Why Older Nuclear Power Plants Remain 'Cash Cows' Despite Fukushima
There are no new nuclear plants in the foreseeable future for Exelon Corp., the largest U.S. reactor operator. Old plants, though, are a different story.
Exelon's proposed acquisition of Baltimore-based Constellation Energy, announced yesterday, would add five nuclear reactors at three plants to the 17 reactors at 10 plants that the Chicago-based company already runs. Exelon's total nuclear capacity would climb from 17,047 megawatts to nearly 19,000 if the projected $7.9 billion deal is completed.
"They can buy them much more cheaply than they can build them," said Ellen Vancko, nuclear project manager for the Union of Concerned Scientists.
Although the disastrous accident at Japan's Fukushima Daiichi nuclear complex may lead to new regulations and higher costs for owners of existing U.S. reactors, that risk did not sidetrack merger negotiations between Exelon and Constellation, which began months before the March 11 earthquake and tsunami.
The reason, industry representatives and critics agree, is that the existing plants remain very profitable, even with the decline in electricity prices that followed the market crash and recession in 2008.
The Nuclear Energy Institute, the industry's main trade organization, ranks current nuclear plants as the cheapest source of U.S. electricity, with operating, maintenance and fuel costs of just over 2 cents per kilowatt-hour in 2009, compared to 5 cents for electricity from natural gas-fired plants and 3 cents for coal generation. Exelon said its generating plants returned average margins of 3.76 cents per kilowatt-hour last year, despite lower power prices, and two-thirds of Exelon's overall generation capacity comes from nuclear plants.
"These [nuclear] plants, which are fully depreciated, were purchased at a discount and are, in fact, cash cows," said industry critic Mark Cooper, a senior fellow at Vermont Law School's Institute for Energy and the Environment.
Christine Tezak, an energy analyst with Robert W. Baird & Co. Inc., said that Exelon has been regarded by the Nuclear Regulatory Commission's staff as among the best managers of nuclear plants in the United States. Adding Constellation's nuclear plants in New York and Maryland creates opportunities for leveraging nuclear operations expertise and resources, the companies said yesterday.
Exelon has turned its back on new nuclear power projects, for the balance of this decade, at least, because the power output from the multibillion-dollar new plants could not compete with natural gas-fired power plants in the absence of a carbon price. Instead, Exelon will channel most of its capacity expansion into gas generation, its officials say.
But Exelon has also embarked on a costly plan to increase the output of its existing nuclear plants through uprates achieved by expanding reactor capacity. The uprates would add as much as 1,500 megawatts of new generation if the Nuclear Regulatory Commission (NRC) approves the projects. It is also expected to seek 20-year operating license renewals on the remaining reactors that have not yet been cleared for the license extensions.
Upgrading older plants protects profits
It is not clear whether the NRC will impose new regulations affecting existing plants, uprates or plant license extensions in response to the Fukushima accident.
The commission heard an update from its staff yesterday on the ongoing safety review begun after the Fukushima accident, focusing on the NRC's "station blackout rule," which deals with a nuclear plant's ability to maintain required cooling of the reactor core and spent fuel pools if all outside power is lost.
"We don't have the information yet to determine whether there are possible improvements to be made to this rule or others, in light of the events in Japan," NRC Chairman Gregory Jaczko said yesterday.
Exelon Chairman John Rowe said this week that he expects there could be "incremental oversight or process changes" required by the NRC, but until the details are known, the company was not projecting an impact on its earnings.
However the NRC responds, Exelon and the rest of the industry face a future of increased investment to keep old facilities running and seek new commercial opportunities, analysts say. The proposed merger would considerably strengthen Exelon's future ability to raise capital for such investments, executives of the companies said yesterday.
Moody's Investors Service estimated last year that the utility industry, with $200 billion in annual revenues, will have to invest $20 billion a year in this decade to upgrade an aging asset base of generators and transmission and distribution networks. More investment will be called for as utilities pursue "smart grid" strategies aimed at expanding customer services and safeguarding the grid. And in another 20 years, Exelon will face the need to replace its current nuclear fleet with some combination of new generation sources and energy savings.
An improved lobbying platform?
The announcement raised immediate questions of how Exelon's lobbying platform in Washington might change.
Exelon was a leader in the power industry's unsuccessful push through the U.S. Climate Action Partnership (U.S. CAP) coalition for a cap-and-trade strategy to limit power plant emissions. A rising price on carbon emissions would be a windfall for existing nuclear plants.
Constellation was not a U.S. CAP member, although industry observers said the two companies are philosophically close, supporting competitive power markets and nuclear power as a largely carbon-free power source. "I think there is pretty high degree of alignment in terms of their objectives. It's a merger that makes sense from that vantage point," Tobyn Anderson, senior vice president of the Lighthouse Consulting Group, a Washington-based public affairs firm.
Exelon's interests in federal transmission policy issues could become more complex if the merger proceeds, some industry experts said.
The bulk of Exelon's nuclear operations are in Chicago, and it is already concerned about the impact of excess low-priced wind power from the Great Plains that flows into Illinois but cannot easily move eastward because of limited transmission capacity. Surplus wind power in Exelon's home service area puts pressure on its nuclear plants to reduce output, and that strikes directly at the profitability of nuclear operations, some analysts said.
For the same reasons, Exelon has commercial reasons to see wind power move through the PJM Interconnection grid to the East Coast rather than have large build-out of wind power occur off the Atlantic Coast. Neither Exelon nor Constellation supported Maryland Gov. Martin O'Malley's (D) failed legislative proposal this spring to support wind projects off Maryland's coast by requiring utilities to purchase electricity from the wind farm. Constellation's objections were pivotal, according to people familiar with the issue.
Who pays to improve the grid?
The Federal Energy Regulatory Commission is preparing a landmark rulemaking that would broadly allocate costs of future high-voltage transmission lines, but is facing opposition from a powerful industry group led by utilities in the Southeast, Michigan and New Jersey.
"Exelon's Washington footprint will get bigger" if the merger goes through, one energy sector official noted. The industry will closely watch whether Exelon supports FERC in this controversy.
Former FERC Commissioner Nora Brownell noted that Exelon expanded its wind generation capacity through its acquisition of John Deere Renewables last year. "With wind assets and a diverse mix of assets, I'm hoping they step up and support a more aggressive transmission policy," she said.
The conclusion of the merger would end an eventful history of Constellation's nuclear operations. Constellation, like other U.S. nuclear plant owners, foresaw a nuclear "renaissance" beckoning after passage of the 2005 Energy Policy Act, with its promise of $18.5 billion in federal loan guarantees for new plants and other financial incentives.
Facing possible bankruptcy because of electricity trading losses, it struck a partnership with EDF, the French utility giant, which rescued Constellation with a $1 billion upfront investment and took a 49.99 percent stake in Constellation's nuclear operations. The two companies planned to invest in new U.S. reactors, beginning with Constellation's nuclear plant site at Calvert Cliffs in southern Maryland.
The French connection
But then the drop in natural gas prices poisoned the outlook for new nuclear plants and Constellation abruptly called off the nuclear marriage last year. EDF maintained a minority position in Constellation's nuclear subsidiary. Exelon would take over that business under the planned merger.
EDF said yesterday, "We are studying the proposed terms and, as all vigilant shareholders are undoubtedly doing, are evaluating the value proposition and our options. EDF will also be mindful that the integrity of our existing nuclear joint venture with Constellation is preserved."
The deal, if consummated, would also end a series of unsuccessful acquisition attempts by Exelon over the past decade that offered opportunities to expand its nuclear portfolio. Most recently, Exelon gave up a hostile takeover bid for NRG Energy in 2009, in the face of opposition from NRG's stockholders. At the time, NRG was planning an expansion of its South Texas nuclear plant. But this month, it abandoned those plans, citing the uncertain regulatory climate in the United States following the Fukushima accident.
After Exelon's NRG bid was rejected, Rowe commented, "The NRG shareholders have spoken, and Exelon will move on." That path led to Baltimore and Constellation.