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US Nuclear Power: Bloodied, but Unbowed

By Roger Conrad on February 8, 2013

Another one bites the dust. Following months of speculation, Duke Energy Corp (NYSE: DUK) announced this week that it will permanently close the Crystal River nuclear plant it acquired as part of last year’s merger with the former Progress Energy.

Crystal River’s operating license won’t expire until 2016. The 36-year-old Florida reactor, however, had been closed for some time, following the 2009 discovery of cracks in the concrete building housing the 860-megawatt reactor. And while a company report last year concluded a fix would cost $1.49 billion, indications were rising that the expense could soar as high as $3.43 billion in a worst case. 

The decision of what to do with Crystal was rumored to have played a role in the ouster of Progress’ former CEO. Initially slated to be CEO of the post-merger Duke, he had allegedly favored spending whatever it took to get the nuke back up and running.

But whatever the backroom politics, the move seems to have boiled down to simply this: extreme uncertainty about the cost of restarting an aging nuclear plant that may not have been relicensed by the Nuclear Regulatory Commission (NRC). In the end, that option just didn’t stack up against the availability of cheap natural gas-fired generation to replace it.

The decision to shut Crystal isn’t entirely painless. An insurance settlement will enable Duke to recover the estimated $835 million in refunds for amounts already billed to its Florida customers relating to the plant. And there’s no real assurance of what Florida regulators will pass along in rates from the needed investment in generation to replace Crystal.

Even all that, however, was worth it to eliminate Crystal as a future drain on Duke’s earnings and balance sheet. And the company’s investors seem to agree, as the stock has rallied sharply since rumors of the decision began to emerge.

Credit raters also apparently concur. Moody’s, for example, issued an opinion following the announcement that affirmed credit ratings for Duke and its Progress Energy unit.

The rater noted the insurance settlement, low gas prices, avoidance of a long and uncertain restart process, and flexibility in decommissioning the plant as reasons for its favorable view. Duke has up to 60 years to completely decommission the facility, allowing it to cover the cost with the $600 million fund already established without raising new money to finish the job.

That’s about as close to a win-win for the company and its shareholders as is possible in a case that involves such a huge asset. The broader question is whether we’ll see more nuclear plants shut down this way–and will this affect plans to build a new generation of nuclear power plants in the US?

Not the Only One

To be sure, Crystal’s not the only nuke from the old generation of plants being shut down as we speak. Dominion Resources (NYSE: D), for example, has plans to shut the Kewaunee nuclear facility in Wisconsin. The reason isn’t operating plants or relicensing, as the NRC had already renewed its right to operate until 2033. Rather, it was the plant’s small size that makes output uncompetitive with gas-fired generation at these prices.

Dominion had tried in vain to find a buyer for the facility, which sells its power wholesale and therefore does not fit the company’s strategy of focusing on fee-based business and long-term contracts. The resulting $281 million writeoff of the plant’s value, however, is minor for a company of its size. And a trust fund will pay for the shutdown of the plant and removal of radioactive material.

The upshot is a decision based on economics that will wind up saving Dominion money in the long run, while allowing it to eliminate another part of its business with variable profitability. And as with Duke’s move on Crystal, the market’s view has been positive.

There are other nuclear plants in the US where economics combined with politics may spur similar decisions. California’s San Onofre nuclear plant, jointly owned by units of Edison International (NYSE: EIX) and Sempra Energy (NYSE: SRE), is one candidate.

Unit one has already been shut. Units 2 and 3, meanwhile, have been out of operation since January 2012, when operator Edison discovered steam generator damage. And the NRC has not acted on a plan for a restart of Unit 2, held at 70 percent capacity to avoid shaking damaged pipe.

To be sure, California needs the energy, which is enough to power 1.4 million homes. Politics, however, is decidedly anti-nuclear in Sacramento, with powerful forces suggesting very damaging lawsuits if San Onofre’s owners push ahead to restart the reactors. That’s despite the fact that the CEO of California’s Independent System Operator has asserted that the power grid will “remain fragile” until the reactors are operating again.

Limits of Shutdowns

San Onofre remains a very uncertain situation, and the plant is a likely candidate for eventual shutdown. But given that California’s already sky-high power rates will only go higher if that happens, it’s highly doubtful most other states will follow that example. 

For one thing, despite being much maligned in the press, the vast majority of nuclear plants continue to run efficiently and safely. Exelon Corp (NYSE: EXC), for example, owns and operates 20 percent of US nuclear power capacity and reported a 93 percent operating rate in the fourth quarter of 2012.

And Entergy Corp (NYSE: ETR), which is the next largest operator, came in with a 90 percent operating rate, despite an outage at a New York plant due to a transformer issue. That compares with an average nationwide operating rate of about 65 percent in the mid-1990s, when most plants were owned by regulated utilities.

As for low natural gas prices, utility executives tend to have a much longer view than the public. Gas prices are low now, and the consensus view is they will likely remain so for some years yet.

That, however, was also the conventional wisdom in the late 1990s, when a building boom of gas plants spurred demand and sent prices soaring into double-digits by 2005. It may be a while before we see gas prices surge again in the country, given the surplus of shale capacity. But with demand rising in North America and export capability developing, sooner or later they’re going to move closer to global prices, which are at double-digits in both Asia and Europe.

When that happens, nuclear power is going to look a lot more attractive. And the trick could turn even faster if Washington does eventually enact a carbon tax, or even as Environmental Protection Agency regulations on carbon dioxide are tightened.

To be sure, nuclear power is on its heels now. But those who expect a mass wave of shutdowns of existing capacity–or for Southern Company (NYSE: SO) and SCANA Corp (NYSE: SCG) to cancel construction of new plants–are setting themselves up for disappointment. At 20 percent of the US power mix, nuclear isn’t going away, no matter how much some may hope it will.

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