Can New England's energy market survive the fracking revolution?
BRATTLEBORO -- During a press conference on Aug. 27 announcing the closure of Vermont Yankee nuclear power plant in Vernon, Bill Mohl, the president of Entergy Wholesale Commodities, said the decision to stop producing power at the plant was based on the economics of the plant, and not operational performance, litigation risks or political pressure.
"Simply put, the plant costs exceed the plant's revenues and this asset is not financially viable. Despite its excellent track record, Vermont Yankee is a single, small-unit nuclear station operating in a very challenging marketing environment."
Most challenging for Yankee was competition from producers using natural gas to power turbines to create electricity. Due to advancements in hyrdraulic fracturing, extraction companies have been able to exploit reserves in the Marcellus Formation, driving down the price of natural gas.
From 2003 to 2012, wholesale prices fluctuated between $48.59 per megawatt hour to $36.09 a megawatt hour, it hit a high of $80.56 in 2008, dropped to $46.68 in 2011 and then $36.09 in 2012.
Julien Dumoulin-Smith, an energy markets analyst for UBS, said he was not surprised by Entergy's decision. Earlier this year, Dumoulin-Smith had released a report stating the plant simply could not compete in the wholesale market.
"This plant almost had no chance given how low natural gas prices have gone," he told the Reformer, shortly after Entergy's announcement.
Dumoulin-Smith said Yankee's retirement is a watershed moment for the nuclear industry.
"This is not a random event. This is a leading indicator of a potential widespread retirement of nuclear reactors in this country," said Dumoulin-Smith. "It is a bellweather."
But more importantly, he said, the closure is indicative of the "critically flawed" nature of the New England power supply system, in that it has no ability to set appropriate price signals in order to retain power production assets such as Vermont Yankee.
"You have power prices that are tied to a commodity index that is irrelevant and disconnected from the underlying power supply demand. You have a very grim outlook for power generators in New England."
ISO New England, operator of the region's high-voltage power grid and wholesale electricity markets, is attempting to address the concerns of Dumoulin-Smith and other analysts who have questioned the ability of New England's power generators to adapt to the fluctuations in the power market.
Though Yankee supplied only 4 percent of the power that is consumed in New England, overall, nuclear generation produced 31 percent of the region's electricity in 2012.
"The retirement of (Vermont Yankee) will result in less fuel diversity and greater dependence on natural gas as a fuel for power generation," stated a press release from ISO New England. "The ISO has identified New England's dependence on natural gas for power generation and the potential retirement of generators as key strategic risks, and is developing solutions to address these and other strategic challenges."
Natural gas generated more than 52 percent of the energy produced in New England last year, and the price of natural gas has declined significantly. With falling natural gas prices, wholesale electricity prices in New England fell in 2012 by nearly 23 percent, to their lowest levels since 2003, when markets in their current form were launched.
Lower natural gas prices have resulted in lower electricity prices and less revenue for energy producers, while excess supply has dampened prices in the capacity market.
"While lower prices are beneficial for consumers, resource owners must base their business decisions on whether to continue to compete based on their specific circumstances," stated the press release from ISO New England.
In addition to the closure of Yankee, the current market is pushing other older, fossil-fuel-fired generators toward retirement, which will only increase the region's dependence on natural gas.
"The ISO is working with market participants and the New England states to develop potential market enhancements, including a pay-for-performance market mechanism that will create strong financial incentives for generators to assure that they have adequate fuel arrangements to be able to produce electricity when called on by the ISO," stated the press release.
Dumoulin-Smith recognized ISO New England's efforts to address the flawed nature of the power production system in New England, but whatever policy ISO settles on still has to be approved by the Federal Energy Regulatory Commission, which may take several years.
And the next couple of winters could prove critical to the grid because creating a dependency on natural gas raises other concerns, said Dumoulin-Smith.
"Is there an adequate natural-gas infrastructure to feed these plants? Many reports indicate no."
This might become disturbingly clear during the next two winters, when power demand spikes, he said.
"There is no effective policy in place to allow consumers to pay for new pipes to get this into the market," said Dumoulin-Smith.
A pay-for-performance market enhancement would create strong financial incentives to power generators to assure electricity would be there when the demand is the greatest, said Ellen Foley, spokeswoman for ISO New England.
"We are going to ask generators to set up contracts with the natural gas companies or develop dual-fuel types of arrangements or develop contracts with storage facilities," said Foley.
She disagreed with Dumoulin-Smith's contention that the market is failing to send appropriate price signals to generators and that signal is "lower prices mean lower revenues."
"These are economic forces," said Foley. "And they will only increase the region's dependence on natural gas, which we have identified as a challenge."
In addition, the New England grid has excess supply, which has also dampened prices, said, and because lower natural gas prices have resulted in less revenue for power producers, they are hesitant to construct new power-generation facilities, she said.
"That may be beneficial to the customer, but power plant owners have to base their business decisions on whether they want to continue to compete based on specific circumstances," said Foley.
Bob Audette can be reached at firstname.lastname@example.org, or at 802-254-2311, ext. 160. Follow Bob on Twitter @audette.reformer.
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