Coal power plants aren't the only casualties to cheap and abundant natural gas. After providing over 70% of Vermont's total in-state electricity generation capacity in the last 42 years, the 604-MW Vermont Yankee nuclear power plant stopped sending watts to New England's grid just over one week ago. The move was announced in late 2013 by Entergy (NYSE:ETR), owner of the facility, which cited that maintenance and operating costs were too high for Vermont Yankee to remain economical.
Unsurprisingly, the event has been covered by environmental groups, pro-nuclear analysts, employment agencies, and countless others. Some are worried that Vermont Yankee will cost Entergy billions to safely decommission, while others aren't so sure New England should be betting the house on natural gas. Others wonder if nuclear power is economical at all. What's really going on here and how does it affect investors?
Natural gas is cheaper and easier to use than nuclear. So what?
The closing of Vermont Yankee is part of a much larger pool of issues facing nuclear energy in the United States, which is the world's largest generator of atomic power. Nuclear power plants, which are nearly all decades old, are finding it difficult to operate at a profit in many major markets. That has been a painful reality for Exelon shareholders, which are suffering from the company's massive nuclear portfolio in Illinois. But it's not so black and white.
While New England has been cozying up to natural gas (which supplied 30% of the region's total electricity in 2001 and 52% in 2012), it suffers from supply bottlenecks that can lead to price spikes when energy is needed most. You know, like, winter time. The epicly cold winter of 2014 pushed national average natural gas prices over $6 per MMbtu last February. However, New England saw spot prices climb to nearly $70 per MMbtu and average nearly $34 per MMbtu for all of February of last year.
Building new pipelines could help relieve the pressure, but that's easier said than done in densely populated areas. Ironically, as some Vermont residents have protested nuclear energy, others have protested building natural gas pipelines through their towns and wilderness. The potential for a stalemate has energy officials worried that energy price spikes will continue to threaten New Englanders thanks to the region's overdependence on a single energy source. Those fears have been proven correct just a few days into 2015.
How will New England fill its energy generation gap?
Vermont Yankee has generated about 4% of New England's annual electricity supply since 2007, so it's loss isn't meaningless. However, the region has lost more than a nuclear plant to natural gas. Dominion Resources closed its 750-MW Salem Harbor coal power plant in mid-2014, while two regional oil-burning power plants owned by NRG Energy and Exelon have converted to natural gas.
In all, New England will close more than 1,369 MW of generating capacity between 2013 and 2016 -- most coming from Vermont Yankee and Salem Harbor. The region will add 1,193 MW of capacity in the same span, which will mostly be comprised of wind and natural gas.
However, wind power does not generate power as consistently (capacity factor) as baseload sources such as nuclear and coal, which means more generation capacity (MW) is needed to generate the same amount of electricity. To help fill the gap, regional utilities have renewed supply contracts with Hydro-Quebec to import up to 225 MW of hydroelectric energy from Canada through 2038. While clean and green, the starting electricity price is a whopping $0.581 per kWh. By comparison, average electricity prices for residential customers in New England were $0.178 per kWh last fall.
How much will it cost to decommission Vermont Yankee?
Plenty of headlines will answer that question -- it's $1.24 billion -- but few go into the details. Roughly $817 million will go toward early termination of the power plant's operating license, while $425 million will go toward fuel management beginning in 2016 and site restoration in 2073.
However, what most people fail to realize is that every nuclear power plant in the United States pays into the national Nuclear Decommissioning Trust, or NDT, with every watt of energy produced for its entire lifetime. Entergy has already contributed $643 million into the NDT for Vermont Yankee. After assuming a 2% growth rate for its portion of the trust over the remainder of the decommissioning process, Entergy will have a total of $1.56 billion to throw at decomissioning costs. That's 126% of the total costs, meaning it won't cost shareholders or taxpayers a penny.
And while many are quick to point out that the United States has no long-term solution for nuclear wastes, consider that several Generation IV reactors (the world has only deployed up to Generation III reactors commercially) are capable of consuming nuclear wastes. Better yet, some are small enough to fit inside current nuclear sites. I have a funny feeling Vermont Yankee hasn't seen it's last nuclear reactor operate just yet.
Is nuclear power uneconomical?
It has certainly become less economical in recent years, but determining the economics depends on how you calculate the value of nuclear power and what variables are included. For instance, building large-scale nuclear power plants is prohibitively costly upfront, but the majority of next-generation reactors are small modular reactors, or SMRs, which can be built and operated for a fraction of the costs of traditional reactors. Babcock & Wilcox and General Electric are among the companies pushing SMRs through regulatory and licensing protocols with first deployment expected in the next 15 years.
Governments and investors must determine what value to place on the ability to avoid carbon emissions with nuclear given new climate change policies and emissions goals. Additionally, how power is sold must also be taken into account. Entergy doesn't have the pricing flexibility of regional utilities, which can generate and sell power to customers. Entergy was forced to sell power from Vermont Yankee to utilities for fixed prices in regulated contracts that capped its profit potential. According to the Energy Information Administration:
Entergy operated Vermont Yankee as an independent power producer (also called a merchant generator), meaning that the costs associated with running or maintaining the plant cannot be recovered through regulated cost-of-service rates.
Is it really that surprising that a 42-year-old power plant of any kind is challenged by sleeker, newer investments? Remember, even the newest natural gas power plants built in 2015 will face unpredictable risks by 2057.
What does it mean for investors?
Entergy's decision to decommission Vermont Yankee should serve as a reminder to energy investors that energy markets are in a state of change. The nuclear plant was too costly to maintain and operate, not surprising for a 42-year-old power plant, but expanding the region's natural gas pipelines will cost residents, too. While power generators in New England rush to close older power plants to build new natural gas capacity, they may just be substituting more expensive power production with more volatile supply. Both translate into higher costs, which means the market has yet to reach an equilibrium -- perhaps pointing to opportunities for investors. There really is no perfect short-term solution for New England.