After the nuclear meltdown at the Fukushima Daiichi power plant, countries have toughened safety regulations. This accident prompted Germany and Japan to decommission its entire nuclear fleet.
However, public oversight on nuclear energy has relaxed. Rising awareness of climate change has mitigated safety concerns. According to the WSJ, Japan will reopen two nuclear reactors on June 2015.
Despite a favorable regulatory environment, investments in nuclear power plant operators such as Exelon (NYSE:EXC) may not be prudent. The economics of generating electricity from nuclear reactors is deteriorating. Most of the nuclear power plants in the United States are at risk for retirement.
Nuclear Energy In The United States:
Exelon is the largest nuclear power plant operator in the United States. Exelon's nuclear reactors generate 22% of the nuclear power in the United States. Exelon operates 14 nuclear power stations that have 19 gigawatts (GW) of generating capacity. The company's energy portfolio, as shown below from the company's 10K, is broken down into 60% nuclear, 29% fossil fuel and 11% hydro/solar.
Nuclear power plant profits have suffered as a result of softer wholesale electricity prices and higher uranium costs. The quark spread, a proxy for the gross profit of a nuclear plant, has tightened. The chart below, from the U.S. Energy Information Administration, shows that the quark spread tightened from $50 per megawatt hour in 2006 to $30 per megawatt hour in 2013 in the Mid-Atlantic. Note: The quark spread is the difference between the wholesale price of electricity, per megawatt hour, and the price of the fuel (uranium) used to generate that electricity. The figure below is from the US EIA.
Nuclear power plant profits are squeezed by softer electricity prices. Wholesale electricity prices have decreased as a result of lower natural gas prices. The abundance of shale gas in the United States has driven natural gas prices to new lows. The price of natural gas, according to the U.S. Energy Information Administration, reached a new low at $2.79/mmbtu, down from an all-time high of $12.30/mmbtu in 2008. (Figure from the US EIA)
Nuclear power plant profits are further squeezed by higher uranium costs. Citigroup expects uranium prices to increase at a CAGR of 7.0%. Uranium prices are expected to increase as a result of emerging market demand and Russian sanctions. According to Raymond James, quoted below, China plans to build 89 nuclear power plants, Russia plans to build 38 nuclear power plants and India plans to build 11 nuclear power plants. Furthermore, according to Raymond James, Russia controls a huge chunk of the global uranium supply. Current US Sanctions against Russia resulted in the loss of a steady supply of competitively priced, highly enriched uranium.
Over the next decade, we expect uranium demand to grow at about 3% per year (3%/year) with about two-thirds of that incremental buying coming from China, Russia and India. China is building reactors like they're going out of style-30 units are currently under construction domestically, with 59 in the planning stage - and we've just seen China grow its presence internationally with an equity stake in the Hinkley Point power station in the U.K. Russia is building 10 reactors at the moment. It's got 28 on the drawing board, according to the World Nuclear Association, and that's going to more than offset the retirement of some of its aging reactors. Russia is heavily involved in vending reactors globally as well, with projects around the world. One interesting aspect of that is the build-own-operate model, where Russia will build and operate a plant in your country and then sell you electricity from that plant. In India, despite some headwinds with the nuclear liability law, another new reactor just connected to the grid, an additional six units are currently under construction and five dozen are on the drawing board. You've got new entrants like the United Arab Emirates, Turkey and Vietnam showing that they're very serious about nuclear as a power source.
Nuclear power plant profits will be further compromised by accelerating maintenance costs. According to Citigroup, operating and maintenance expenses accelerate rapidly for plants built more than 30 years ago. The figure below, provided by Citigroup, shows that operating costs accelerate for plants over the age of 30.
The majority of Exelon's nuclear power plants are ~30 years old and are likely to experience accelerating maintenance costs. Exelon's oldest nuclear reactor at Nine Mile Point is 46 years old. Furthermore, Exelon's newest nuclear reactor at Limerick is 25 years old. Exelon's ageing fleet, from the company's 10K, is shown below.
The confluence of these factors makes it hard to justify significant capital expenditures to maintain nuclear power plants located in the United States. According to Citigroup, nuclear power plants that generate an EBITDA of $10.0 per MWH or less are at risk of retirement. A nuclear power plant that generates an EBITDA of $10.0 per MWH just covers its maintenance capital expenditures. According to Citigroup:
[Citigroup] estimates that refueling expense approximates $3-$4/Mwh, not including the cost of actual nuclear fuel which is capitalized. Based on this, [Citigroup] believes that economics of plants with normalized EBITDA below $6/Mwh may not justify their next refueling given razor thin profitability and lack of margin of error. [Citigroup] views such plants as extremely marginal and put them on our "Danger List". Further, considering that nuclear maintenance CAPEX approximates $6-$8/Mwh across our coverage universe, [Citigroup] considers all plants with EBITDA below $10/Mwh at risk of closure as their economics may not justify capital costs, and therefore any maintenance issue that requires investment above bare-bone maintenance capex level would likely trigger a retirement, as we have already begun to see with SONGs, CR3 and Vermont Yankee.
Furthermore, according to Citigroup, most of Exelon's nuclear power plants are financially challenged and are at risk for retirement. 5 of Exelon's 14 nuclear power plants does generate sufficient EBITDA to cover its maintenance capital costs and are at risk for retirement. Furthermore, 6 of Exelon's 14 nuclear power plants are not at immediate risk of retirement but operate with razor thin margins.
As a result of the challenging economics, many U.S. nuclear power plant operators have retired their nuclear reactors. Dominion Resources (NYSE:D) retired its Kewaunee nuclear power plant. According to Dominion:
Dominion shut down its 556-megawatt Kewaunee Power Station permanently on May 7, 2013, ending almost 40 years of nuclear-generated electricity at the station located about 35 miles southeast of Green Bay on Lake Michigan. Over its life, the power station generated about 148 million megawatt-hours of electricity.
On Feb. 5, 2013, Duke Energy announced its decision to retire the Crystal River Nuclear Plant, known as CR3, located on Florida's Gulf Coast approximately 85 miles north of Tampa.
The only U.S. electric company building nuclear power plants is Southern Company (NYSE:SO). However, the projected cost of U.S. nuclear energy is not attractive. Therefore, the construction of SO's Vogtle nuclear station has raised many concerns by rate-payers and by public utility commissions.
The economics of nuclear energy production in the United States is deteriorating. Most of Exelon's nuclear power plants are at risk for retirement. Despite a favorable regulatory environment, after the Fukushima nuclear crisis, investments in the nuclear energy industry may not be prudent.
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