A Milestone in the US Nuclear Industry

Written by Weekly Market Update | May 2, 2024 5:57:15 PM

Energy Markets Update

In this newsletter, we cover the factors you need to know impacting US energy markets as well as cost increases at Everett LNG, the present and future of nuclear power, IRA tax credit transferability, gas and coal-fired plant restrictions, and MISO capacity prices.

Weekly Natural Gas Inventories

The US Energy Information Administration reported last week:

59 Bcf increase in US natural gas storage
87.8 Bcf the five-year average injection for May
2,484 Bcf total US natural gas in storage last week
- 21.3% higher than last year
- 34.9% higher than the five-year average

US Energy Market Update

A summary of recent changes and important information about the US energy markets.

This week, prompt month futures for NYMEX natural gas topped the $2/MMBtu threshold for the first time since February. This is still below the breakeven production price, even in the most efficient basins, however, it's also the first telltale sign of the pending price correction we have been anticipating.
The move above $2.00 is playing out later than most traders had expected, no doubt. Producers have been shutting in supply for months now and it hasn’t been making an impact on national storage levels. Daily US natural gas production is now below 100 Bcf/d, down from a peak of over 105 Bcf in December. We should expect the surplus, now 35% above the 5-year average, to drop sharply as power sector demand picks up.
Spot prices for power were extremely low in April. Power in LA averaged 1 penny per kWh.

Source: ISO Data

GDP growth slowed to a rate of 1.6% in the first quarter of 2024 according to a Commerce Department report last week. This was lower than the 2.4% consensus forecast. Mixed inflation reports indicate some stagnating price increases.
MISO conducted a capacity auction late last week in which the Missouri zone cleared at almost $800 per MW-d vs $20 for other Midwest zones. This is covered in more detail below.
New Jersey opened up its 4th offshore wind solicitation seeking up to 4 GW of capacity. New Jersey now has more than 5.2 GW contracted, almost halfway to its 11 GW by 2040 goal. It was set back last year when Orsted canceled a 2.2 GW project, citing insurmountable commercial challenges.
New England will lose one of its largest power plants at the end of the month. The 1,700 MW gas-fired Mystic River Generation Station is scheduled to retire May 31. In its 2024 Outlook however, regional planners at ISO New England expressed confidence in their ability to maintain system reliability over the next decade, despite radical challenges. A deal does appear to be in the works to save the adjacent LNG import terminal, however, there have recently been controversial and late-breaking changes proposed by the terminal’s operator, Constellation.

Constellation Requests Increase in the Cost of Proposed Everett LNG Agreements

Constellation is requesting for an increase in operational fees to cover an additional component of Everett LNG's operations.

A prior newsletter from February covered an important story in New England that Constellation Energy had secured supply contracts with natural gas utilities in Massachusetts for the ongoing operation of its Everett LNG Terminal located near Boston. After submitting these four agreements for regulatory approval, Constellation has recently requested an increase in operational fees, which may complicate approvals.
Constellation is requesting fixed demand charges unrelated to the delivery of the natural gas, to cover costs related to discrepancies in the volume contracted and the actual volume delivered.
As a result of the changes, Eversource estimates the average customer’s gas bill would increase by $2.85, while National Grid estimates a monthly increase of 72 cents.
Additionally, the Attorney General representing Massachusetts ratepayer advocates, expressed strong concerns on how the utilities’ supply agreements will reach the state’s climate goal. Massachusetts goals include a 50% reduction in carbon emission by 2039 compared to 1990s levels and net-zero emissions by 2050.

A Milestone in US Nuclear: Vogtle Unit 4 Reactor Begins Commercial Operations

Vogtle Unit 4's completion brings clean energy to the grid but marks the end to nuclear power projects in the construction queue.

This past week marked a major milestone in the US nuclear power industry. Vogtle Nuclear Unit 4 began commercial operations in Georgia, following Vogtle 3 in July 2023. After this, the most recently commissioned reactors in the US are Watts Bar II (a TVA project) in 2016, Watts Bar I in 1996, and Sequoyah Station Unit 2 (also TVA) in 1981…
The Vogtle Electric Generating Plant is jointly owned by Georgia Power (45.7%), Oglethorpe Power Corporation (30%), Municipal Electric Authority of Georgia (22.7%) and Dalton Utilities (1.6%).
Georgia Power contracted for 2 x AP1000, a new reactor design pioneered by Westinghouse and owned by Toshiba, in 2008. Westinghouse partnered with the Shaw Group and its Stone & Webster division to manage the project. Westinghouse was responsible for engineering, design, and overall management, and Shaw was responsible for manufacturing the pre-fabricated component modules and managing the on-site construction. This original team would subsequently be gutted during the project for a variety of reasons.
The good – Vogtle 3 & 4 add 2,200 MW of clean, firm power to the US grid and we can expect them to operate for another 60-80 years. This is a significant achievement against impossible headwinds.
The bad – Vogtle commenced construction in 2009 and was expected to finish in 2016 and 2017. So it arrives about 7 years late after a 13-year construction period. In comparison, the Chinese are finishing reactors in about 6 years, on average.
The ugly – at over $35B in construction & finance costs, Vogtle 3 & 4 is the most expensive power plant ever built. It was approximately $17B over budget.

Approximately 70% of a nuclear plant’s levelized rate base is construction financing. For Vogtle, this is considerably higher.

Source: Nuclear Energy Agency

The levelized cost of power from Vogtle is likely to come in at $160-180 per MWh, depending in part on financing terms. This is high, but comparable (if not somewhat lower) than many of the emerging offshore wind resources that have been “rebid” after withdrawing from contracts with the various Northeast states.
The large construction force in Georgia has already begun to scatter, redeploy, retrain, and retire. America’s best bet to keep a foot in the game will be to commence on a couple more AP1000s over the next few years. With much of the same knowledge capital in place, and some valuable lessons learned, it seems likely that costs would come down considerably.
The US has not really had a developed labor market and supply chain around nuclear since the 1970s. With nuclear power's total capacity remaining stagnant since 1987, the performance at Vogtle is indicative of a rusty industry.

Source: EIA

The biggest question for US nuclear is whether another US buyer will soon commit. There has reportedly been interest in nuclear power by some of the large tech companies as they build out their data centers necessary to meet the future demands of AI and complex computing. The reliability of nuclear power, along with its flat production profile that mimics datacenter demand, appears to be a good match, but the financing and timescale of such projects are challenging.

Clean Energy Tax Credits Officially Have Two New Payout Methods

The market for clean energy tax credits and their transferability was further clarified last week.

It’s been almost two years since the Inflation Reduction Act (IRA) was signed into law and on Tuesday, April 30th, the U.S. Treasury Department and IRS finally posted the official rules governing how new tax credit transferability mechanisms will work. Tax credit transferability allows entities without sufficient tax liability to fully monetize the tax incentives associated with renewable energy investment. This allows governments, non-profits, and some businesses to fully utilize the credits themselves instead of leasing projects from private developers, which was commonplace under the prior paradigm.
This is a significant development because although there was previously a market for transferring tax credits, the final guidance provided further clarity on this mechanism, which is now expected to accelerate the market by making it far more open and straightforward to monetize credits.
The transferability provision applies to credits such as the renewable electricity production credit, carbon dioxide sequestration credit, clean hydrogen production credit, and energy investment credit.
In addition to transferability, the IRA established an elective "direct pay" provision allowing certain entities like state/local governments, tribes, and nonprofits to receive the value of applicable credits as direct cash payments from the federal government.
While the final rules on tax credit transferability provide important clarity, the clean energy industry is still eagerly awaiting additional guidance from the Treasury Department on several other key provisions in the IRA, including the domestic content bonus credit that increases the value of credits for projects using U.S-made equipment, the credit which covers capital expenditures on renewable energy projects, and the production tax credit specifically incentivizing clean electricity generation.

Fossil-Fueled Plants Emissions Standards and Reduced Use in Federal Buildings

New restrictions on certain gas and coal-fired power plants will help accelerate emission reduction commitments.

On April 24th the US Environmental Protection Agency finalized a controversial ruling that sets strict limits on carbon and mercury emissions from coal plants and new gas-fired plants.
The rulings will require existing coal plants and new gas plants operating above a 40% capacity factor to reduce their carbon dioxide emission by 90% or cease operations by 2039. Initial compliance is scheduled for 2032. The EPA encourages the use of “carbon capture and sequestration system technologies” to achieve the stark efficiency targets, despite statements from utility and power plants expressing how the ruling relies on unproven technology that may threaten the power grid’s affordability and reliability.
The other ruling will update restrictions for all coal-fired plants’ toxic metals and mercury emissions. The EPA set reductions of at least 67% for toxic metals and 70% for mercury from “existing lignite-fired sources.” As a result of the EPA’s two rulings, the agency stated it can expect savings of up to $370 billion in climate and health-related benefits over the next twenty years.
In another anticipated effort towards greenhouse emission reductions, the US DOE set additional thresholds to meet the Biden Administration net-zero emission goals by 2045. The DOE mandates that new federal facilities or federal facilities undergoing significant renovation to reduce their fossil use by at least 90% by 2029.
This should yield significant carbon emissions reductions. The federal government is the largest energy consumer in the US. The DOE estimates a reduction of 2 million metric tons of carbon dioxide and 16,000 tons of methane emissions over the next thirty years.

Capacity Prices Surge in MISO

MISO's Missouri capacity prices spring to alarming highs in the most recent capacity auction.

In the most recent Midcontinent Independent System Operator (MISO) capacity auction, regional constraints in Zone 5 (Missouri) caused prices to surge over 500% to approximately $720 per MW-d. This equates to about $60 per MWh for a typical customer.
Elsewhere in the region, prices for the upcoming spring and summer cleared at $34.10/MW-day and $30/MW-day, respectively. This is more than triple their previous levels for the same periods last year, however, cleared prices are at the lower end of cleared forward capacity prices nationally.
Overall surplus capacity for the upcoming summer period fell 29% to 4,624 MW from 6,482 MW last year. Prices for MISO zone 5 — served by Ameren Missouri and Columbia, Missouri’s municipal utility — jumped to $719.81/MW-day for the upcoming fall and spring seasons from $15/MW-day and $10/MW-day, respectively, in the previous auction.

Source: MISO

MISO stated that a combination of increased demand, coal-fired retirements, and planned plant maintenance, resulted in an alarming lack of capacity in zone 5, which was exacerbated by transmission constraints.
The most recent Planning Resource Auction covers the period 2024-2025, or (PRA). The PRA marks the second year MISO has used a seasonal capacity framework to better assess grid capacity needs throughout the year, rather than only focusing on summer peak demand. Other RTOs are considering similar redesigns to their auction framework as much of the country anticipates the emergence of winter peak loads in the future.