was expected to be the best quarter of the year.
Consumers or Shareholders Left Holding the Bag
It is clear Exelon's executives are concerned. In the earnings conference call, they warned that if they cannot achieve higher revenues for their generating assets, Exelon may be forced reduce their dividends. Exelon's CEO Christopher Crane said in his November 1, 2012 conference call, "If [power prices] do not play out favorably, revisiting our dividend policy will be in the range of options for preserving our investment-grade rating that management and the board will need to consider."
Executives managing Texas' grid have a different perspective but have reached a similar conclusion. In order to attract adequate generating assets to their grid, the Electric Reliability Council of Texas decided to lift price caps and let market clearing-prices drift to $9,000 per megawatt-hour, or 900 cents a kilowatt-hour. And, retail consumers will pay even more to have that power delivered to their meters. According to the Fort Worth Star-Telegram, the Texas Public Utility Commission said raising prices is necessary to encourage more plant construction and prevent power outages.
Power prices will go up. At the current price levels, marginal power producers, such as Kewaunee will be forced to exit the market. Shareholders will demand management pare costs by retiring economically unproductive assets and produce earnings. With capacity leaving the market, supply and demand curves will be adjusted and average wholesale prices will drift higher. The consumer will pay the difference.
U.S. Green Technology specializes in connecting those seeking to quality employers. Whether you’re looking for a specific green-collar job, or are open to opportunities at companies with sustainable practices, U.S. Green Technology provides resources for all skill levels and industries. Check out any of the popular searches above!
The future of solar in Georgia seems really bright after a new green utility petitioned Georgia Public Service to be licensed to offer electricity generated exclusively from solar to consumers. If the proposal receives the nod from state authorities, the Georgia Solar Utilities (GaSU) will be well positioned to challenge the stranglehold that Georgia Power has had on the power utility scene in Georgia.
News of the new startup came almost simultaneously with the announcement that Georgia Power was embarking on a project that would see the utility triple the solar production capacity by 2015. While the announcement was meat with a measure of skepticism, it is an indicator that there is a paradigm shift in achieving the largely unexplored potential of Gerogia in solar production.
The supply for GaSU’s power will come from a proposed 90 MW facility, which would be three times as large as the Simon Solar Program, the state’s largest approved solar farm. The projected cost of the new farm is $320 million and is said to open up opportunity for “hundreds of jobs” during its construction.
But all this assumes it can get approval from the state to operate as a utility. But a major barrier is the 1973 Georgia Territorial Electric Service Act, which effectively gives the state’s largest utility, Georgia Power, a monopoly on utility services. Previous attempts at changing utility legislation have met strong opposition
If the law was amended and GaSU was allowed to operate in Georgia, it could open up the state’s tremendous green energy potential. Georgia Power only just brought its first large solar farm online this July with a capacity of 1 MW, enough power for about 300 homes. Georgia Power has bought into three more large solar projects that promise to provide the company with 50 MW by 2015. While this would be a significant step up from the state’s current level of 18MW of solar production, it is still a tremendous under-utilization of a resource that could meet 31% of the state’s energy needs from rooftop solar alone. Currently, about 5% of Georgia’s total energy production comes from renewables.
However, GaSU could build its solar farm without action by the legislature or the PSC, and existing federal law would require Georgia Power to buy its electricity. But it would only pay GaSU an amount equal to what it could buy from its cheapest wholesale supplier.
The start-up wants instead to sell its electricity directly to retail customers who would be billed by Georgia Power or the other existing utilities, similar to the way natural gas is sold in Georgia. GaSU would pay the utilities for the use of their wires in the electric grid and any profits would be shared with customers.