New York (Platts)--9Jan2013/323 pm EST/2023 GMT

This will be a challenging year for merchant nuclear generation and as many as 3,000 MW of reactors, or nearly 3% of the 101,350-MW US fleet, could be at risk of retirement, according to a UBS Securities analyst.

The sector faces twin challenges of regulatory mandated investments and a low power price environment as a result of cheap natural gas, analyst Julien Dumoulin-Smith said in a report released late on Tuesday, but dated January 2.

While the variable costs of nuclear plant dispatch remain low, and will continue to do so, tight margins in a gas-driven market are no longer able to support nuclear operators' "exceptionally high" fixed cost structures, Dumoulin-Smith said.

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Fixed costs for nuclear plants are four to five times the costs for a coal plant of a similar size, and maintenance costs of about $50/kW-year coupled with rising nuclear fuel costs will "impede" economic viability and limit free cash flow for merchant nuclear generators, Dumoulin-Smith said.

And while nuclear fuel costs are still "relatively insignificant," Dumoulin-Smith expects them to move to $8-9/MWh eventually, from an historical level of $5-6/MWh.

On the regulatory front, the US nuclear fleet is at risk of having to shoulder higher capital expenditures to comply with post-Fukushima safety upgrades expected from the Nuclear Regulatory Commission in February. He estimates costs of about $15 million per reactor to upgrade vents with a worst case scenario of $30 million-$40 million per reactor.

In addition, updated once-through cooling regulations being drawn up by the Environmental Protection Agency will likely take a toll on the fleet, he said, though he did not quantify that impact.

Overall, Dumoulin-Smith estimated that 2,000 MW-3,000 MW of nuclear plants could be at risk of retirement over the next several years.

Dumoulin-Smith said Dominion's 556-MW Kewaunee plant in Carlton, Wisconsin, may be the "canary in the coal mine" for merchant nuclear plants. Dominion in October said it planned to close the plant in the second quarter after efforts to sell it failed.

The nuclear plants most at risk of retirement, according to Dumoulin-Smith, belong to Entergy and Exelon. They are Entergy's 838-MW James A. FitzPatrick plant in Scriba, New York, and its 605-MW Vermont Yankee plant in Vernon and Exelon's 1,065-MW Clinton plant in central Illinois and the 580-MW R.E. Ginna plant in Ontario, New York.

COMPANIES RESPOND

Ginna is owned by Constellation Energy Nuclear Group, a joint venture 50.01% owned by Constellation Energy and 49.99% owned by EDF. Exelon bought Constellation Energy in March 2012.

Those plants share several characteristics that make them vulnerable, including their relatively small size and the fact that they operate primarily in deregulated markets in New York and the Midwest, which suffer from low capacity payments as a result of surplus capacity and "structural regulatory interference," Dumoulin-Smith said.

Exelon spokesman Craig Nesbit, in an email Tuesday, said the company is not considering closing any of its nuclear plants, including Clinton, at this time. The company is continuing to invest in its nuclear plants "to ensure that they operate safely and efficiently for as long as they practically can," Nesbit said.

Exelon' nuclear fleet is "a low-cost and extremely competitive set of long-term assets, and we avoid shifting our long-term investment decisions based on short-term fluctuations in natural gas prices," Nesbit said.

CENG, in an emailed response for comment Wednesday, said that although the current low energy prices do negatively affect the profitability of Ginna, it continues to positively contribute to its shareholders, Exelon and EDF.

"We do not currently have plans to shut down any units prior to the end of their operating licenses," the company said. "Any decision to prematurely shut down a unit would be made through the normal CENG oversight and governance process and would require the approval of both Exelon and EDF."

In an email Tuesday, Entergy spokesman Michael Burns said, "As a matter of policy, Entergy does not comment on the financial performance of individual plants."

But given their importance in providing tax revenues as well as baseload power, any potential nuclear retirement could face regulatory and political intervention, Dumoulin-Smith said, particularly in Illinois or New York.

But for Entergy or Exelon early retirement of some nuclear plants could be accretive to near year earnings, he said and could bolster aggregate cash flows as they adapt to the lower gas price environment.

--Peter Maloney, peter_maloney@platts.com
--Steven Dolley, steven_dolley@platts.com
--James Ostroff, james_ostroff@platts.com
--Edited by Richard Rubin, richard_rubin@platts.com

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