The U.S. nuclear power business is in trouble, and Exelon has six units totaling more than 5,300 MW of dependable capacity on the chopping block. How will the Chicago electricity giant respond? Perhaps by acquiring more nuclear capacity?
Chicago-based Exelon Corp., the largest nuclear power generator in the U.S., is facing what could be the greatest challenge in the company’s history. Exelon confronts the potential shutdown of six operating nuclear generating units at four stations, out of a fleet of 23 units at 14 stations across the country.
This comes after Exelon essentially abandoned coal, selling off its interests in coal-fired generation. In late 2014, the company unloaded its last minority shares in major coal generation, the Keystone (42%) and Conemaugh (32%) plants in central Pennsylvania, once a significant element in its power mix (see sidebar “Exelon’s Generating Fleet”). RTO Insider newsletter commented, “Exelon once had extensive coal-fired generation but has either sold or retired them over the years as it concentrated on new gas-fired generation and its massive nuclear fleet.”
Exelon’s Generating Fleet
According to Exelon’s website, its generation profile today is 64% nuclear, 20% natural gas, 5% hydro, 4% wind, 4% gas and oil, 3% oil, and 1% solar. The company says it has 32,700 MW of owned capacity “comprising one of the nation’s cleanest, lowest-cost power generation fleets.” It does business in 48 states and “has 10 million customers in Delaware, the District of Columbia, Illinois, Maryland, New Jersey and Pennsylvania through its Atlantic City Electric, BGE, ComEd, Delmarva Power, PECO and Pepco subsidiaries.”
The company’s fleet of 23 nuclear units has six plants located in its traditional service territory of Illinois (Quad Cities, Byron, Dresden, Braidwood, LaSalle, and Clinton); six plants in the Middle Atlantic states, all a result of mergers (Three Mile Island, Limerick, and Peach Bottom in Pennsylvania, plus Oyster Creek in New Jersey and Calvert Cliffs in Maryland); and Fort Calhoun in Nebraska (which Exelon operates under contract for owner Omaha Public Power District, although that plant is slated to close by year end for economic reasons).
As it has exited coal generation, Exelon has put considerable emphasis on natural gas, partly as peaking power to coordinate with its 24/7 baseload nuclear capacity but also for baseload and load following. The eight-unit, 352-MW Southeast Chicago Energy Project, for example, is a blackstart simple-cycle turbine plant designed to provide instant power (Figure 3). Similarly, Exelon’s ExTex LaPorte near Houston, Texas, has four combustion turbines, with a combined capacity of 152 MW, designed for peaking service.
Exelon also has been investing in big combined cycle gas plants in Texas. In 2002, the company bought the 1,441-MW Hadley and 893-MW Mountain Creek plants from TXU for $443 million. In 2011, Exelon bought the 704-MW Wolf Hollow plant in Texas (which AES developed in 2003) and broke ground on a 1,000-MW expansion in July 2015. At the same time, it began a 1,000-MW expansion of the 498-MW Colorado Bend station in the Lone Star State. Both projects are combined cycle upgrades and both are scheduled for completion next year.
Other Exelon gas projects include the five-unit, 268-MW Handsome Lake plant in western Pennsylvania, acquired in 2012 as a result of the merger with Constellation Energy; also part of the merger with Constellation was the three-unit, 722-MW combined cycle Hillabee plant in Alabama, which went into commercial operation in 2009. Other gas acquisitions in the Constellation merger were the single-unit, 97-MW Gould Street plant in south Baltimore and the single-unit, 116-MW Westport station, also in Baltimore. In Massachusetts, Exelon is developing the 200-MW, two-unit West Medway simple cycle gas-fired station.
Exelon’s recent nuclear market woes have jeopardized its generation strategy, built years ago around nuclear bidding into competitive merchant markets. The company faces the biggest hit in a nuclear industry that is declining across the country, driven by market economics, market design, the rise of natural gas and renewables, and continued antipathy by many, but not all, national and local environment groups.
“I find it frustrating,” Exelon President and CEO Christopher (Chris) M. Crane told POWER in mid-July. Crane, 57, advanced to lead the company through the nuclear power community and feels the stress on nuclear power personally. “I’ve talked for years about the unintended consequences of policies that incentivize technologies versus outcomes,” he said.
Crane said it has been difficult making the case for the value that nuclear power brings to the country in terms of reliability, zero carbon emissions, and low-cost power.
“I’ve talked for years about the unintended consequences of policies that incentivize technologies versus outcomes.”
—Chris Crane, Exelon President and CEO
In late June, Exelon notified state and federal regulators that it plans to close the 1,098-MW Clinton, Ill., single-unit boiling water reactor (BWR) in June 2017 and the two-unit, 1,880-MW Quad Cities BWR in Cordova, Ill., a year later. According to Exelon, Quad Cities and Clinton (Figure 1) have lost a combined $800 million over the past seven years, “despite being two of Exelon’s best-performing plants.” The plants have been unable to compete in auctions for contracts to supply electricity to competitive markets, losing out to low-cost natural gas and subsidized renewables, particularly wind.
The announcement came after the Illinois legislature this spring failed to enact legislation that would allow Exelon to bid into the PJM and Midcontinent Independent System Operator wholesale markets by way of the markets recognizing the currently unstated value of zero-carbon emissions. “We worked for more than two years to find a solution,” said Crane in a press release announcing the planned closures, “but now it is time to take the necessary steps to retire the plants. We are committed to working with all stakeholders to ensure the plants are shut down in a responsible, safe and transparent way.”
Evolving Nuclear Market Support
But Crane has not given up on getting Illinois to subsidize his money-losing nuclear units. He told POWER that Exelon is continuing to advance its case with key state legislators, staff, and stakeholders. He hopes that the company will be able to bring up the nuclear support issue again when the legislature meets from November 2 through December 2 for a short “veto session.”
The difficulty in Illinois last spring, Crane said, was that the nuclear problem “was not the biggest issue to be resolved in Springfield.” A protracted budget fight was the highest priority and dominated the legislature’s attention. The state faced a severe funding crisis, going into a second year without a budget, portending school closings and major cuts in social service programs. The legislature at the last moment agreed to a stopgap budget, which may not prove lasting.
Also on Exelon’s nuclear life support are three units in New York—the elderly Ginna 610-MW Westinghouse pressurized water reactor near Rochester and the two-unit, 1,761-MW Nine Mile Point BWR station, also upstate.
In the Empire State, Exelon may have better prospects for a governmental rescue. Gov. Andrew Cuomo is pushing a plan to compensate the upstate nukes for their lack of carbon dioxide emissions so they can compete in New York’s wholesale competitive market, the New York Independent System Operator (NYISO). Exelon sent a letter in mid-June to the New York Department of Public Service (PSC) saying it needs to have agreement to the Cuomo subsidy by the end of September or it will close the plants. An Exelon attorney told the PSC that the company “must make critical business decisions by the end of September 2016,” including expenditures on fuel fabrication for a Nine Mile Point 1 refueling in March 2017.
Crane said he was optimistic about Cuomo’s plan, if it can be enacted [which it was on August 1]. It “guarantees a long-term revenue stream” that Exelon believes allows it to plan for the future. “If the program is approved,” Exelon public policy chief Joseph Dominguez said in July, “we will immediately reinvest approximately $200 million in the plants in the spring and continue to operate. If the program is not approved, we need to go in a different direction.”
At the same time, New Orleans–based Entergy Corp. is facing the closure of its FitzPatrick plant in New York, located next door to Exelon’s Nine Mile Point station on Lake Ontario. Entergy has said its decision to close the money-losing plant is firm (see “Entergy Sheds Uneconomic Merchant Nuclear Plants to Focus on Regulated Business” in the April 2016 issue or at powermag.com). Entergy’s intent comes despite Cuomo’s subsidy proposal, which Entergy says is too late.
Exelon’s threatened New York nuclear units and Entergy’s FitzPatrick plant are in NYISO’s market, where auction prices do not reflect any value for lower carbon dioxide emissions. Cuomo’s proposed Clean Energy Standard (CES) attempts to remedy that situation. According to the New York utility regulators’ staff, the cost of the Cuomo plan over the first two years would amount to nearly $1 billion, far in excess of the original estimates.
While Entergy wants out of the NYISO market, the prospect of the New York benefits for the upstate nukes has struck a positive cord for Exelon, including the possibility that it could buy Entergy’s unit if the Cuomo plan comes to life. In a July 13 press release, Crane said Exelon and Entergy are discussing terms of an acquisition of FitzPatrick (Figure 2), although he told POWER it would be premature to discuss them in detail.
“With Governor Cuomo’s leadership, we have an opportunity to rescue and continue to operate a critical power plant that supports thousands of skilled men and women,” said Crane. “The proposed CES program, if approved, will give us the confidence to invest hundreds of millions of dollars in FitzPatrick in January to refuel the plant and upgrade systems needed to reverse the shutdown decision.”
But a deal with Entergy depends on adoption of Cuomo’s plan. That’s up in the air at the writing of this article. Noting that, “we know how to operate nuclear plants,” Crane said, “We are not going to take on any further merchant risks.”
A sale to Exelon would require a time-consuming and possibly daunting series of regulatory hurdles at the Justice Department or Federal Trade Commission for antitrust issues, the U.S. Nuclear Regulatory Commission, the Federal Energy Regulatory Commission, and before regulators in Illinois and New York.
Also on critical life support is Exelon’s 825-MW Three Mile Island unit in Pennsylvania, which, along with Quad Cities, failed to clear the PJM 2019–2020 capacity auction. Crane said, “The capacity market alone can’t preserve zero-carbon emitting nuclear plants that are facing the lowest wholesale energy prices in 15 years.”
Exelon’s Long, Convoluted History
Exelon’s modern history is largely the product of the legendary leader John Rowe during a 14-year period in the late 20th and early 21st centuries. Rowe, often an iconoclast in electric utility circles (he supported cap-and-trade legislation for controlling greenhouse gas emissions, was skeptical of new nuclear, and unloaded coal-fired plants as fast as he could), engineered a series of major mergers that put Chicago-based Commonwealth Edison on the path from a local power to the nation’s largest electric utility.
But the company has deep historical roots. The base of the corporate tree was Chicago’s Commonwealth Edison. The company began, as so many U.S. electric companies did, in the immediate aftermath of Thomas Edison’s Pearl Street Station and the creation of General Electric Co. An early figure, George H. Bliss, started a GE subsidiary to sell small generators and lighting systems in Chicago, serving one or several buildings. Another company with a larger vision bought the company in 1882 with the aim of developing central station electric generation.
Through a series of business moves and acquisitions, that company—Chicago Edison—came under control of Edison’s chief business developer, Samuel Insull, who swept up a number of Chicago electric companies and initiated construction of a 6.4-MW generating station—then the largest in the U.S.—which went into service in 1894. In 1907, the company became Commonwealth Edison (locally known since then as ComEd).
Under Insull’s direction, the company grew, acquired local competitors, and built ever more generation, mostly coal-fired. Then the Great Depression of the 1930s struck the nation, and Insull’s nationwide empire of electric monopolies unraveled. The Encyclopedia of Chicago notes, “Although Insull went bankrupt and fled the country during the Great Depression, Commonwealth Edison survived; after World War II, it received a new 42-year franchise from the city.”
ComEd proceeded along the course of many utilities after the war, consolidating its position in its local market, building considerable generation capacity, particularly nuclear. The company built and operated the first privately financed nuclear plant, Dresden 1, in 1960 (and retired the plant in 1978), the first of an aggressive nuclear construction program that led to the company becoming the country’s leading nuclear generator.
The company’s appetite for newer and bigger nuclear plants nearly brought it to its political and economic knees in the 1980s and into the1990s. The New York Times wrote in 1993, “Commonwealth Edison has embraced nuclear power more fervently than any other electric utility in the nation, and it is best known on Wall Street for the resulting troubles with regulators, consumer groups and environmentalists.”
The Times article continued, “The heavy investments to build 12 nuclear plants piled up debts and saddled customers with some of the highest rates in the nation. The company also paid dearly for long-term coal contracts signed in the 1970’s that linked prices to the general rate of inflation, leaving it with higher fuel bills than its neighbors when coal prices declined.”
The company brought in new management in 1993, cut costs, and worked a rate deal with Illinois regulators. The creation of competitive wholesale markets came on the U.S. scene as a result of the Federal Energy Regulatory Commission’s Orders 888 and 889 in 1996, causing a sea change for conventional electric utilities. ComEd had seen the coming tidal wave, created a (brief) new holding company called Unicom, and began reassessing its operations. In 1997, Illinois passed a law that drove utilities to divest their generating assets in separate operations (although still owned and largely controlled by the utilities) and required them to bid their power into wholesale markets.
In 2000, Unicom bought Philadelphia’s monopoly utility, PECO, and became Exelon. That was the point at which John Rowe entered the Exelon scene, after having served as the CEO of New England Electric System and Central Maine Power. Rowe first served in 2000 as co-CEO with PECO’s Corbin McNeill as part of the merger deal (that didn’t work). He soon became the sole decider at Exelon.
Under Rowe’s leadership—he retired in 2012—the company acquired Baltimore’s Constellation Energy, the nation’s largest supplier of commercial and industrial customers, as well as a large residential load in Maryland, ranging from north of Baltimore, into the city itself, and including large portions of the Maryland suburbs of Baltimore and Washington, D.C. He also set in motion the successful acquisition of Pepco Holdings, parent of the Washington, D.C., utility, which also serves most of the surrounding suburbs, and utilities in New Jersey and Delaware. That deal closed in 2016, under Crane’s leadership.
Crane took the top Exelon job after serving as Rowe’s chief operating officer. He joined the company (then ComEd) in 1998 and was named chief nuclear officer in 2004. He assumed direction of all of the company’s generating assets in 2007. Before joining the Chicago utility, Crane was Browns Ferry site vice president for Tennessee Valley Authority and worked in new plant start-up at the Comanche Peak Nuclear Power Plant in Texas and Palo Verde Nuclear Generating Station in Arizona.
Technology Is Changing, Markets Not So Much
As Exelon prepares for the future, Crane says he sees renewables making a big impact. “Renewables will be a critical part, a larger part in the future,” he said. “Technology is advancing faster in this sector than I’ve seen in my career.” Renewables particularly make sense if economic large-scale storage becomes available. “We really have an eye on what life after lithium ion will look like. I don’t know if it’s one decade or two decades away, but it is coming.”
“Renewables will be a critical part, a larger part in the future. Technology is advancing faster in this sector than I’ve seen in my career.”
—Chris Crane, Exelon President and CEO
Exelon is also betting on the smart grid. “We put in 7.4 million smart meters, and that’s had massive economic benefits,” Crane said. Exelon will invest $18 billion in the smart grid by 2020, according to the company’s 2015 sustainability report, released last July. In a message accompanying the report, Crane said, “During 2015 at our legacy utilities—BGE, ComEd and PECO—we invested $3.7 billion to make the grid smarter, more reliable and more resilient. These utility investments will continue, with an estimated additional $18 billion to be invested from 2016 to 2020.”
Exelon sees smart grid technologies working along with distributed generation, particularly with community solar. The utility sees community solar as much more cost effective than individual rooftop installations, as well as offering a way to bring solar to customers who are renters or where rooftop solar won’t work.
Exelon is also bullish on microgrids as a way to provide reliability of key services during both natural outages and possible hostile attacks on the grid. The Illinois legislation approving smart grid spending also included approval for ComEd microgrid projects, with a price tag of $300 million. Among them are ComEd’s 17-MW Chicago Rockford International Airport microgrid, some 90 miles northwest of Chicago, and a project to tie into an existing Illinois Institute of Technology (IIT) microgrid, in the Bronzeville community. (For an interactive view of the IIT microgrid, see http://www.iitmicrogrid.net/microgrid/index_all.htm.)
Crane said the Bronzeville project would connect a local hospital, gasoline stations, food vendors, and a major police station into the university’s microgrid. He noted that the 2012 “Superstorm Sandy” event in the Northeast crippled much of the response to the storm by taking out electricity that served gas stations, so the pumps wouldn’t work. “We can’t turn the whole grid into micros,” he said, “but we can identify some critical areas that we can island. That’s well worth pursuing.” In a press release, ComEd said, “Microgrids help improve grid resilience and security by lowering the impact of power outages due to severe weather, security, or other disruptions.”
Coal is not on Exelon’s future agenda. “I do not see coal coming back,” Crane said. “The technology has not advanced; the back end looks cost-prohibitive.” He noted that the pilot projects now under way are not performing well, jeopardizing any future economic prospects.
“I do not see coal coming back. The technology has not advanced; the back end looks cost-prohibitive.”
—Chris Crane, Exelon President and CEO
In the future, said Crane, “Technology is changing and the desires of customers are changing. We have to be in front of those changes.” The challenge is “making sure the regulatory compacts continue to advance” from their historical emphasis on volumetric rewards toward more of an infrastructure-based regulatory system.
In a national market that is half competitive and half conventionally regulated, is there any movement of market design in either direction? Here, Exelon is not very optimistic. “I see some design changes in competitive markets to support long-term resources,” Crane said, pointing to Cuomo’s plan and some changes in the PJM Interconnection’s capacity markets. In regulated markets, he said, “We are starting to see some adjustments” to recognize the value of long-term assets.
Overall, Crane said he doesn’t see “revolutionary” change in electricity market designs “on either side. It’s difficult to put the genie back in the bottle. I just see enhancements going forward.”
—Kennedy Maize is a long-time energy journalist and frequent contributor to POWER.
[This article will also appear in the September 2016 print issue of POWER. The word “merchant” in the teaser was deleted July 27 because Exelon clarified that if the deal for FitzPatrick goes through, it would not be operated as a merchant plant. Updated Aug. 4 to reflect approval of New York’s Clean Energy Standard.]