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Customers would pay millions to rescue Pa. nuclear reactors, including some that are already profitable

Pa. electric customers would pay hundreds of millions of dollars a year to the state’s nuclear industry — up to about $5 more per month per household — under a draft nuclear rescue bill.

Three Mile Island nuclear power plant complex in Middletown, Pa. TMI Unit 2, (left), shut down in 1979 after an accidednt. TMI Unit 1, on the right, is still operational, although owner Exelon Generation says it will close it down in September without subsidies.
Three Mile Island nuclear power plant complex in Middletown, Pa. TMI Unit 2, (left), shut down in 1979 after an accidednt. TMI Unit 1, on the right, is still operational, although owner Exelon Generation says it will close it down in September without subsidies.Read moreClem Murray / File Photograph

Pennsylvania electric customers would pay hundreds of millions of dollars a year in subsidies to the state’s nuclear industry — about $5 more per month for a typical household, by one estimate — under a draft nuclear rescue bill widely circulated in Harrisburg.

The long-awaited legislation, which proponents say is still undergoing revisions before it is formally unveiled, would direct a massive infusion of ratepayer funds to the state’s nine reactors. The owners of three reactors have announced their imminent retirement if they do not receive subsidies that they say would put the plants on equal footing with other zero-emission power generators, such as wind and solar.

But some of the state’s reactors are not in immediate danger of closure. The state’s most profitable nuclear plant, the twin-unit Limerick Generating Station in Montgomery County, is projected to earn hundreds of millions of dollars in the next few years, without a subsidy.

Supporters say the proposal would correct “market flaws” by including nuclear energy into the state’s 2004 Alternative Energy Portfolio Standards Act (AEPS), which mandates that 18 percent of all power sold in the state be derived from alternative energy sources by 2021. The draft proposal would create a new category of zero-emission power reserved largely for nuclear producers, that would supply 50 percent of the state’s electricity demand.

Advocates say the rescue would save high-paying nuclear jobs, preserve a diverse mix of electricity sources, and prevent an increase in emissions of carbon dioxide and other pollutants from natural-gas plants that would step in to replace retiring nuclear plants.

“You can’t be serious about fighting climate, you can’t be serious about reducing smog in Pennsylvania, and stand idly by as a distorted market closes down nuclear plants,” said John Hanger, former Pennsylvania Department of Environmental Protection secretary, who works as a consultant to Exelon Corp., which has promised to shut down its Three Mile Island Unit 1 reactor in September without a rescue. Unit 1 is located next to Unit 2, the infamous reactor that shut down 40 years ago this month after a partial meltdown.

The proposal has already generated fierce opposition from the natural gas industry, large industrial customers, and consumer groups such as the AARP, which deride the bill as a “bailout” that will increase costs, distort competitive energy markets and fail to improve the reliability of the electric grid. They say the subsidy would enrich most of the state’s nuclear plants, which are competitive without a subsidy.

“They’re crying this is an emergency," said Kathleen Duffy Bruder, a lawyer with McNees Wallace & Nurick, LLC in Harrisburg, which represents the Pennsylvania Consumer Energy Alliance, a trade group of large industries. “They’re pressuring legislators to rush this through based on scare tactics -- `If you don’t do this, you’re losing jobs, you’re losing the nuclear industry, you’re losing all these things.'”

The bill’s supporters say the draft bill dated Feb. 6, first reported by StateImpact Pennsylvania, has been eclipsed by more recent versions, but the basic framework of creating a new subsidized category of zero-emission power generators is likely to remain in the final version.

The current AEPS rewards two tiers of power producers. The first tier reserves 8 percent of the market for emerging renewable producers including wind, low-impact hydro, geothermal and biogas, and includes a 0.5 percent market share for solar photovoltaic producers. A second tier sets aside 10 percent of the market for alternative power producers, including large-scale hydro, waste-coal generators and power plants that burn solid waste.

Profitability of Nuclear Power Plants in Pa.

A report estimates that profits will decline at Pennsylvania's nuclear plants in the next few years, but only Exelon Generation's Three Mile Island Unit 1 will lose money. Legislation would channel hundreds of million of dollars a year from ratepayers to rescue the plants.

SOURCE: PJM Independent Market Monitor
Staff Graphic

Local utilities, and other retail sellers of power, must buy alternative energy credits from producers to prove they are complying with the AEPS. The credits are the mechanism by which the subsidy is transferred to producers.

According to the draft legislation, the price of the new Tier III credits for nuclear power would be derived from the market price of the Tier 1 credits. The Pennsylvania Public Utility Commission would set the price annually, and would also determine which power producers are eligible for the credits. Technically, any nuclear power plant in the regional power grid operated by PJM Interconnection LLC would qualify, though the bill says the plants must establish a positive impact on Pennsylvania’s air quality.

One analyst, Christina Simeone of the University of Pennsylvania’s Kleinman Center for Energy Policy, on Friday estimated that the draft proposal would generate about $500 million a year -- nearly twice as much as New Jersey’s 2018 nuclear rescue, which is priced at $300 million. Simeone earlier estimated the subsidy would cost ratepayers $891 million, but said she revised the number downward after obtaining more current pricing information.

The bill’s supporters say Simeone based her initial calculations on incorrect estimates of the prices and quantities upon which the credit would be based. “I look forward to having a serious discussion on the legislation when it’s introduced,” Rep. Thomas Mehaffie (R., Dauphin), one of the bill’s sponspors, said through a spokesperson.

Pamela Polacek, a McNees Wallace & Nurick lawyer who also works with large industrial electricity customers, estimates the cost would range from $424 million to as much as $900 million, and would add anywhere from 0.3 cents to 0.6 cents per kilowatt hour to customer bills. A typical residential customer uses about 875 kWh per month, which would peg the high estimate at $5.25 per month, per household.

“People in the capitol are talking about it being a $500 million deal,” said Rob Altenburg, director of the PennFuture Energy Center, an environmental advocacy group. But Altenburg thinks the industry-wide rescue would need to be greater if the subsidy has to cover projected losses at Three Mile Island Unit 1, according to a November report by Monitoring Analytics LLC, a Montgomery County firm that serves as the independent market monitor for PJM, the regional power grid.

Three Mile Island is a single-unit reactor, which means it has higher operating costs and is less efficient than the state’s four other nuclear plants, which each have two reactors and produce twice as much power as TMI. The report projects that Three Mile Island, which produces about 8 percent of the state’s nuclear energy, is the only nuclear plant that will lose money over the next three years. FirstEnergy Corp., which owns the twin-unit Beaver Valley Nuclear Power Station near Pittsburgh, has announced its planned retirement in 2021, unless it is rescued.

Exelon Corp.’s top lobbyist says the bill will likely morph after introduction, depending upon the needs of various interests.

“With any bill, whatever is ultimately introduced is an opening bid, an opening of a debate," said David Fein, senior vice president of state government and regulatory affairs for Exelon, which successfully engineered nuclear rescue packages in Illinois, New York and New Jersey. “These things tend to evolve over time after they’ve been introduced.”

Some critics believe that Exelon will shut down Three Mile Island, regardless of passage of the subsidies. But Fein denies it. “Obviously we wouldn’t be working as hard as we’re working with stakeholders if it wasn’t our intention [to keep TMI open],” he said. “These are very serious issues, with peoples’ lives and livelihoods at stake here.”

Polacek said the expansion of the AEPS to include a nuclear rescue would undermine the aim of the 1996 law that deregulated the electric industry and introduced competition into the generation market.

“If this thing were to pass, all of a sudden we would have 68 percent of our generation mix dictated by the AEPS Act," she said. "That’s just such a complete reversal from the idea that competitive markets would determine which generation suppliers survive, and which don’t.”

The competition act of 1996 is the source of another sore point for nuclear rescue critics, who say that ratepayers already compensated Pennsylvania power generators $11 billion for their investments in expensive nuclear plants. During the transition to competitive markets, which concluded in 2010, customer rates were capped to allow utilities to recover their “stranded investments” in plants that were previous included in customer rates. After 2011, power plant operators were at the mercy of competitive markets to recover their costs.

“We certainly paid significant stranded costs for the nuclear plants," said Tanya McCloskey, Pennsylvania’s acting consumer advocate. "That was considered once and done. The idea was they would go out and compete in the competitive markets.”

But Exelon’s Fein calls the stranded costs argument “a red herring.” He said the mechanism allowed producers to recover their initial plant investment. It did not include recovering of ongoing operating costs, including billions of dollars imposed by regulators on the industry to install security and safety measures after 9/11 and the Fukushima nuclear accident in Japan.

Hanger, who as a member of the PUC in the 1990s was one of the chief architects of Pennsylvania’s competitive markets, said consumers actually came out ahead from the rate settlements to pay down stranded costs in plants. “If it were not for those cases, Peco customers would still be paying for Limerick," said Hanger.

Hanger also argues that nuclear power plants are now forced to compete unfairly in a flawed market that neither values their zero-carbon emissions nor imposes a carbon tax on coal and gas power plants for their emissions. “You can’t have a competitive market without a carbon tax or a substitute,” he said. “You can’t ask renewables and nuclear to compete with coal and gas plants that are subsidized -- bailed out -- by a carbon price of zero.”

But the method chosen by Pennsylvania and other states to subsidize nuclear power plants, upheld so far by federal courts, has nevertheless unsettled the regional power grids that manage competitive markets. PJM, under pressure from federal regulators to respond to growing tendency of states like New Jersey and Illinois to give out-of-market subsidies to nuclear power, is rewriting its rules to better value plants for their reliability.

The changes are likely to result in “upward pressure” on some market prices, said Stu Bresler, senior vice president of operations and markets for PJM, which is based in Valley Forge and oversees grid operations in 13 states and the District of Columbia. Bresler said it’s not clear if those upward price movements would be sufficient to save any particular unprofitable power plant from closure.

PJM has also conducted extensive studies into whether the early retirement of some nuclear power plants would make the power grid less reliable because of an over-dependence on natural gas power plants.

“We do not have a near-term reliability issue,” said Bresler. If the four nuclear plants in the region that have announced early retirements actually shut down -- Three Mile Island, Beaver Valley, and Perry Nuclear Power Plant and the Davis-Besse Nuclear Power Station in Ohio -- their closures do not pose a reliability threat, according to a December PJM report. The grid remains intact even under dire circumstances of an extreme weather event, a pipeline interruption, and restrictions on oil deliveries for backup generators.

But the calculus changes if some large nuclear and coal power plants that are now profitable are forced to retire early, said Bresler, which could create a situation in which the grid would have to “shed load” -- impose rolling blackouts -- to keep from collapse.

“It’s a longer-term issue, and there’s some argument out there that the market will do this already because as you see retirements, the prices will reflect the reduced supply and will result in not getting into those extreme scenarios,” he said. But he said the grid operator is still making plans to respond to such an emergency, just in case.