From Your Pocket to Theirs: Nuke Subsidies Unwarranted

We are at a pivotal point in Ohio energy policy as the Ohio General Assembly blasts House Bill 6 through the lawmaking process. So much has been written about the implications of this complex bill, but the bottom line is that customers would be forced to subsidize two nuclear plants that are “not profitable on their own” by paying them $176 million per year for as long as the plants are in service. In the process, lawmakers have gutted the renewable energy and energy efficiency programs. (There are also two coal plants that would receive an additional $125 million annual subsidy cloaked as “clean energy,” but that discussion is for another blog.)

Beside all the negative effects of this proposed bill, which include market distortion, long-term energy price increase, increase in customer cost, elimination of energy efficiency programs, elimination of renewable portfolio standards, to name a few, this sends a huge message to any independent power plant developer seeking to invest in building new electricity generation. The message is: “If you’re looking at Ohio: Beware, the playing field is not level, participate at your own risk as we favor your competition.”

Ohio’s energy landscape has drastically changed since the shale boom in the past decade. The shale formations in Ohio (Marcellus and Utica) are providing more natural gas than anyone could have predicted, making up over 30% of the overall production in the lower 48. Continued growth in natural gas production, coupled with new natural gas- fueled power plants, has pushed electric prices to historic lows of approximately $30/MWh for the foreseeable future.

So how far underwater is nuclear energy? According to PJM, the transmission grid operator for 13 states including Ohio, out of the 18 nuclear plants in its territory, only Davis-Besse and Perry, which are owned by FirstEnergy Solutions, and Three Mile Island in Pennsylvania, are not profitable. If 85% of the nuclear fleet can compete in this market what are the operating costs of Davis-Besse and Perry?

E-Cubed Policy and Associates, LLC has calculated through publicly available information that the expected ongoing operating cost of Davis Besse is $31.83/MWh and $34.03 /MWh for Perry. In a $30/MWh power market this is not going to work; however, these units can receive additional revenue from PJM in the form of annual capacity payments of around $6 per MWh. Adding this revenue stream into the equation makes these units profitable to the tune of $28 million annually for Davis-Besse and $44 million annually for Perry. According to E-Cubed, these operating costs are 25% lower than the industry average.

So, wait! These plants are operating better than the fleet average but are not profitable? The issue is not the operating costs; it is the drag of the debt service on the assets. The mechanism to remove debt is to file for bankruptcy protection. FirstEnergy Solutions did just that on March 31, 2018. As FirstEnergy Solutions emerges from bankruptcy protection, this debt service will be reduced if not eliminated. What will the owner then hold? Assets running profitably with little to no debt and the additional subsidy of $176 million per year paid by Ohio consumers due to HB 6.

House Bill 6 is bad policy for Ohio.