EIA: "quark" spreads for nuclear operators put pressure on profits

quark nuclear profits Energy Information Administration

By Barry Cassell, Chief Analyst, GenerationHub

Low wholesale power prices lately are putting profit pressure on nuclear power plant operators due to compression of "quark" spreads—which are a measure of the potential profitability of nuclear power plants, said the U.S. Energy Information Administration on April 24.

Quark spreads – which are like the dark spreads used in relation to coal-fired power plants - have fallen in recent years largely because of falling wholesale electricity prices. A quark spread is the difference between the wholesale electricity price received by a nuclear plant owner and the cost of its fuel. Since 2012, quark spreads in the Midwest and the Mid-Atlantic have ranged between $10 to $35 per megawatthour (MWh), EIA said in the April 24 edition of its Today in Energy feature. Lower natural gas prices have contributed to lower wholesale electricity prices.

The dictionary meaning of quark is any of a group of subatomic particles thought to be among the fundamental constituents of matter—more specifically, of protons and neutrons.

There are two key differences between quark spreads and spark spreads or dark spreads, EIA noted:

  • Nuclear fuel costs are more stable than fossil fuel costs. Natural gas costs, and to a lesser extent coal costs, experience more short-term volatility than nuclear fuel costs.
  • Nuclear power plant fuel costs are typically much lower on a $/MWh basis than coal or natural gas plant fuel costs: in 2011, the estimated average national fuel costs for coal and natural gas plants were $25/MWh and $36/MWh, respectively. In contrast, the national average cost of nuclear fuel was $6/MWh. As a result, given the same wholesale electricity price, nuclear power plants generally produce more revenue net of fuel cost on a dollar-per-megawatt basis than coal- or natural gas-fired plants, EIA said.

Wholesale electricity prices in the Mid-Atlantic and Midwest regions depend primarily on the cost of fuel used by the marginal (highest cost) generating unit. This is typically a natural gas-fired unit in the Mid-Atlantic and a coal unit in the Midwest. Given the relatively low cost of nuclear fuel, nuclear units always operate at baseload. Changes in wholesale electricity prices directly drive changes in quark spread values.

“Natural gas and coal spreads are typically calculated based on daily or weekly spot prices for the underlying fuels, while for the purposes of this analysis, nuclear fuel costs are calculated on an annualized basis,” EIA said. “Because nuclear power plants are always operated as baseload, their fuel prices can be more easily annualized.”

Because wholesale electricity prices tend to be higher in the Mid-Atlantic region than in the Midwest, nuclear power plants in the Mid-Atlantic typically have higher quark spreads. Average monthly wholesale electricity prices were significantly higher in 2007 and 2008 than they were in 2011 and 2012, especially in the Mid-Atlantic. Therefore, the quark spread for a nuclear plant in the Mid-Atlantic in 2007 was higher than it has been recently, EIA pointed out.

As with dark (coal) and spark (natural gas) spreads, the quark spread calculation does not take into account other costs associated with the generation of electricity, such as routine operating and maintenance (O&M) costs or long-term capital investment. It also doesn't take into account other sources of revenue such as capacity market payments. In that way, a quark spread is an indicator of market conditions, but it is not necessarily an exact measure of profitability for any one nuclear power plant.

“The recent narrowing of quark spreads may affect investment decisions for plants that anticipate major capital expenditures or increasing O&M costs in the near future,” EIA wrote. “Nuclear plants owned by vertically integrated utilities under cost-based state regulation may be in a better position to recover increases in plant expenses by passing them through directly to ratepayers, after approval by the state public utility commissions. In contrast, merchant plants are more directly reliant on the wholesale electricity market for the revenue necessary to recover these costs.”

Non-utility nuclear economics have been facing pressure lately. Dominion Resources (NYSE: D) plans the May 7 shutdown of the merchant Kewaunee nuclear plant in Wisconsin in part due to problems with wholesale market pricing. So the effect that EIA is talking about exists in the real world of nuclear plant operations.

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