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Exelon Corporation (NYSE: EXC ) is considering closing some of its nuclear power plants because they have become unprofitable. Despite what CEO Christopher Crane said during its fourth-quarter earnings call was its "best-ever year in generation," Exelon blames low electricity prices and "bad energy policy" for making some of its units unprofitable to continue to run. By "bad energy policy," Crane is referring to subsidies for renewable energy that Exelon has long campaigned against.
Exelon operates 17 nuclear reactors at 10 power plant sites around the country, which accounts for one-fifth of the nation's nuclear fleet. It is the largest operator of nuclear power plants in the U.S., but it is now being forced into deciding by year-end whether or not it will ultimately close some of those units. The Chicago-based company has tried to reassure investors, arguing that there is a possible path toward profitability because of the prospect of dozens of coal plants shutting their doors in the coming years. Tighter environmental regulations and cheap natural gas is hammering the coal industry, and Exelon predicts that there are 52 gigawatts of coal-fired generation set to retire by 2016. After those plants close, the electricity market will tighten, pushing up power prices, and allowing Exelon's nuclear plants to return to profitability.
Should Exelon close some reactors, the decision will be another hit to an industry already struggling from plant closures and prospects for anemic growth. Dominion closed its Kewaunee plant in Wisconsin last year; Entergy (NYSE: ETR ) is closing its Vermont Yankee plant at the end of 2014; and Exelon will close its Oyster Creek unit in 2019. The San Onofre power plant in California also closed because of safety issues. There are only five new reactors under construction in U.S. – two in South Carolina, two in Georgia, and one in Tennessee – with little prospect for more.
Exelon achieved its highest ever level of generation in 2013, but with many of its units located in the Midwest, Exelon faces fierce competition from the wind industry. The production tax credit (PTC), which Exelon has long fought hard against, has allowed the wind industry to rapidly expand in states like Iowa. Although wind will only make up an estimated 4.2% of the U.S. electricity supply in 2014, it competes in the same markets as nuclear. And power prices have already been driven lower by abundant shale gas. Taken together, wind and natural gas have driven electricity prices in the Midwest down 40% since 2008.
This puts Exelon in an untenable position. CEO Christopher Crane hinted at their Clinton plant in Illinois and the Quad Cities plant in Iowa face particular trouble. Low electricity prices are proving to be an existential threat, but Exelon argues it should be compensated extra for its standby capacity – paid a premium for what the company believes provides greater reliability than any other fuel source.
The nuclear industry is not really on firm ground when it rails against government support for renewable energy, having benefited from government largesse for years. Still, the closure of many nuclear reactors around the country would have its downsides. As a large source of carbon-free power, the possibility of seeing the shortfall in nuclear power made up by natural gas would put President Obama's climate goals in jeopardy. The administration's goal of reducing greenhouse gas emissions 17% below 2005 levels by 2020 would be much more difficult to achieve should nuclear operators like Exelon close some of its power plants. But, if Exelon can't figure out a way to make them profitable, that's exactly what might happen.
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