Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

I've got a nuke and I'm not afraid to not use it.

That pretty much sums up the strategy for struggling nuclear power generators in the U.S. these days. Entergy's announcement on Wednesday that it is in talks to sell its 838 megawatt FitzPatrick nuclear power plant in upstate New York to Exelon captures what's going on to a tee.

Why are so many nuclear power plants, which collectively generate about a fifth of U.S. electricity, having a rough time? Take a look at this chart and you don't need to be a nuclear physicist to work it out:

E=MC/2
Average wholesale power prices across the U.S. have dropped by more than half over the past decade
Source: Bloomberg
Note: Trailing 52-week average prices

Power prices have been dragged lower by three developments that don't look set to change anytime soon:

  • Cheap natural gas from the shale boom, which sets the price of power in many regional markets;
  • More renewable generation such as solar and wind, which, once switched on, enjoy very low running costs (the fuel's free, after all);
  • Stagnant power demand as energy-efficiency efforts have intensified.

 At these prices, many nuclear power plants simply aren't making a dime. In a report published earlier this month, Bloomberg New Energy Finance calculated that 55 percent of the country's nuclear fleet looks unprofitable between now and 2019. Among their ranks sits FitzPatrick.

Meltdown
FitzPatrick's P&L looks solidly in the red for the foreseeable future
Source: Bloomberg New Energy Finance
Note: Estimated and projected pre-tax earnings.

Let's not forget, though, that this is the electricity sector, which isn't exactly a model of free-market capitalism. Many a political career has been short-circuited by blackouts, and there are other considerations for states regarding the nuclear power plants operating within them. Shutting down a nuclear plant means losing not just a reliable source of baseload power to keep the lights on for constituents -- power which is largely free of carbon dioxide, too. It also means lost jobs -- FitzPatrick has 547 employees -- and, potentially, tax revenue.

So nuclear operators have been engaged in a game of chicken with several states. Toward the end of last year, Entergy said FitzPatrick would shut down, and later said this would happen by January 2017. That focused minds in Albany, as New York state has set aggressive targets for cutting carbon emissions, and Governor Andrew Cuomo favors shutting the Indian Point reactors -- which Entergy also owns -- for safety reasons due to their proximity to New York City.  Hence, state officials have now proposed direct subsidies to keep FitzPatrick and several other nuclear plants open.

For Entergy, that offers a lifeline for the plant but not a reason to keep hold of it. The company's merchant generation arm, which includes FitzPatrick, has been declining as a share of Entergy's overall revenue in favor of its regulated utility business. Given the latter is much more beloved of yield-hungry investors these days, Entergy is better off keeping that particular trend going.

Powering Down
Entergy's wholesale operation has dropped from more than a quarter of its business to less than a fifth
Source: Bloomberg
Note: Bars show percentage of trailing 4-quarter revenue.

Enter Exelon. It already has two nuclear plants in upstate New York, Ginna and Nine Mile Point, that would benefit from the proposed subsidies (BNEF projects both to also be loss-making under current conditions). Adding FitzPatrick would bolster Exelon's position in a state offering financial support.

And Exelon could use some of that. Only last week, it informed a regional grid operator of its intention to close Quad Cities nuclear power plant by June 2018, one of two Exelon intends to close in its home state of Illinois. Having failed thus far to extract subsidies from that state, Exelon says it can no longer shoulder the losses from the two plants. Its press release helpfully pointed out that the plants support 4,200 jobs directly and indirectly. It's possible there may yet be a reprieve.

It is a sign of the times that, like the solar power business that is hurting them, nuclear power operators are chasing in and out of states depending on the subsidies on offer. The same debates are going back and forth in Ohio, Connecticut and elsewhere. What's clear is that, perhaps more than ever, the business of splitting atoms must rely on support in the statehouse rather than the power exchange.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The added twist here is that Indian Point's proximity to Gotham's hungry power market means it is also one of the few consistently profitable nuclear plants cited in BNEF's report.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net