Retired Duke reactor may signal more U.S. nuclear shutdowns

NEW YORK/HOUSTON Wed Feb 6, 2013 4:45pm EST

Crystal River Nuclear Generating Plant, Unit 3, located 80 miles north of Tampa, Florida, is shown in this undated Nuclear Regulatory Commission photograph. REUTERS/Progress Energy/NRC/Handout

Crystal River Nuclear Generating Plant, Unit 3, located 80 miles north of Tampa, Florida, is shown in this undated Nuclear Regulatory Commission photograph.

Credit: Reuters/Progress Energy/NRC/Handout

NEW YORK/HOUSTON (Reuters) - A decision by Duke Energy Corp to retire rather than repair its damaged Crystal River reactor in Florida may signal the shutdown of other older U.S. nuclear plants as weak natural gas prices make significant investment in them uneconomical.

While energy analysts said the circumstances surrounding Duke's decision were unique to that plant, decade-low electric prices, especially in deregulated states where the market sets power rates, make it difficult to support costly upgrades on reactors when building gas-fired units is much cheaper.

"It is a tough economic environment in the electricity market due to the glut of natural gas, particularly for those that operate in a deregulated environment," said Tony Pietrangelo, chief nuclear officer of industry trade group Nuclear Energy Institute (NEI).

Profit margins for nuclear operators in deregulated markets have decreased over the last few years due to lower power prices and weaker growth in demand since the recession, he told Reuters.

Duke, the largest U.S. power company, said on Tuesday that it would retire the Crystal River reactor, which has been shut since 2009, due to rising repair costs and uncertainty about how long it would take to fix a series of cracks in the walls of the reactor containment building.

One Duke report found the repair bill for the 860-megawatt (MW) reactor might exceed $3 billion and take up to eight years. By comparison, it would cost about $1 billion to build a similar-sized gas-fired plant in about three years.

Duke said it is considering the construction of a new combined cycle gas plant, among other alternatives, to replace the power produced by Crystal River for its more than 1.6 million customers in Florida.

"You can buy replacement power much more cheaply today than in the past, and you can install replacement capacity very cheaply, in the form of a combined-cycle plant," said Sanford C. Bernstein senior analyst Hugh Wynne.

Nuclear plants were extremely profitable when gas prices soared in the mid-2000s. The situation reversed course, though, as gas prices began to slump due to a boom in shale production that drove supplies to record highs. The average gas price sank to a 13-year low in 2012.

"Gas prices have gotten so low they are challenging the nuclear portfolio," said UBS energy analyst Julien Dumoulin-Smith. "It's getting tougher for nuclear to compete."

GAS IS CHEAP

Those weak gas prices helped pull power prices to near-decade lows, making it uneconomical for many generators to invest in their older plants - especially coal-fired units - to keep them compliant with stricter federal environmental regulations.

Since 2009, power companies have announced plans to shut more than 40,000 MW of coal-fired capacity in the coming years, and nuclear plants are next.

The Kewaunee reactor in Wisconsin is the first nuclear unit to succumb, as owner Dominion Resources Inc plans to shut it this year, partly because of pressure from shale gas.

UBS's Dumoulin-Smith has identified other reactors in danger of shutting, including Entergy Corp's Vermont Yankee in Vermont and FitzPatrick in New York, Exelon Corp's Clinton in Illinois and Constellation Energy Nuclear Group LLC's Ginna in New York.

These older reactors operating in deregulated states will find it harder to compete, Dumoulin-Smith said, due to high fixed costs compared with gas plants, expensive safety upgrades needed to implement lessons learned from the Fukushima accident in Japan, and stricter cooling water rules, among other things.

The total capacity of those four units, plus Kewaunee and Crystal River, is about 4,500 MW, which is about 4 percent of the nation's nuclear capacity.

New reactors under construction at Southern Co's Vogtle plant in Georgia, Scana Corp's Summer in South Carolina and Tennessee Valley Authority's Watts Bar in Tennessee would more than offset the lost capacity when they enter service over the next several years.

'THE PRICE RULES'

Pietrangelo at NEI, however, said those reactors, including Kewaunee, are running well without producing greenhouse gas emissions and are the low-cost producers in their regions.

"One of the attributes of deregulated markets is 'the price rules,' and they don't value nuclear like regulated markets do," Pietrangelo said.

"When you are not properly valued, it leads to purely economic decisions and ... a closing can happen," he said, noting that this was what happened to Kewaunee.

Entergy does not comment on the financial performance of individual reactors, said spokesman Rob Williams at Vermont Yankee. "We remain fully focused on the safe operation of our plants today and into the future," he said.

Exelon is not considering closing any nuclear plants, including Clinton, spokesman Krista Lopykinski said. "We do not change our long-term investment decisions based on short-term market fluctuations," she added.

Exelon owns about half of Constellation, which did not immediately respond to a request for comment.

ONOFRE NEXT?

Nuclear critics are also calling for the retirement of the troubled San Onofre nuclear station in California, operated by a unit of Edison International.

Opponents recently "celebrated" the first year that the state grid operated without the 2,150-MW nuclear plant. Both reactors have been shut since January 2012 due to accelerated wear that affected thousands of tightly packed tubes inside new steam generators.

Operator Southern California Edison has proposed a plan to restart San Onofre Unit 2, but warned that more severe damage found in Unit 3 might require a longer, costlier repair. The company did not immediately respond to a request for comment for this story.

Bernstein's Wynne said a utility must weigh many factors, not just the price tag of the repair, in deciding whether to fix or shut a plant, including a reactor's age, whether its 40-year license has been renewed, its location and market structure.

"Each of these decisions with respect to retirement is pretty much related to the individual characteristics of the plant and the costs of keeping them in service," said Wynne.

Lower gas prices may make the choice between a risky repair and a costly upgrade even harder.

(Additional reporting by Joe Silha in New York, Editing by Lisa Von Ahn)

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