For the past few years, we've seen a trend of certain states reducing wholesale power rates to negative prices -- which affects, more than anyone else, coal and nuclear power plants.
In this segment from the Industry Focus: Energy podcast, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe explain which states are doing this and why, what it means for the coal and nuclear plants in those states, and how some companies are facing up to the new challenges these regulations impose on them.
A transcript follows the video.
This podcast was recorded on April 7, 2016.
Sean O'Reilly: I don't know why I didn't know about this, but apparently, at certain times -- I think it happened in California 12 times a year or two ago -- but negative rates for power and wholesale power markets in certain states like California, Texas, it's happening a little bit in the Northeast. I was interested to read that it's basically a way to incentivize coal and nuclear plants to shut down. Taylor, can you add some color here? Are you nervous if you own a nuclear plant at this point? Negative rates. Telling you to shut your damn -- pardon my French.
Taylor Muckerman: I think my degree of nervousness would go coal, nuclear, natural gas, because (a) coal is already on the decline. Coal companies are going bankrupt in the U.S., seemingly every month. Europe is severely waning on coal production, and they were the founders of coal power. You still have India and countries that are developing using coal, but slowing growth there. China is starting to seem like it's peaking on coal power production. That would be the most nervous I would be.
Tyler Crowe: It actually flatlined.
O'Reilly: Oh yeah, they're a little tired of the pollution, among other things. (laughs)
Muckerman: Yeah, when you can't see five feet in front of your face, I think it's time for a wake-up call.
O'Reilly: I went to Beijing like five years ago, it's true, all of it, it's true.
Muckerman: You have reports of Zuckerberg going on the Smog Run when he was in China to talk about climate change, and obviously, Facebook getting into China.
O'Reilly: Did he actually go on a jog in Beijing?
Muckerman: Yeah, it was some of the leaders from China, and they called it the Smog Run, because the pollution was so bad. But, I mean, you had to expect this to happen sooner or later, because sun and wind -- well, sun is kind of predictable. The clouds, obviously, obstruct it a little. But wind is less predictable. You could have peak times of both at the same time, and you can't shut down a nuclear plant willy-nilly. So, yeah, I think it's time to start getting nervous, at least in states that have seen the most growth from both. I think if it's just solar or if it's just wind, you probably have a few years before you need to get worried.
O'Reilly: At what point do nuclear plants and natural gas plants start complaining to the government?
Muckerman: They've been complaining.
O'Reilly: Yeah. But, granted, the cost of solar has gone down. I think we read it was like 1/150th of the cost of solar in the 1970s. (laughs) Do you guys remember that James Bond film, I think it was The Man with the Golden Gun?
Crowe: Oh yeah, I remember that.
O'Reilly: It was like, the Solex, the little gadget? Forty years later, we finally got our solar power like James Bond had.
Muckerman: The happening, yeah.
O'Reilly: But one of the reasons wind has been so big is because of these tax credits that have been going on. Buffett talks about them as part of his rationale for doing all the investments that he's done in solar.
Muckerman: It's funny, you see the tax credits get extended into perpetuity just so we could export oil. But how long is that oil exportation really going to be a big deal? We're still importing a ton, we haven't really exported -- I mean, we exported a fraction...
O'Reilly: We just started, a little bit.
Muckerman: Yeah. But I think, in the long run, obviously, those credits are going to be a much bigger deal to fossil fuels than oil exports are going to be.
O'Reilly: What have you heard? Are natural gas companies -- and, obviously, coal companies are...
Muckerman: Well, I think with natural gas, you can flip the switch on and off a little easier.
O'Reilly: Right. But if you're nuclear, at what point are you like, "What the heck, federal government?"
Muckerman: Yeah, I think long term, you're probably up a creek unless you can figure out a way to turn it off and on.
Crowe: And there isn't just one single nuclear company. Most utilities have some sort of diversified generation, because you have your base load, which is your nuclear power...
Muckerman: Exelon (NYSE:EXC), I think, is a good example. They're starting to grow renewable, but they are the largest nuclear power provider in the country.
Crowe: Right, so you have that base load power, and then you go into your more variable power sources like your natural gas and your solar and wind, so that when solar and wind are getting a lot of power from that, you've got that little bit of base load power from nuclear to support, and then on the peak times, which is basically when you start to get waning production from solar and wind during certain times of the day, then you can ramp back up with natural gas. Having that diversified generation portfolio can help offset having the issue of just being a pure nuclear player.
O'Reilly: Right. Utilities clearly just need to get in on the game in order to survive and make sure they're...
Crowe: Most definitely.
Muckerman: I went to the Pittsburgh Pirates Cardinals opening day on Sunday, and we were obviously in coal country driving through Pittsburgh, and there was a huge billboard that was like, "Wind stops, suns set, coal is forever." And I was like, "Oh God, please tell me that billboard is a decade old." They're still trying.
O'Reilly: I can't believe somebody is still writing the check for that. Who's writing the check for that?
Muckerman: Coal companies, coal producers.
O'Reilly: Yeah, but they're bankrupt! What's going on here?!
Muckerman: Well, I don't think billboards are the highest-priced advertising model anymore. It's probably is the lowest-hanging fruit to put a word out.
O'Reilly: Oh, it's like a dying model and a dying model teaming up! Oh, this is funny.
Muckerman: One would imagine, yeah. It wasn't even one of those flashy billboards that changes three different times as you drive by; it was just paper painted up there.
O'Reilly: (laughs) Just a straight-up billboard, yeah.