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Exelon Still Blaming Wind PTC For Nuclear Challenges, Exelon Still Wrong About It

By Adam James, Guest Contributor on June 27, 2013 at 12:28 pm

"Exelon Still Blaming Wind PTC For Nuclear Challenges, Exelon Still Wrong About It"

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An Exelon nuclear power plant. (Credit: Andrew Harrer / Bloomberg vis Getty Images)

Exelon recently shelved plans to expand nuclear capacity at their LaSalle and Limerick plants, taking a $100 million hit and once again reverting to the tired old strategy of blaming subsidized wind. The specific target of their ire is the Production Tax Credit (PTC). For wind, that is, not the one that they happily collect for nuclear.

Exelon is (again) wrong about the PTC, as anyone who read our last post already knows.

First, let’s look at the big picture. Wind power has been a tremendous boon for North America. Costs have fallen 90 percent since 1992, the domestic content of wind turbines has dramatically risen, and 75,000 people are employed in the industry. This growth is directly tied to the continued extension of the Production Tax Credit. Wind power is cheap and carbon free, making it good for consumers and the climate alike.

However, Exelon has decided that wind power is bad for their business. The argument they’ve been making is that because wind can collect tax credits for producing energy at times when demand for electricity is very low, electricity prices become negative as the generator pays consumers to take electricity. This hurts their other generators, like nuclear plants, who then have to sell at a loss. Buried in the story about Limerick and LaSalle is a very important point though: negative prices didn’t occur once in springtime.

We debunked this tale before, but I’ll recap the highlights here:

  • Nuclear power does most of its business in day-ahead markets, where wind never set the clearing price. This means that nuclear plants were never, not once, taking a price that had been set by a wind turbine. Again: never, not once. The day ahead markets are key for nuclear power, which cannot ramp up and down quickly — so securing contracts in advance make much more sense.
  • Nuclear competes a little in real time markets, but wind only accounted for 0.5 percent of all dispatchable offers there. Whereas coal and gas accounted for 89.2 percent of the dispatchable offers. Do the math on what you think played a bigger role in hurting their profit margins (hint: it’s probably cheap natural gas).
  • The real problem is a “supply bubble” where nuclear plants are co-located with wind power and limited access to transmission. The basic idea is that when a bunch of power plants are “islanded” away from where all the demand is, they offer their product (electricity) at a lower price even when demand is higher.

I will add a fourth from more recent market developments:

  • The last place where nuclear makes money is in the capacity market. This year, Exelon took a hit because natural gas lowered capacity prices. Prices in the PJM capacity market, which offers payments to secure capacity three years ahead of time, were less than half those of the previous year. Cheap natural gas put downward pressure on prices, and this really hurt the company.

So Exelon’s biggest problem is actually natural gas driving down prices and beating them out in the market, followed by the combination of limited transmission access and too much supply. They can’t really attack natural gas, which composes 28 percent of their generation portfolio. But, as I argue below, Exelon could quit complaining about a tax treatment that has helped create thousands of jobs and a homegrown industry, and start building more transmission in the Midwest instead.

Exelon Should Spend More Money On Transmission And Less On Lobbyists

The real problem in Northern Illinois, where some of Exelon’s nuclear fleet is located, is that there is a generation bubble combined with a transmission constraint. In other words, a lot of power plants are clustered together but there aren’t enough wires to get the power to where it is needed. And, competing for transmission access with Exelon’s nuclear plants in this bubble are — you guessed it — wind turbines.

Exelon’s problem isn’t the PTC having a distortionary effect, it is that the PTC has made building wind turbines more competitive, and now that cheap wind power is contributing to oversupply in a particular region. The map below shows just how close nuclear plants (the little red circles) and wind turbines (the grey ones) are located together right outside Chicago.

This is a problem because nuclear is largely “non-dispatchable.” This means it cannot quickly stop generating electricity in response to the market. This isn’t really a problem if that nuclear plant is the only game in town, means of transporting electricity are readily available (transmission), and demand is high.

However, none of these factors are holding steady in Northern Illinois. Instead, there is wind providing competing generation, transmission is severely constrained, and demand is sometimes low. In response, Exelon is choosing to try and eliminate the competition instead of building more transmission.

This is supported by the data. As the chart below shows, pick a day and look at congestion prices in the real time market. Congestion prices kick in when there is heavy use of the transmission system but the lowest price electricity cannot get to the destination. In these cases, the price of energy is lower at the sending end and higher at the receiving end. In other words, people pay more for electricity but the generators get less compensation. As you can see, transmission congestion prices skyrocket in the COMED Zone — which contains the Chicago General Hub, the Chicago Hub, and the Northern Illinois Hub. The recent market monitor report confirms that COMED was the second most congested zone so far in 2013.

This means that the price nuclear receives for generating electricity goes down, because not enough of that electricity can get out of the supply bubble. To raise prices, Exelon can either build more transmission out of the bubble or kill the competition in the bubble.

It is no secret that Exelon’s stock took a huge hit last year and again this year after the capacity auction. This is likely because Exelon has bet on electricity prices being higher to justify their investment in nuclear, which composes 55 percent of the company’s generation portfolio. It’s also worth noting that the company slashed dividends 59 percent last month to free up more cash. They should direct some of that towards new transmission in the Midwest to protect their nuclear investment and alleviate the $34.3 million in congestion costs consumer paid last year, instead of spending it lobbying against the PTC in Washington.

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9 Responses to Exelon Still Blaming Wind PTC For Nuclear Challenges, Exelon Still Wrong About It

  1. Theodore says:

    The solution is simple: just shut down a couple of the nuclear power plants so we can build more wind farms in the area.

    • quokka says:

      So you want to replace one form of low emission electricity generation with another? How about replacing fossil fuels?

      Where are the priorities?

      • Theodore says:

        I don’t consider global warming to be the world’s #1 problem. It might be #2 or perhaps somewhere between #2 and #5. The #1 spot is held by the threat of nuclear war followed by nuclear winter, and nuclear power plants that use uranium and plutonium are the cause of weapons proliferation that will make that war a very likely event in the chaos of the next few decades. I do support fusion and thorium. Possession of uranium should be illegal, especially for national governments and other irresponsible (human) organizations.

        • quokka says:

          Thank you for an honest reply.

          However, you a factually wrong on a number of counts. Light water reactors (the overwhelming majority of power reactors) are so unsuitable for producing weapons grade material that they have never been used for that purpose. The basic reason is that plutonium with the high concentration of Pu-239 required for weapons is not present in their spent fuel and it is in practice extremely difficult or impossible to separate it out. Light water reactors are not considered a proliferation risk. Even Hilary Clinton publicly stated that there is objection to Iran’s Bushehr nuclear power plant.

          Historically weapons grade plutonium was made in carbon moderated or heavy water reactors. Any would be proliferator would follow this course. You could shut down every light water reactor in the world and it would make not the slightest difference to proliferation risk.

          There is no doubt about the connection between nuclear power and weapons in the early days, but times have changed and the connection is very, very slight today.

          The bottom line is that proliferation is a political problem and there is no sure fire technical solution. That era is long gone. All that can be done technically is to make it difficult.

          As for banning uranium – just won’t happen. The radio isotopes made in reactors are far too valuable in medicine, industry and research. Nuclear medicine saves and extends an enormous number of lives and there is no chance at all that will be abandoned.

          PS you can breed Uranium 233 from Thorium. As U 233 is fissile you can theoretically make a bomb from it though the difficulties may be considerable. The distinction between “nice” Th and “nasty” U is a bit artificial – it depends what you do with them.

  2. Jay Alt says:

    Today in Bloomberg News there’s an article called-

    Exelon gets Obama boost after years of climate lobbying

    They point out Exelon is the nation’s lowest carbon utility.
    They run 17 nuclear reactors and own 44 wind farms.

    I appreciate your reporting of the costs and bidding. But I think their wind farm holdings require that you reconsider your analysis.

  3. Rabid Doomsayer says:

    The state of the grid is precarious in places. But it just does not attract the attention it deserves.

    And yes they do have a wind division.

  4. Adam James says:

    Yes, I note that in the first post (see link)

    Wind is only 3 percent of their total portfolio.

  5. DaveChgo says:

    Jay,

    Adam is absolutely right in this post. Need further evidence? Consider this article from Crain’s Chicago Business. Exelon asked permission from PJM to cut output from its nuke fleet when prices went negative. In the 8 week pilot, they NEVER did.

    http://www.chicagobusiness.com/article/20130620/NEWS11/130619723/why-exelon-may-cut-its-illinois-nuke-output

  6. quokka says:

    @Adam James,

    You link to a dictionary definition of irony to support some implied claim about tax preferences for nuclear power.

    A rather more reliable source is the Congressional Budget Office. The 2012 report is here:

    http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-06-FuelsandEnergy_Brief.pdf

    Fig 1, page 4 indicates that since 1977, nuclear power received far less than fossil fuels and renewables, with renewables dominating in recent years.