ISO-NE: Don't blame the market for Vermont Yankee retirement

ISO New England don't blame market Vermont Yankee nuclear power plant Entergy Dominion Kewaunee Duke Energy Crystal River SCE Edison International SONGS San Onofre

By Wayne Barber, Chief News Analyst, GenerationHub

While the retirement of the Entergy (NYSE:ETR) Vermont Yankee nuclear plant will make New England more reliant on generation from natural gas, ISO-New England (ISO-NE) says the regional market isn't necessarily the villain.

This appeared to be the crux of an ISO-NE statement released Aug. 27 hours after Entergy announced plans to close the 600-MW single-unit boiling water reactor in late 2014.

Entergy said in its statement that “artificially low” energy and capacity prices were a major factor in the plant's retirement - despite a 20-year license extension from NRC and legal victories over Vermont's efforts to shut the plant down.

Furthermore, an Entergy official told GenerationHub in a phone interview that ISO-NE rules and regulations have effectively capped prices and he doesn't consider the ISO a true competitive market.

While not directly referring to Entergy's criticism, ISO-NE said the market isn't necessarily the bad guy.

“Although the ISO, as the administrator of the region's wholesale electricity markets, does not favor any fuel or technology, the retirement of this large nuclear station will result in less fuel diversity and greater dependence on natural gas as a fuel for power generation,” ISO-NE said.

“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,” ISO-NE said.

The ISO is working with stakeholders to develop potential 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.

Natural gas generated more than 52% of electricity produced in New England last year, while nuclear accounted for 31%, ISO-NE said. ISO-NE said it lacks authority to prevent a power plant from retiring.

“With falling natural gas prices, wholesale electricity prices in New England fell in 2012 by nearly 23%, to their lowest levels since 2003, when markets in their current form were launched.” ISO-NE said.

“These fundamental economic dynamics demonstrate that these markets are competitive,” ISO-NE said. The ISO also said that while customers like lower prices, “resource owners must base their business decisions on whether to continue to compete based on their specific circumstances.”

At 600 MW, Vermont Yankee is one of the region's largest power plants and one of four baseload nuclear stations serving New England.

Consultant cites many factors in VY decision

ScottMadden Partner Chris Vlahoplus told GenerationHub that many variables played into the Entergy decision to idle this “small single” nuclear plant.

“While there are some New England market design attributes that contribute to lower capacity and energy prices, market fundamentals are causing this as well,” Vlahoplus said.

“Sluggish demand and high reserve margins are driving down capacity market prices - it is simply too much supply and not enough demand,” Vlahoplus said.

“Designing a real capacity market for electricity has proved elusive for several reasons,” the ScottMadden consultant added.

“Even with FERC-led reforms, rolling 3-year auctions just do not sync with 20+ year investments. New England has had an auction-based forward capacity market, and in each of the first six auctions (covering 2010 to Spring 2014), capacity has cleared at the floor price, ostensibly because of surplus capacity,” Vlahoplus said.

“Generators are dissatisfied because in New England, unlike PJM, there is no locational distinction in pricing,” the consultant added.

Geographic quirks also played a role, Vlahoplus said.

“New England is increasingly dependent upon natural gas, which is taking its toll on margins to competing generation as elsewhere,” Vlahoplus said. “Meanwhile, just north, the Atlantic provinces are expanding hydro production and transmission capabilities, which may also work to suppress prices,” he added.

“And while ISO-NE has been working to modify its capacity market to meet some FERC directives (like instituting a minimum offer price rule), continued tweaking of the rules and the continuing issues PJM is having with its markets (as a bellwether), may have led Entergy to deem revenues for the plant too uncertain to warrant its continued operation.”

Vermont officials mostly pleased with news

“Entergy's announcement today confirms what we have known for some time,” said Vermont Gov. Peter Shumlin. “Operating and maintaining this aging nuclear facility is too expensive in today's world. Vermont utilities no longer have contracts with Vermont Yankee, and our regional grid is not reliant upon it for stability,” Shumlin said.

The governor added that he grew up in Windham County and knew the closure would result in “significant upheaval for the region, and for the state as a whole.”

Vermont Lt. Gov. Phil Scott devoted his prepared statement entirely to the economic impact. “High-paying jobs are few and far between in Vermont; we now run the risk of seeing many highly skilled employees who work at Vermont Yankee leave our state,” Scott said.

Sen. Patrick Leahy, D-Vt., focused on the safety of Entergy's decommissioning plan. Entergy has said that they intend to employ the “SAFSTOR” approach, meaning they intend to mothball the plant, largely intact, for years before cleanup is fully addressed, Leahy said.

Leahy said quickly launching the decommissioning would best ensure that work continues for the plant staff beyond the 2014 shutdown date.

Vermont Yankee becomes latest nuclear unit to fall

Four U.S. nuclear plants have either closed or announced plans to retire in the recent past.

They are the Dominion (NYSE:D) Kewaunee plant in Wisconsin; the Duke Energy (NYSE:DUK) Crystal River 3 plant in Florida; the Edison International (NYSE:EIX) San Onofre Nuclear Generating Station (SONGS) station in Southern California and now Entergy's Vermont Yankee. Kewaunee is probably the one that has the most in common with Vermont Yankee, being a small, single-unit merchant generation plant.

Wall Street analysts such as UBS Investment Research have indicated nuclear plants such as Entergy's FitzPatrick plant in Oswego County, N.Y.; and the Exelon (NYSE:EXC) Clinton plant in Illinois and the Constellation Energy Nuclear Group (CENG) R.E. Ginna Nuclear Power Plant in Ontario, N.Y., and CENG's Nine Mile Point Nuclear Station in Scriba, N.Y. (The CENG plants are being integrated into the Exelon fleet. Exelon is already owner of Constellation and has agreed to buy out the ownership interest of France-based EDF Group in the CENG plants).

An Entergy official said Aug. 27 that the company still plans to refuel its FitzPatrick nuclear plant in 2014.

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