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Rising Natural Gas Prices Not Enough to Save Kewaunee's Cheap Nuclear Energy

Rod Adams's picture
President and CEO Adams Atomic Engines, Inc.
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  • Apr 22, 2013 11:00 pm GMT

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kewaunee nuclear power plantOn May 7, 2013, the Kewaunee Nuclear Power Station is scheduled to stop generating emission free electricity for the last time. The plant is one of the better run and maintained facilities in the US, it has an operating license that is effective until December 2033, and it generates electricity for an average cost of about $30 per MW-hr.

That generation cost number does not tell much of the story for Kewaunee because it implies that each MW-hr has a similar cost. If that was true the total ownership cost could be reduced by reducing operations. The reality is that, Kewaunee’s cost of ownership as an operable nuclear power plant is almost entirely fixed; my best guess for the annual cost is approximately $135 million whether the plant produces no power or 4.52 billion kilowatt-hours, which is what it produced in 2012.

The only part of the plant’s cost that is variable is fuel, but that is such a small portion of the cost that the owners selected a shutdown date that leaves about six months worth of fuel unburned and destined for eventual long term storage in a dry cask.

According to some news reports, the biggest driver for the low market price in Kewaunee’s service area has been the low market price for natural gas. Company insiders believe that another factor is MISO’s proximity to the Powder River Basin where there is an abundant resource of low sulfur, low heat content coal. That fuel sells for something less than $2.00 per MMBTU; unlike many other coal burning facilities, MISO located generators do not have to pay much to transport the fuel. They are not very far from the Wyoming mines.

A third factor contributing to the low price is a rapidly expanding inventory of subsidized wind generators that can make money producing electricity even when demand is so low that prices fall below $0. Corporations that operate wind turbines erected with the past 10 years get paid $23 per MW-hr by federal taxpayers for all the power they can generate. The final factor in the low prices is the long term slow down in energy intensive manufacturing and other economic activity in the MISO service region.

All four factors combined to form the basis for the spreadsheet calculations that made Kewaunee a loser for Dominion and for the other power generation companies that kicked the tires during the year or so that Dominion quietly marketed the plant for sale before announcing its closure in October 2012. One of the most important lessons I have learned as a nuclear professional decision maker is to record and understand the basis and assumptions used in support of any major decision. It is only through that process that one can effectively make changes and reevaluate decisions. If the basis shifts, the final decision may change if recalculation warrants that action.

The first factor noted above has shown the most change. Since reaching a nadir of $1.88 per MMBTU almost exactly one year ago (week of April 16-20, 2012) the New York Mercantile Exchange (NYMEX) price for natural gas at Henry Hub has increased by 133% to close at $4.42 on Friday, April 19, 2013.

According to a number of investment oriented web sites, the glut in natural gas that filled all available storage reservoirs and caused the price to fall so dramatically is officially over. However, at least one major drilling company, France’s Total, that has available leases to exploit in North America, has stated that it will not even begin a new drilling campaign until prices are above $6.00 per MMBTU. (Note: That last link is in French, but the magic of Google Translate is available.)

As regular readers know, I never pass up a chance to publish a reminder copy of the price chart for natural gas that should give any decision maker a reason to worry when her analysts tell her that they know what the price of natural gas is going to be at any time in the future beyond a few months.

Graph displaying natural gas prices from 1997-2013

Daily price of natural gas at Henry Hub

The second factor stressing Kewaunee continues unabated; wind power capacity continues to grow and new wind turbine projects continue to receive federal subsidies for every kilowatt hour they generate – at a projected cost to the budget of $12 billion for 2013.

The third factor is a wild card. Powder River Basin coal prices remain virtually unchanged over the past year, but they have gone up about 10% since October 2012. In addition, new regulations continue to add unpredictable costs to coal burning facilities. There is little doubt that the environment suffers when the replacement power for a 560 MWe nuclear plant is produced by burning coal.

The relatively slow pace of energy consumption growth in the Midwest should be improving as manufacturing recovers and as energy intensive users recognize the opportunities presented by power costs that are significantly below the world average. I have not yet found any definitive sources that support that assumption, but I will keep looking.

If I was making the Kewaunee decisions at Dominion, I would ask for a final run of the numbers by my spreadsheet wizards. I would want to know if the decision made a year or more ago to either sell the plant or shut it down still makes sense. Even though there are balls rolling, contracts being executed with destruction companies and people arriving on site with decommissioning expertise, the plant is still operating today. The irreversible state happens when the operating license is revoked; there has never been a plant relicensed after permanently ceasing operations.

However, I don’t work for Dominion and have no say in their decision process. Since I feel so strongly that the plant is a valuable asset that should not be destroyed, I’ve had conversations with a variety of people including investment bankers, lawyers, utility executives and others who have all expressed a sense of regret at the loss of a valuable asset, but they have accepted the results of decision process. I’ve even approached a few financially strong companies that purchase hundreds of megawatts for servers and famously tout their desire to buy clean power, but those companies currently have policies that do not consider nuclear as being clean power.

None of the people I contacted share my judgement that shutting down a well-run, well-maintained nuclear facility is fundamentally the wrong thing to do. They have faith that the company has diligently run the numbers and is doing the right thing for its stockholders. Some of them agree that the plant could be a valuable asset in a few years when power prices rise, but they do not know who has the stomach or the financial capacity to accept annual losses for an unpredictable amount of time before the value is recognized by the market.

One of the facets of the issue that continues to frustrate me is the lackluster response by the people at the plant. Someone started a Keep Kewaunee Open For Business page on Facebook. I’ve made comments there and shared the supportive articles posted here, but not one of my posts generated any comments, personal inquiries or comments on Atomic Insights. Perhaps the employees there have the same accepting attitude that the decision was regrettable, but inevitable.

Before giving up, I want to point out that instead of generating about 4.5 billion kilowatt hours of useful electricity with no emissions for the next 20-40 years, the Kewaunee Nuclear Power Station will be undergoing a $1 billion destruction effort that might linger on for 60 years.

Is that really the right course of action for the prosperity and environmental cleanliness of the region and the rest of the United States? Is there no capable investor in the US who can help to maintain the operations of a plant that prevents the emission of roughly 4.5 million tons of CO2 every year. During the 20 years remaining on its operating license, Kewaunee would prevent 90 million tons of CO2 from entering the atmosphere.

(Note: That number is based on assuming that all of the replacement power is produced by coal. A good thumbrule for coal fired power is a kilowatt-hour produces a kilogram of CO2, so a billion kilowatt-hours produces a million tons of CO2. Quibble all you want, the resulting round numbers are close enough and really easy to compute.)

The post Kewaunee needs a “deus ex machina”; rising natural gas prices not quite enough appeared first on Atomic Insights.

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Michael Berndtson's picture
Michael Berndtson on Apr 22, 2013

The issue is that the current owner Dominion wanted to sell the plant. There were no buyers. Wind has almost nothing to do with it since Wisconsin has all but banned wind power integration (see Tea Party crazies and ALEC). The $1 billion decommissioning price tag and inability of utilities and marketers to weasel out of that commitment is probably why they’re looking at gas. Department of Homeland Security has mussle under both parties typically.

Here’s an article from Chemical and Engineering News titled Nuclear Retirement Anxiety. It’s a pretty good premier on the subject of nuke plant operating life, security and decommissioning:

From the article:

“Yet to be seen will be the impact on aging power plants of new safety and maintenance requirements springing from NRC’s analysis of the Fukushima Daiichi nuclear power plant accident in Japan. That tragedy happened two years ago this spring. Under a phased schedule, NRC is requiring new safety additions for 31 U.S. reactors that are similar in design to the three Japanese reactors that suffered a meltdown and released radioactive materials following an earthquake and tsunami.

The new requirements include emergency backup power and instrumentation to ensure spent-fuel pools operate adequately. All these reactors must also now have hardened vents for reactor containment structures to relieve pressure and discharge built-up hydrogen during a reactor vessel accident. NRC is also contemplating requiring filters to capture vented radioactive material.”

I K's picture
I K on Apr 22, 2013

You need to look at the second side of the equation, what will it cost to generate the lost 4.5TWh using coal? The important part is that the utility will likely not need to build an additional coal or gas plant but will just operate its existing coal plants at a higher capacity thus the only cost to replace the lost energy is the cost to buy nearly 2 million tonnes of coal annually.

With the proximity of the PRB it might only be about $40 a tonne so annual cost would be lower than about $80M. So at this stage it’s simply a matter of looking at the cost to run the nuclear station and if it is higher than $80M there is a financial case to close it. That means the plant would need to generate power for less than $18/MWh to be viable which it probably doesn’t do.

With a global grid it could have just exported its output to $80/MWh electricity Europe…..

Rod Adams's picture
Rod Adams on Apr 23, 2013

You may not realize that Kewaunee is a Westinghouse designed Pressurized Water Reactor with a large containment structure; it would not be affected by any new requirements for hardened vents on BWRs.

Rod Adams's picture
Rod Adams on Apr 23, 2013

I assume you do not believe that air pollution, water pollution or CO2 dumping are problems worth expending any funds to address.


Rod Adams's picture
Rod Adams on Apr 23, 2013

My issue with Dominion is that they kept their sales effort a near secret until they gave up and announced that they were closing the plant.

Most people that have a valuable asset that they would like to sell put a little more effort into marketing and trying to reach potential buyers. From what I can tell, Dominion only talked to a few other companies, probably those that were already in the business of producing power and had no real interest in adding to their existing capacity in a slow market.

I K's picture
I K on Apr 23, 2013

What I think is irrelevant to the reality on the ground today and the near future.  The utility needs to maintain positive cash flow and profitability and that may or may not mean closing that nuke down

I was just trying to highlight that the value of the nuke in an excess capacity network is the marginal fuel cost of the existing plants that will step in and in this case that may be as low as 15 dollars per mwh.

I K's picture
I K on Apr 23, 2013

A single rich company or individual could potentially subsidise it for a few years. May require as little as 20m dollars a year. Agree a strike price per mwh with the utility for 10 -20 years

Below x the investor mskes up the difference.  above x thr investors get tge difference. Effectively a future bet on electricity prices.  Where x is the price the utility is willing to keep the unit open.

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