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.