Though equipped with a license to operate for an additional 20 years, the Kewaunee nuclear power station rode into the sunset this week, having generated its final kilowatt-hour. Dominion Resources, the Virginia-based company that owns the 550 MW facility along Lake Michigan, plans to spend nearly $1 billion to decommission the facility and transform the acreage back to its former status as farm fields. The process could take as long as 60 years.
It’s more than a little odd to see a 39-year-old nuclear plant taken offline in a state that’s replete with middle-aged fossil units. But in this story, age and fuel type matter less than the extremely unfavorable market structure confronting an independently owned baseload plant in the Upper Midwest, especially one lacking a power purchase agreement.
Back in 2005, when the Kewaunee plant was sold to Dominion, the prevailing expectation among Wisconsin electricity stakeholders was that sales and revenues would never stop growing. They were convinced then that there would be room for every new power station on the drawing boards or under construction. But when reality intruded in the form of a nasty economic contraction, electricity loads headed downward.
Just after the peaking of electricity sales in 2007, an unusually large wave of new generating units came online, including a mammoth 1,235 megawatt (MW) coal-fired plant just south of Milwaukee. (More about the Elm Road station later.) In a flash, the once roomy environment for power plants vanished, leaving in its wake a glutted field of generators trying to stay afloat in a shrinking pool of revenues.
Wholesale electricity prices in the Upper Midwest are set in accordance with a generator’s marginal cost of energy. Without a captive rate base to underwrite safety upgrades and relicensing expenses, Dominion desperately needed a power purchase agreement to have any chance to operate Kewaunee at a profit.
But the utilities, who have their own middle-aged generators plants to protect, were not about to throw a lifeline to Kewaunee. Recognizing an opportunity to thin the generation herd without having to write down one of their own assets, they decided to let brute economics administer the coup de grace to an unwanted competitor.
As a baseload plant, Kewaunee was poorly adapted to compete in a depressed market. Nuclear power plants operate pretty much at one speed--full throttle—and end up producing the same quantity of electricity at 2:00 AM, when the wholesale price of electricity in the Upper Midwest is often below the cost of production, as they do at 2:00 PM, when the prevailing price is at or above production cost.
Unfortunately for a generator like Kewaunee, there are more off-peak hours than on-peak hours in a year. When baseload plants compete in a market that does not cover the marginal cost of operations, they tend to hemorrhage money.
Ten years ago, baseload generators were touted as the firewall that would protect ratepayers against price gouging orchestrated by unscrupulous power marketers like Enron. Today, we have a diametrically opposed dynamic. In a chronically depressed market, baseload generators are the ones in greatest need of additional ratepayer outlays to sustain them.
This point merits much more discussion than can be squeezed into this column, as it signals the emerging obsolescence of the traditional utility business model. Suffice it to say that we can now appreciate baseload generation as a luxury made affordable by rapid load growth rates that allow the investment in capacity expansion to be spread over a larger population of ratepayers. Sustained load growth encouraged utilities to capture economies of scale by building centralized power plants and running them flat out over many decades. This growth was essential for driving power prices lower through much of the previous century.
But when loads stop growing, the operational inflexibility of a large coal or nuclear plant becomes a liability. Unlike a gas-fired turbine, a baseload coal plant cannot be ramped up and down without incurring wear and tear. And, unlike a solar electric array, a baseload generator cannot turn itself off at night, when wholesale energy prices fall through the floor.
Nowhere is this situation more evident than with Elm Road, the aforementioned coal plant owned mostly by Milwaukee-based We Energies. With a price tag of $2.3 billion, this twin-unit leviathan was the most expensive construction project in Wisconsin’s history.
And how has it performed to date? In 2012 , its first full year of operation, Elm Road produced only 18% of its rated capacity, roughly one quarter of its projected output for that period. By comparison, We Energies’ newest wind power installation, Glacier Hills, logged a capacity factor of 27% in 2012.
In March 2013, the most recent month in which utilities have reported their production data, Elm Road’s capacity factor dropped to an abysmal 8%, the lowest percentage among We Energies’ mainstay generators. Indeed, a hypothetical 1,235 MW solar farm in We Energies territory would likely have outproduced Elm Road that month, recurring spells of cloudy weather notwithstanding.
Now, if a new building was unable to achieve a 20% occupancy factor in its first year, the building owner would face a stark choice: find more tenants or let the banks take over. Similarly, if an airline found itself struggling to fill more than one of every five seats in a given route, it wouldn’t take long for management to cut back on the number of flights or cancel service between those airports altogether.
Unlike the hypothetical airline or building owner, the parent companies that own Elm Road are sitting pretty, because they can count on receiving monthly lease payments that will, over a 30-year period, recover the capital sunk into that plant, along with a tidy double-digit return on investment. Those lease payments are now embedded in utility rates, whether Elm Road is cranking out the kilowatt-hours or gathering dust.
The same market conditions—low natural gas prices and depressed demand--that hastened Kewanee’s retirement are partially responsible for Elm Road’s breathtakingly poor performance to date. But the plant’s difficulties are exacerbated by its massive size and its operational inflexibility.
There are likely a few hours in every weekday when market prices rise high enough to bring an Elm Road unit online. The trouble is, Elm Road is not equipped to cycle like a gas-fired plant just to cover a few afternoon hours. When those situations arise, the system operator dispatches a smaller, more flexible generator that can do the job, even if Elm Road’s unit energy cost is nominally lower. So Elm Road just sits there, consuming electricity instead of producing it.
There is simply not enough market space right now in Wisconsin to accommodate a large newcomer like Elm Road at anywhere near its rated capacity, even after Kewaunee’s departure. Until the generation herd thins out some more, Elm Road’s utility to the ratepayers who are picking up the tab for this monumental misallocation of investment capital will remain virtually nonexistent.
The lessons from Kewaunee and Elm Road are clear: building baseload plants belongs to a bygone era. The older ones are fraught with legacy costs, while the newer ones carry burdensome financial risks. Those states that manage to avoid the choking levels of overcapacity we have in Wisconsin have plenty of room to stake out an aggressive clean energy development program going forward.