Some merchant nuclear plants could face early retirement: UBS

This will be a challenging year for merchant nuclear generation and asmany as 3,000 MW of reactors, or nearly 3% of the 101,350-MW US fleet, couldbe at risk of retirement, according to a UBS Securities analyst.

The sector faces twin challenges of regulatory mandated investments anda low power price environment as a result of cheap natural gas, analystJulien Dumoulin-Smith said in a report released late on Tuesday, but datedJanuary 2.

While the variable costs of nuclear plant dispatch remain low, and willcontinue to do so, tight margins in a gas-driven market are no longer able tosupport nuclear operators' "exceptionally high" fixed cost structures,Dumoulin-Smith said.

Fixed costs for nuclear plants are four to five times the costs for acoal plant of a similar size, and maintenance costs of about $50/kW-yearcoupled with rising nuclear fuel costs will "impede" economic viability andlimit free cash flow for merchant nuclear generators, Dumoulin-Smith said.

And while nuclear fuel costs are still "relatively insignificant,"Dumoulin-Smith expects them to move to $8-9/MWh eventually, from anhistorical level of $5-6/MWh.

On the regulatory front, the US nuclear fleet is at risk of having toshoulder higher capital expenditures to comply with post-Fukushima safetyupgrades expected from the Nuclear Regulatory Commission in February. Heestimates costs of about $15 million per reactor to upgrade vents with aworst case scenario of $30 million-$40 million per reactor.

In addition, updated once-through cooling regulations being drawn up bythe Environmental Protection Agency will likely take a toll on the fleet, hesaid, though he did not quantify that impact.

Overall, Dumoulin-Smith estimated that 2,000 MW-3,000 MW of nuclearplants could be at risk of retirement over the next several years.

Dumoulin-Smith said Dominion's 556-MW Kewaunee plant in Carlton,Wisconsin, may be the "canary in the coal mine" for merchant nuclear plants. Dominion in October said it planned to close the plant in the secondquarter after efforts to sell it failed.

The nuclear plants most at risk of retirement, according toDumoulin-Smith, belong to Entergy and Exelon. They are Entergy's 838-MW JamesA. FitzPatrick plant in Scriba, New York, and its 605-MW Vermont Yankee plantin Vernon and Exelon's 1,065-MW Clinton plant in central Illinois and the580-MW R.E. Ginna plant in Ontario, New York.

COMPANIES RESPOND

Ginna is owned by Constellation Energy Nuclear Group, a joint venture50.01% owned by Constellation Energy and 49.99% owned by EDF. Exelon boughtConstellation Energy in March 2012.

Those plants share several characteristics that make them vulnerable,including their relatively small size and the fact that they operateprimarily in deregulated markets in New York and the Midwest, which sufferfrom low capacity payments as a result of surplus capacity and "structuralregulatory interference," Dumoulin-Smith said.

Exelon spokesman Craig Nesbit, in an email Tuesday, said the companyis not considering closing any of its nuclear plants, including Clinton, atthis time. The company is continuing to invest in its nuclear plants "toensure that they operate safely and efficiently for as long as theypractically can," Nesbit said.

Exelon' nuclear fleet is "a low-cost and extremely competitive set oflong-term assets, and we avoid shifting our long-term investment decisionsbased on short-term fluctuations in natural gas prices," Nesbit said.

CENG, in an emailed response for comment Wednesday, said that althoughthe current low energy prices do negatively affect the profitability ofGinna, it continues to positively contribute to its shareholders, Exelon andEDF.

"We do not currently have plans to shut down any units prior to the endof their operating licenses," the company said. "Any decision to prematurelyshut down a unit would be made through the normal CENG oversight andgovernance process and would require the approval of both Exelon and EDF."

In an email Tuesday, Entergy spokesman Michael Burns said, "As a matterof policy, Entergy does not comment on the financial performance of individualplants."

But given their importance in providing tax revenues as well as baseloadpower, any potential nuclear retirement could face regulatory and politicalintervention, Dumoulin-Smith said, particularly in Illinois or New York.

But for Entergy or Exelon early retirement of some nuclear plants couldbe accretive to near year earnings, he said and could bolster aggregate cashflows as they adapt to the lower gas price environment.

--Peter Maloney, peter_maloney@platts.com
--Steven Dolley, steven_dolley@platts.com
--James Ostroff, james_ostroff@platts.com
--Edited by Richard Rubin, richard_rubin@platts.com

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