In an ironic twist, fracking has been cited as a prime reason for shutting down New York’s Indian Point nuclear power plant, as cheap natural gas eroded the economics of generating nuclear power in the region. New York’s Governor Cuomo is a fracking critic who supported banning the practice, a step taken by the state in 2015. But Cuomo has also opposed Indian Point – located about 30 miles north of New York City – on safety grounds for years. Last week’s announcement that the plant would close 14 years early is being touted by the governor as a major victory, but his unlikely ally in that win is natural gas produced from the Marcellus and Utica shale resources located in nearby Pennsylvania, Ohio and West Virginia.
Hydraulically fracturing wells to produce natural gas has unleashed new supplies of the fuel in volumes that have turned the power generation business on its ear. Natural gas has flooded the US market and consistently depressed natural gas, coal and wholesale power prices. Power generation companies typically turn to the least expensive fuel to produce electricity and that’s been natural gas in recent years. As their feedstock prices have come down so have wholesale power prices, which account for the bulk of the revenue they receive from selling power.
The situation is compounded by the fact that natural gas and power price forecasts remain depressed over the short and even medium term.
This poses tough questions for investor-owned utilities that need to make long-term investments in power generation assets, i.e. new and existing power plants. If a plant is losing money today, and anticipated to continue losing money for at least the next several years, it’s hard to tell investors that’s where you are putting their money. This is Entergy’s position with Indian Point.
“Key considerations in our decision to shut down Indian Point ahead of schedule include sustained low current and projected wholesale energy prices that have reduced revenues, as well as increased operating costs,” Bill Mohl, president of Entergy Wholesale Commodities said in a statement. “Record low gas prices, due primarily to supply from the Marcellus Shale formation, have driven down power prices by about 45 percent, or by about $36 per megawatt-hour, over the last ten years, to a record low of $28 per megawatt-hour,” he added.
The elephant in the room, however, is the prospect of becoming overly reliant on a single power generation fuel. Utilities have typically strived to maintain a diverse energy supply portfolio – much like investing in a wide range of security products – in order to insulate against extreme price volatility affecting a single commodity. As more coal and nuclear plants close due to a combination of market and regulatory forces, power generators are increasingly being pushed toward gas for baseload power. Renewables are becoming cheaper and gaining market share, but still lag fossil fuels in most US markets. If this trend continues and natural gas prices increase over the longer term – perhaps due to greater consumption and exports, another recent trend – gas-heavy utilities will face challenges.