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FirstEnergy revives call for state policy solutions as it plans to close 3 nukes

Market conditions and a lack of intervention from state and federal policies are the reasons FirstEnergy Corp. cited in announcing plans to shut three merchant nuclear plants in the next few years.

On March 28, FirstEnergy said it would close the 908-MW Davis-Besse plant in 2020 and the 1,268-MW Perry and 1,872-MW Beaver Valley plants in 2021. The closure depends on a study from regional grid operator PJM Interconnection analyzing whether there are impacts to the regional grid. On March 29, it asked the U.S. Department of Energy to issue an emergency order requiring PJM to compensate at-risk nuclear and coal-fired plants, a move that environmental and competitive supplier groups immediately challenged as unnecessary and possibly illegal.

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PJM spokeswoman Susan Buehler said the 13-state grid will take 90 days to complete the study but it currently has enough supply to meet demand with a margin of 28%. PJM's grid has about 176,570 MW of generating capacity, making the roughly 4,048 MW from the three plants about 2% of its generating capacity.

Though FirstEnergy is also looking for buyers for the three plants, the planned closure aligns with its intent for merchant generating subsidiary FirstEnergy Solutions Corp. to exit the competitive supply business. The trade group the Nuclear Energy institute said in a statement March 29 the company's decision is "evidence of a larger systemic problem: the full value of nuclear power plants is not recognized in the price of electricity, and policymakers are failing to act."

Grid operators including PJM and others have pressed federal regulators for more holistic solutions to reform markets focused on price formation. Price formation looks broadly at how generators are paid and whether all resources including coal and nuclear plants are paid enough for the benefits they provide to the grid. Since 2017, PJM has convened market participants to discuss price formation in its energy and capacity markets.

FirstEnergy has lobbied in Pennsylvania and Ohio for state subsidies after Illinois and New York adopted zero-emission credit, or ZEC, programs to keep certain nuclear plants operating.

Ohio legislation supporting nukes has stalled

Legislative efforts in Ohio to support FirstEnergy's nuclear plants have stalled.

Ohio Rep. Anthony DeVitis introduced H.B. 381 in October 2017, which modifies legislation introduced in April 2017 to create a zero-emissions nuclear, or ZEN, resource program that implements credits for in-state nuclear capacity within the PJM Interconnection market.

The bill, which has been referred to committee, is designed to compensate the Dave-Besse and Perry plants for their carbon-free generation. The credits would start at an initial set price of $17/MWh for the first two-year period of the ZEN program, which would run for successive two-year periods through Dec. 31, 2030, unless extended by the General Assembly.

Under ZEN legislation, which also surfaced last year in the Ohio Senate, the state's electric distribution utilities would be obligated to buy the ZECs that are submitted by the nuclear resources to the ZEN program. FirstEnergy has said the ZECs would bring in about $300 million each year.

Ohio Sen. John Eklund, a sponsor of ZEN legislation, said in a March 29 statement that "time is running out" to save the nuclear plants. "I have been straining for over two years to get our General Assembly, our Governor and his administration, and federal authorities to recognize, and take action to support, the environmental, strategic and energy system resilience impact that these facilities provide," Eklund said. "The economic impact to Ohio of these plants' closing would be deep, wide and negative."

Guggenheim Securities LLC analyst Shahriar Pourreza does not anticipate any policy changes that would rescue the plants. "I just think the timing doesn't really work in their favor," Pourreza said, adding he does not foresee any buyers for the assets and expects them to be shut down.

"I think from an overall standpoint, it's no surprise that plants like these are generating negative cash flows. And even if they're generating slightly positive cash flows, on a risk-adjusted basis it doesn't make sense running these plants," Pourreza said. "It's not a relatively tight market, where the shutdown of these assets would necessitate a power market issue. But I think it's probably somewhat of a last attempt to try to save these plants prior to making something more draconian I guess."

In Pennsylvania, nuclear caucus waits for federal intervention

A group of 67 Pennsylvania lawmakers formed the Nuclear Energy Caucus in 2017 to lead a state review of the risks the state's five nuclear plants. Exelon Corp. previously announced plans to close its 829-MW Three Mile Island plant in Dauphin County, Pa., in September 2019.

In 2017, the General Assembly adopted Senate Resolution 227 and House Resolution 576 to push for the U.S. Department of Energy for a solution. In September 2017, the DOE issued a proposal for the Federal Energy Regulatory Commission to revise market rules to help coal and nuclear stations recover their operating costs, but FERC in January rejected that proposal.

In response to FirstEnergy's announcement, caucus members said in a March 29 statement, "Yesterday's announcement confirms what we have suspected for well over a year — and have been asking the federal government to assist us in addressing — that there are very serious and consequential underlying issues in the PJM wholesale electric markets which are being administered by the FERC." In a March 6 letter to the caucus, PJM President and CEO Andy Ott said efforts are underway to explore improvements to energy prices.

Current and forward power prices show squeezed profits

Earnings at the Perry and Davis-Besse plants in Ohio have tightened amid relatively low current and forward wholesale market prices. For example, PJM monthly day-ahead prices at the AEP-Dayton hub averaged about $29/MWh in 2017 and peak at about $30/MWh in January 2019, according to data from S&P Global Market Intelligence. Operation and maintenance costs at Davis-Besse, which is currently licensed to operate to 2037, are sometimes higher than projected wholesale power prices.

Perry began operating in 1987 and its original license has not been renewed. It is licensed to operate to 2026. The plant remains economic to operate, with monthly operating costs estimated in the $25/MWh-$26/MWh range through 2019, below 2018 and 2019 forward prices at the AEP-Dayton hub. Forward prices currently peak at $39.14/MWh in January 2019, according to S&P Global Market Intelligence data.

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Current and forward wholesale prices at PJM's western hub are slightly above Beaver Valley's estimated operating costs. Day-ahead pricing at PJM's western hub averaged about $30/MWh in 2017 and is expected to peak at $44.72/MW in January 2019, higher than Beaver Valley's estimated operating costs of $25/MWh-$26/MWh. The Beaver Valley plant has two units, one licensed to run until 2036 and the other to 2047.

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Jeffrey Ryser is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is owned by S&P Global Inc.