Nuclear:

Exelon's Von Hoene discusses impact of wind energy incentives on nuclear's competitiveness

As the nuclear power industry struggles to remain competitive in electric power markets in the United States, how could a shift in energy policy framework affect the industry's future? During today's OnPoint, William Von Hoene Jr., senior executive vice president and chief strategy officer at Exelon Corp., the largest nuclear provider in the U.S., discusses the market and policy factors having the greatest impact on nuclear's role in the electricity sector. He also discusses the future of Exelon's business model.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. With me today is William Von Hoene, senior executive vice president and chief strategy officer at Exelon. William, thank you for joining me.

William Von Hoene Jr.: Thank you, Monica. Nice to be here.

Monica Trauzzi: Bill, nuclear power plants are facing a competitive issue in power markets here in the United States, and in the past year and a half, five reactors have been shut down. Exelon has the largest U.S. nuclear fleet. How would you qualify the current state of play of the nuclear industry?

William Von Hoene Jr.: Well, the nuclear industry, to start out with, is enormously important to the overall energy composition of the country, provides 20 percent of the electricity to the United States nationally and 64 percent of the carbon-free emissions in the United States. And a variety of factors have put tremendous pressure on the operation of nuclear plants throughout the country. The reduction in prices as a result of the fracking has been one factor. Reduction in demand has been another factor, but also, importantly, government policies that have not treated nuclear plants equally relative to other forms of generation have put the pressure on and have resulted in some of the things that you referenced in your question.

Monica Trauzzi: So, specifically, the conversation that you're having here in Washington right now is focused on the production tax credit for wind, and that's set to be taken up by the Senate next week. How do you think the wind PTC is directly affecting the nuclear industry?

William Von Hoene Jr.: What essentially happens, Monica, with the wind production tax credit is that wind is paid to run regardless of the need for the electricity generation. So the tax credit, for example, in evenings when needs are low, when demand needs are low, will still pay the wind to operate, which will result in many instances in negative pricing for some of the base-load operations such as the nuclear plants. So it puts a tremendous pressure on the economics of the nuclear plants in selected areas and is a disguised cost in some ways to the consumers. The single-year extension of the production tax credit in 2013 cost about $12 billion to taxpayers for electric generation that performs, on average, about 21 percent of the time, as opposed to nuclear plants, which perform 85 to 95 percent of the time.

Monica Trauzzi: Clean energy investments were, on the whole, down last year. This is coming from a recent report that Pew put out. So then why all the shutdowns that we saw last year of the nuclear plants?

William Von Hoene Jr.: There were a series of circumstances that led to the shutdowns, but ultimately what happened in each instance, and in some circumstances, there were operational issues and they did not return to service, but in each of those instances, the basic economics that are facing nuclear plants today were such that it did not make sense for the owners of those plants to continue the operations in those circumstances.

Monica Trauzzi: Tax incentives have been offered in the energy industry for decades, so what's different now? I mean, isn't that kind of the way it's always worked? Why is this different?

William Von Hoene Jr.: Well, in some ways, the pressures that I've talked about that have occurred have made the tax incentives that have been in place more impactful so that, for example, the other production tax credit, you have other programs that benefit forms of renewable energy such as renewable portfolio standards that are in place in a variety of states. In each of those instances, even though nuclear is the most effective carbon-emission-free source of energy, the playing field is not made equal for nuclear, or even for nuclear. Those are the beneficiaries of that, and nuclear is competing in an essence with those forms without any tax benefit, without any advantage, even though it provides the overwhelming majority of carbon-free generation in the United States.

Monica Trauzzi: So how are you suggesting the energy policy framework be changed?

William Von Hoene Jr.: I think there are three or four places, Monica, where we believe that progress can be made to even the playing field. The president has directed the EPA to generate regulations which will come out later this year and which will be finalized next year with respect to the emissions from power-generating plants. We hope that those will be material in place, and we hope that the implementation of those, which will be largely left to the states, subject to EPA approval, will be level playing fields so that we don't have circumstances such as in the renewable portfolio standards in the states where nuclear is disadvantaged relative to every other kind of emission-free or reduced-emission generation source. There are transmission policies and transmission constraints that could be improved. The production tax credit and similar programs that benefit forms of renewable energy to the disadvantage of nuclear, notwithstanding nuclear's impact, is another important area in which we can look at this, and there are also a series of market rules and regulations that we are interfacing with FERC and various state agencies on that will be important to do -- not give nuclear an advantage, and we're not asking for that, but just to get the playing field level so that the marketplace can choose the most efficient, the most cost-efficient and the most reliable sources of renewable energy.

Monica Trauzzi: Recently FERC Commissioner John Norris indicated he's seeking more information on why nuclear power plants are being forced out of the market, and he called AWEA's contention that the PTC was not having an impact compelling. He's asked Exelon for feedback. How does this action by FERC impact the discussion?

William Von Hoene Jr.: Well, first of all, we are very pleased that Commissioner Norris and FERC and the Department of Energy and others are listening carefully to this issue and considering the issue carefully and the importance, and we're encouraged by the fact that this dialog has been elevated to a place in which we can have that discussion. The AWEA report that he references we believe is technically flawed in a very material way. Essentially, it does price forecasting rather than looking at real-time pricing and the impact on nuclear operations, and we think, properly placed in the perspective where we have apples to apples, so to speak, that the impact that we have advocated, that the wind has and the production tax credit has is, in fact, accurate and that the AWEA report is not accurate in that regard.

Monica Trauzzi: The U.S.'s existing fleet of nuclear power plants is aging. Is the critical component here more money put towards research and development?

William Von Hoene Jr.: Well, there are a number of places where research and development for smaller modular reactors is occurring. Right now, those are not -- they're not price-competitive in terms of what the costs would be that would be associated to do that. We hope that the research and connection with that will result in some sort of nuclear renaissance, but we are very even-minded about this, Monica. It's hard to build new nuclear plants in the United States now, given the costs that are associated with doing that. That being said, the existing nuclear fleet, which, if nothing else is built, has an average life, additional life of 30 or so years, continues to provide and, in some cases, has expanded to provide carbon-free emissions that are very, very important to the country and very, very important to meeting our carbon goals and also, importantly, to providing reliability that the nuclear plants uniquely provide over every other source of electric generation.

Monica Trauzzi: Are there specific plants that Exelon has that you might -- that you think might be subject to closure in the short term?

William Von Hoene Jr.: We have a half a dozen or so plants, and the analysts -- while we have not talked about specific plants with any -- with specificity, there are a number of plants that the analysts, and it's not secret, have looked at and see that they're economically challenged. We have no plans to close down those plants. We're doing everything that we possibly can to keep them open, but we have to have a sustained regulatory environment in which they can operate on an even keel, on an even basis, with other forms of generation in order to be able to do so. And in the event that we can't find that, we can't have that or we can't have that created, then we'll have to make some tough decisions about a number of those plants.

Monica Trauzzi: How do you see Exelon's business model evolving over the next decade?

William Von Hoene Jr.: I think what we will find in the Exelon business model is there are a couple of trends that we'll all be looking at, and it's not unique to Exelon, although the Exelon nuclear factor is relatively unique to Exelon. But as utilities build out and provide more reliable grid and modernize the grid, there will be a number of issues that we will deal with and other utilities will deal with about distributed generation and what that looks like, what impact that has. How committed are we going to be as a country to clean energy and to the carbon emissions reductions that are the goals of the country, and it'll be important for us not only to modernize our systems and not only to preserve the excellent performance that we have in our generation and in our generation and in our transmission and distribution business, but to also help effectuate policies that will support clean, reliable and low-cost energy for the consumers that we serve.

Monica Trauzzi: All right, Bill, we'll end it there. Thank you so much for coming on the show.

William Von Hoene Jr.: Thank you so much, Monica.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

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