First Coal, Now Nuclear: Shale Revolution Is Remaking The Power Industry

  • Date: 07/02/13
  • Julie Johnsson & Jim Polson, Bloomberg

Duke Energy’s decision to dismantle a Florida nuclear power plant rather than undertake the costliest- ever U.S. atomic repair shows how rapidly cheap natural gas is remaking the U.S. power industry, hastening a shift from traditional fuels such as coal and uranium.

Duke’s Crystal River Unit 3 plant in Florida joins Dominion Resources Inc.’s Kewaunee reactor in Wisconsin as the first to be shuttered in the U.S. because of growing shale gas supplies, serving as signposts for utilities from Japan to Belgium also considering decommissioning reactors. At least four other U.S. reactors are also at risk of early retirement due to new power market economics, said Julien Dumoulin-Smith, a New York City- based analyst with UBS Securities LLC, in a telephone interview.

The Crystal River nuclear power plant

“The fuel du jour is natural gas,” Florida Public Counsel J.R. Kelly, the state’s official advocate for utility customers, said yesterday in a telephone interview. “I personally believe in fuel diversity. I’m just afraid the costs of new nuclear are going to be prohibitive.”

The question for Duke, the largest U.S. utility-owner by market-value, is whether Florida regulators will allow it to charge the state’s consumers $1.65 billion for its failed investments in the reactor, while boosting the state’s already hefty reliance on gas to fuel its electricity plants.

Consumer Benefits

Florida’s Public Service Commission expects to hold hearings to determine whether Duke’s decision to retire the plant is prudent for customers, Cynthia Muir, a commission spokeswoman, said yesterday in a telephone interview.

Kelly said he will take “a very close look” at Duke’s funding request.

“We’re not going to leave our ratepayer in the lurch,” he said.

Duke’s Chief Executive Officer Jim Rogers is among utility executives who have warned that too much reliance on natural gas puts customers at risk of power price spikes should fuel costs rise, as they often did in years before producers learned to extract it from abundant shale beds in the U.S. and Canada.

“We view gas as the most viable short-term option,” Mike Hughes, a Duke spokesman, said yesterday in an interview. “The costs are low and we anticipate the cost of fuel for the foreseeable future will remain relatively low. Long term, we don’t think you should put all of your eggs in the gas basket.”

Gas Distortion

A shale-fed plunge in gas prices is tilting the power industry toward that fuel, lowering electricity prices and pressuring profits at coal and nuclear generators. At the same time, rising fuel prices and escalating safety repairs are making older, single-unit reactors like Crystal River increasingly difficult to operate profitably.

“Natural gas is really distorting the markets,” Margaret Harding, a nuclear industry consultant based in Wilmington, North Carolina, said in a telephone interview. “These old, small plants, if they get slapped with a lot of capital upgrades, they’re going to be tough to justify.”

Gas has become the cheapest source of power for much of the U.S. with prices that have tumbled 75 percent below the July 2, 2008 peak of $13.695 per million British thermal units.

The all-in cost to produce electricity during the fourth quarter, including operating and capital expenses, was $90.42 per megawatt-hour at a combined-cycle gas plant, $140.13 at a coal-fired plant and $143.29 at a nuclear plant, according to data compiled by Bloomberg New Energy Finance. A megawatt-hour can power about 800 average U.S. homes for an hour, according to the Energy Department in Washington.

No Competition

The trend has prompted utilities to build gas plants rather than a wave of new nuclear behemoths once predicted to follow Southern Co.’s $14 billion construction of reactors in Georgia.

“The market is telling us that right now, nothing can really compete with natural gas unless it’s renewables that are loaded with subsidies,” Samuel Brothwell, senior analyst with Bloomberg Industries, said in a telephone interview. “The challenge here is that natural gas can be a great power plant fuel, but it can’t be the only power plant fuel.”

Florida already uses gas for about two-thirds of its electricity generation and risks becoming overly reliant on a fuel whose price has swung from $2 to almost $15 per million Btus and back to $2 since the early 2000s, according to Brothwell. Florida’s dependence would rise to more than 70 percent later this decade if Duke builds new gas generation to replace the crippled Crystal River reactor and two coal units in central Florida, he said.

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