8/22/15 - CRAIN'S: Exelon's case for how poorly its nukes are doing

By STEVE DANIELS

For the first time, Exelon is pulling back the curtain on the deteriorating economics at its Illinois nuclear plants.

In a bid to build more support for subsidies financed by rate payers, the state's largest power generator provided Crain's with its most detailed look at the financials of the company's six Illinois nuclear stations. Altogether, they are profitable but may not be in the near future, Exelon Executive Vice President Joseph Dominguez says in an accompanying interview.

The Chicago-based company learned on Aug. 21 that it will receive substantially higher revenue beginning in 2018 from increased consumer payments to power-plant owners for their promise to produce during high-demand periods. Even so, wholesale power prices in northern Illinois have fallen to such a point that the entire Illinois fleet could be unprofitable during the next few years, Dominguez says. He backs up his claim with the first hard numbers that Exelon has offered to date.

“Like any other business, we need to earn a return,” he says. “We're not a nonprofit entity.”

Exelon shareholders agree. Wall Street analysts want the company to shutter money-losing plants in Illinois if it can't get financial relief from the state.

To be sure, Exelon's analysis is a snapshot in time and easily could change, given its reliance on future pricing. In fact, the company is predicting things will get better in a few years. Exelon CEO Chris Crane told analysts last month that northern Illinois prices are “nonsustainable at this level.” The company expects them to rise materially by 2018. That would move Exelon's fleet into the black without state help.

In addition, Exelon sells much of the output from its nukes ahead of time, so the prices they actually fetch will be somewhat above where the market is today. Its Illinois nukes already have sold at least 72 percent of 2016 output and 38 percent of 2017 output, according to company disclosures.

Still, Exelon's increased transparency better supports its request for what critics have termed a bailout. The utility floated legislation last spring that would slap a surcharge on virtually all electric bills in Illinois and funnel most of the $300 million the charge would produce to its nukes. The bill went nowhere in the spring session as budget issues consumed Springfield.

But Exelon will be back to push the measure in the fall and, if necessary, next year. In the meantime, it will put more pressure on lawmakers with the expected announcement next month that it's taking initial steps to shutter its Quad Cities plant, which the company says has lost more than $300 million over the past six years. Also in the crosshairs: Exelon's Clinton plant, which Crane said under oath this year had lost $100 million in 2014 alone.

DOING THE MATH

Here is Exelon's math, according to Dominguez.

Five of its six Illinois nukes are dual-unit stations with costs that are roughly the same—$33 to $34 per megawatt-hour of electricity produced.

For nukes, costs consist of labor, scheduled maintenance and outages, fuel, capital spending, corporate overhead (legal, human resources, etc.) and the substantial property taxes paid to host communities. In addition, these plants budget for costs due to unanticipated outages, which contribute to Exelon's figure.

At Exelon's plant in Clinton—a single-unit generator between Peoria and Springfield—costs run higher, at $38 to $39 per megawatt-hour.

Revenue comes mainly from two sources. The first is energy prices paid by utility customers and businesses. The second is “capacity” charges covered by all consumers and set via a yearly auction of power generators conducted by PJM Interconnection, the power-grid administrator for northern Illinois and all or parts of 12 other states and the District of Columbia.

Round-the-clock energy prices right now for 2016 and 2017 are a little over $30.50 per megawatt-hour. That's down from about $33 a year ago for those time frames. Capacity prices are on the rise thanks to auction changes PJM has engineered to increase them. The capacity price Exelon will get for the year beginning June 1, 2018—which PJM announced Aug. 21—is $215 per megawatt-day, which translates to about $9 per megawatt-hour.

Add $30.50 to $9, and most of Exelon's plants can expect to see revenue of at least $39.50 per megawatt-hour beginning in mid-2018. The company didn't say Aug. 21 which of its plants qualified for payments. Execs said previously that they expected Quad Cities would bid too high to qualify. Byron is a question mark. And Dresden, LaSalle and Braidwood were expected to qualify. Clinton isn't in the PJM region and so isn't eligible.

The higher capacity payments, which hit all businesses and residents, will hike annual electricity costs for the average household by more than $70.

But that's not the end of the analysis. Each nuke has to pay to move its megawatts through various congestion points on the power grid. Those costs, which are quantifiable, are much higher for some plants than for others.

The two plants Exelon consistently has said are losing money each year are Quad Cities and Clinton. Not coincidentally, their congestion costs are by far the highest of any of the Illinois plants.

So Quad Cities paid nearly $10 per megawatt-hour in such costs last year and is projected to pay $9.60 this year. Making matters worse, Quad Cities bid too high to qualify for capacity payments, so it isn't getting any beginning in 2017. Looking at net revenue of around $22.50 per megawatt-hour beginning in 2017, Quad Cities stands to lose $11 per megawatt-hour—about $170 million.

'QUITE PAINFUL'

Small wonder, then, that Quad Cities' demise is looming. Dominguez met with plant employees in mid-August to give them the bad news. Though Quad Cities' troubles have been apparent for some time, “it's still quite painful for them to hear that the decision's right around the corner,” Dominguez says.

Exelon has identified its Byron plant as a money-loser in the past, but if it cleared the PJM auction it will come out a modest money-maker thanks to the higher capacity payments. Byron stands to reap profits of around $26 million even if future energy prices remain this low.

Exelon's Dresden, LaSalle and Braidwood plants, which are closer to Chicago, will continue to make money. All three have much lower congestion costs, from less than $1 to $2.50 per megawatt-hour. With the windfall from the capacity increase, their 2018 profits plus Byron's (if it cleared) appear essentially to offset losses at Quad Cities and Clinton.

The final wrinkle: Exelon's terrible forecast for Quad Cities may well be relieved somewhat by Commonwealth Edison's new Grand Prairie Gateway transmission line under construction and scheduled to be in service in 2017. The line is designed to relieve power-grid congestion from the west, assisting both Quad Cities and Byron.

If congestion costs at those plants come down to levels at Dresden, LaSalle and Braidwood, Byron's profits would increase by $48 million or so, and Quad Cities would lose around $70 million rather than $170 million. So the fleet easily would be profitable without state help.

In a statement, Exelon says the new line would alleviate some of the congestion at Byron but provide “very minor” relief to Quad Cities. It says much of that relief already was reflected in forward pricing.