Wisconsin Nuclear Plant Retires Early Because of Market Forces and Federal and State Government Policies

Earlier this month, Dominion retired its 556-megawatt Kewaunee nuclear power station about 20 years before the expiration of its license. Although Wisconsin is not recognized as a competitive market, the Kewaunee plant performed as a merchant operator with power purchase agreements which were not renewed because of competition from lower-cost and subsidized electricity generation.

Located outside of Green Bay, Kewaunee is the first early retirement of a nuclear plant explicitly due to competition from abundant, cheap natural gas and Powder River Basin coal, as well as large volumes of government-backed wind power. Over the next several years, we expect  more merchant nuclear plants in competitive electricity markets to suffer the same fate.

Q1: What will be the impact of the closure of the Kewaunee plant on the local economy?

A1: Close to 650 people worked directly at the plant, but according to Kewaunee County officials, about one thousand additional jobs were linked to its operation. In addition, local press reports indicate that the town of Carlton, which was the location of the plant, will lose more than half of its budget revenue by 2019. Kewaunee County, with a population of about 20,500, is forecast to suffer a loss of roughly $740,000 out of an annual budget of about $25 million.

In general, a job at a U.S. nuclear facility pays nearly 40 percent more than the average local salary and the average plant generates close to $500 million a year in total output for the community in which it is located. Kewaunee County has benefited similarly from its plant, possessing a per capita income of $32,700 compared to the state average of $26,600.

Q2: Why are merchant nuclear plants vulnerable to cheap gas and subsidized renewables?

A2: First, it’s important to understand the difference between competitive and regulated markets. Thirteen U.S. states and the District of Columbia, representing about 40 percent of the nation’s population, have active merchant markets that vary from state to state in degree of competition. Several other states have markets with limited competition, while the rest of the country operates on a system of economic regulation by local public utility commissions.

In a competitive market, power generators are not guaranteed a profit from the sale of electricity; they respond to market demand and sell their electricity at the going market price. In regulated markets, generators receive a price that is determined by state regulatory authorities; utilities in those areas recover the cost of their investment, plus an authorized return, from the prices set by the regulator and charged to local consumers. Thus, financial fuel pricing risk is borne by the ratepayer in regulated markets, whereas power generators and their investors shoulder this risk in competitive markets.

About half of the United States’ civil nuclear fleet is located within competitive markets, which are located primarily in the Northeast, the Midwest, and Texas. Because merchant nuclear plants must use their earned revenue to cover maintenance and fuel costs, they are far more vulnerable to low electricity prices than units located in regulated markets.

Electricity prices have plunged in part because of the surge in shale gas production. In most markets, the price of electricity is essentially determined by the cost of generation from a gas-fired plant. Last year, natural gas prices sunk to a low of $2 per million British thermal units (MMbtu). Though prices have roughly doubled since then, few market observers see the price of natural gas increasing to more than $5 per MMbtu over the next decade—a price that makes it difficult for merchant nuclear operators to compete. Because of the low price of the feedstock, natural-gas fired plants will continue to set the price of power paid to all generators in many parts of the country.

In addition, all merchant nuclear plants are located in states with renewable portfolio standards, which require those states to produce a certain percentage of their electricity from renewable sources. Those obligations vary from state to state. In Wisconsin’s case, utilities are required to generate 10 percent of their electricity from renewable sources by 2015.

Renewable energy, particularly wind power, has benefitted through allocation of significant federal production tax credits (PTC). Through the receipt of PTC’s, renewable energy generators are incented to produce electricity regardless of market demand or market prices, thus allowing those generators to continue making profits while other sources, such as nuclear, cannot operate profitably. Consequently, there has been a significant expansion of wind in the past several years as investors take advantage of the tax credits.

For example, in the regional electricity market in which Kewaunee is located, wind generated electricity capacity has grown from only 1 GW in 2006 to 12 GW today. Those numbers are expected to grow significantly as Wisconsin and neighboring states ramp up their renewable energy deployment, reinforced by the federal wind PTC.

Combined with the nation’s anemic economic recovery and corresponding weak demand for electricity, cheap shale gas, renewable mandates and subsidies (direct and indirect), and regulatory uncertainty are forming the perfect storm that will result in the closure of possibly an additional 5 or 6 of the nation’s remaining 102 operating reactors in the next several years—all of them in merchant markets. Kewaunee is the second plant to be shut down for economic reasons in the past four months; in February of this year, it was announced that the Crystal River Nuclear Plant was retired when it was determined that repairs to the containment could not be made economically.

Q3: Will the economic outlook for merchant nuclear plants improve in the long run?

A3: By the end of this decade, market analysts predict that about 50 GW of coal-fired capacity will retire from the grid because of EPA regulations and low efficiency. Further, if the EPA is successful in regulating greenhouse gas emissions from new and existing power plants, more coal plants will be driven from the market in increasing numbers.

We expect natural gas to benefit the most from the departure of coal from the grid, but fuel switching from coal to natural gas will increase prices for that feedstock, which will improve the outlook for nuclear in some merchant markets. Civil nuclear power will still face significant obstacles from government renewable mandates in all competitive markets, but particularly in states that are pushing for higher and higher levels of subsidized renewable penetration, as well as in states that are establishing challenging efficiency targets.

Mike Wallace is a senior adviser and director of the Nuclear Energy Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. George David Banks is deputy director and senior fellow with the Nuclear Energy Program at CSIS

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Michael Wallace and George David Banks