Dominion’s (NYSE: D) Kewaunee nuclear plant in Wisconsin “may be the figurative canary in the coal mine,” when it comes to certain merchant reactor units, UBS Investment Research said in a recent analysis.
Dominion announced in October 2012 that it has decided to retire Kewaunee because its small size, distance from Dominion’s other nuclear units, the plant’s small capacity, weak power prices and other factors. Dominion had been unable to sell the plant.
In a review led by UBS Analyst Julien Dumoulin-Smith, UBS predicts high fixed costs and other troublesome economic factors could spell trouble for other non-utility nuclear plants.
Nuclear economics and viability could feature prominently in the upcoming fourth quarter financial reports, UBS said.
“With the gas glut dragging into its fifth year, we believe what started as a focus on coal plant retirements has been expanding into growing risk of retirement of all fuel types, particularly nuclear and oil-fired units,” UBS said. This appears to be “an unavoidable outcome” given limited public support for capacity markets and the lack of any policy encouraging a diverse fuel mix, UBS said.
“That said, given the substantial tax base and employment supported by nuclear plants, as well as the material increases in capacity/power prices resulting from a retirement, we see real potential for regulatory and political intervention to save plants, particularly in IL & NY,” UBS said.
“We see risk to primarily deregulated assets in New York and Midwest, which suffer from low capacity payments due to over-capacity and structural regulatory interference, in conjunction with low power prices,” UBS said in an analysis dated Jan. 2.
Units at particular risk include Exelon‘s (NYSE: EXC) Clinton unit in Central Illinois, and its Ginna plant (CENG) in upstate New York, as well as Entergy’s (NYSE: ETR) Fitzpatrick and Yankee plants.
“Among our greatest concerns for the US nuclear portfolio into 2013 is the risk of greater Fukushima-related costs,” UBS said.
Increased NRC safety rules resulting from the Fukushima Dai-ichi nuclear disaster in Japan have been relatively modest thus far. The expense could increase, however, if U.S. reactors similar to those at Fukushima are required to install so-called “hardened vents.”
“We await the next update from the NRC on hardened vent retrofits in February, with capital likely to be spent by the NRC’s 2016 target,” UBS said. Additionally, concerns over once-through cooling regulations pervade (albeit with the primary point of contention being around Entergy’s Indian Point plant near New York City.
PPL (NYSE: PPL) has estimated it might need to invest $50m to $60m in 2013 to comply with its initial estimate of Fukushima-related capex for its two-unit Susquehanna plant ($30-40/kW), UBS said.
PPL has also cautioned that “installation of hardened vents would be incremental to this estimate should the NRC ultimately decide such retrofits are required; we understand that these could cost up to $30-40 Mn/unit in a worst case outcome,” UBS said.
Low power prices erode nuclear edge; 3GW of retirements possible
Overall, UBS sees 2013 as another challenging year for merchant nuclear operators, especially as new Fukushima-inspired costs are added.
While the true variable cost of dispatching a nuclear plant remains exceptionally low (and as such will continue to dispatch at most hours of the day no matter what the gas price), the underlying issue is that margins garnered during dispatch are no longer able to sustain the exceptionally high fixed cost structures of operating these units, the firm said.
A chunk of Entergy’s nuclear fleet could be “particularly vulnerable,” UBS said, “given their disproportionate relicensing risk and generally smaller-sized units.”
It added: “We increasingly perceive Vermont Yankee is at risk among the US nuclear portfolio given the state’s repeated attempts to shut the unit down; in particular, we see particular risk should the state succeed in continuing to implement a generator tax of ~$2.50/MWh on the plant.”
“We believe the unit is particularly at risk next year, with the unit potentially not seeing a further refueling,” the firm said.
“We estimate 2-3 GW of nuclear (2-5 plants) as being at risk of retirement in the next several years, as generators re-assess plant viability in the face of weakening balance sheets,” UBS said.