The Real Meaning of Kewaunee’s Demise

A commentary by Michael Vickerman, Director, Policy and Programs at RENEW Wisconsin: 

 Shock waves reverberated across the Upper Midwest when Dominion Resources announced in late October that it would permanently shut down its Kewaunee nuclear generating station in early 2013. Operational since 1974, the Kewaunee station, located along Lake Michigan 30 miles east of Green Bay, currently generates about 5% of the electricity that originates in Wisconsin.

Virginia-based Dominion, which bought the 560-megawatt Kewaunee plant in 2005 from two Wisconsin utilities, attributed its decision to its inability to secure long-term power purchase agreements to keep the plant going. Without securing purchasing commitments from utilities, Dominion would have to sell Kewaunee’s output into the regional wholesale market at prices well below the plant’s cost of production.

While the pricing environment for all bulk power generators is nothing short of brutal these days, Kewaunee carries the additional burden of being an independently owned power plant, since the entities most likely to buy electricity from that generator—utilities--have power plants of their own that compete for the same set of customers. And a growing number of these utility-owned generators burn natural gas, which is currently the least expensive generation source in most areas of the country.

Dominion’s decision comes down to simple economics. Wisconsin utilities believe that over the foreseeable future natural gas will remain cheap and supplies will remain abundant. That would explain their unwillingness to enter into long-term commitments with Dominion, even though Kewaunee recently acquired a 20-year extension to its operating license and does not need expansive retrofits to comply with environmental standards, unlike a host of utility-owned coal plants in Wisconsin.

But even if Dominion’s managers were convinced that natural gas prices have nowhere to go but up in 2013 and beyond, the company, lacking a retail customer base in the Midwest, could not risk producing power below cost while waiting for the turnaround.

Wisconsin utilities have placed heavy bets on natural gas in the expectation that it will remain the price-setting fuel for years to come. Over the last 12 months, they have bought several combined-cycle generators from independent power producers. Buying power plants enables them to pass through their acquisition and operating costs directly to their customers while generating returns to their shareholders. I suspect these utilities are anything but broken up over the impending demise of a nonutility competitor that could have supplied electricity to Wisconsin customers for 20 more years.

But there is another side to this story; the low-price energy future that Wisconsin utilities are embracing can only materialize if natural gas extraction companies continue to sell their output below production costs. This expectation is unrealistic, given the massive pain being inflicted on these companies in the form of operating losses, write-downs, and credit rating downgrades.

Don’t just take my word for it, ask Exxon Mobil ceo Rex Tillerson, whose company spent $41 billion during the shale gas boom to acquire XTO, a large gas producer that is now yielding more red ink than methane. As reported in a recent New York Times article, Tillerson minced no words in assessing the impact of its recent misadventures on the company’s bottom line. “We’re all losing our shirts today,” Tillerson said. “We’re making no money. It’s all in the red.”

Much of the industry’s woes are self-inflicted. The lease agreements that drillers eagerly signed during the height of the shale gas boom obligate them to extract the resource by a certain deadline, regardless of whether such activity is profitable. That these companies cannot disengage quickly from existing leases is greatly diminishing their appetite for exploring new natural gas prospects. Until a pricing turnaround occurs, they will refrain from spending money on exploring new resource provinces like Ohio and Michigan.

Sooner or later, this slowdown in exploration activity will tip the supply-demand equation in the opposite direction, resulting in lower-than-average gas storage volumes. Barring a repeat of last winter’s unusually mild weather, the crossover point should occur around January 1st . But with so many balance sheets in tatters from this highly unprofitable market environment, nothing short of a strong and sustained price increase will be required to persuade drillers to start taking risks again.

When this corrective price increase begins rippling through the electricity markets, it will be interesting to observe how the customers will respond. Right now Wisconsin utility managers are convinced that they are making the right call on natural gas. So completely have they swallowed the shale gas “game-changing” mystique that they were willing to let a 560 MW nuclear plant fall out of the supply picture for good. In this brave new world of theirs, gas is the new coal, and resource diversity is passé.

In the aftermath of Dominion’s announcement, a few commentators have defended the impending closure as a textbook example of how markets work. But this view ignores the delusional thinking that sent shale gas extraction into overdrive, causing prices to plunge below the cost of production. The real game-changer, as it turns out, here was not the emergence of “fracking” technology but the industry-generated public relations campaign that implanted the narrative of a nation awash in cheap natural gas into virtually every American cranium. But as we now see, this narrative has boomeranged on the natural gas industry, and they are paying for their current woes in ways that guarantee a pronounced pendulum swing in the direction of higher prices.

The question going forward is: will this narrative also boomerang on Wisconsin electricity users, after the last employee leaving Kewaunee turns out the lights?

 Michael Vickerman is program and policy director of RENEW Wisconsin, a sustainable energy advocacy organization. For more information on the global and national petroleum and natural gas supply picture, visit previous posts Madison Peak Oil Group’s blog: http://www.madisonpeakoil-blog.blogspot.com. This commentary is also listed on RENEW Wisconsin's blog: http://www.renewwisconsin-blog.org/

Press Release from the Public Service Commission of Wisconsin

For Immediate Release - September 26, 2012

Contact: Kristin Ruesch or Matthew Pagel (608) 266-9600

Kristin.Ruesch@Wisconsin.gov or Matt.Pagel@Wisconsin.gov

PSC Upcoming Public Hearings

MADISON - The Public Service Commission of Wisconsin (PSC) will hold two public hearings in Southeastern Wisconsinon regarding the Wisconsin Electric Power Company and Wisconsin Gas (WEPCO) request to adjust its electric and natural gas rates.

Citizens are encouraged to attend the hearings, which will be held at the following locations and times:

Monday, October 1, 2012

1:00 p.m.

Ambassador Inn

Marquette Room

2301 West Wisconsin Avenue

Milwaukee, Wisconsin

Monday, October 1, 2012

6:00 p.m.

Best Western Plus Midway Hotel and Suites

Underwood I Room

1005 South Moorland Road

Brookfield, Wisconsin

Customers attending either hearing may provide written or oral comments. If customers cannot attend a public hearing, but would like to provide comments, an online participation option is available on the PSC's website at http://psc.wi.gov  through October 1^st. Participants should click on the "Public Comments" button on the PSC's homepage and click on the case title.

The hearing locations are accessible to people in wheelchairs. Anyone requiring accommodations to participate should contact Docket Coordinator Candice Spanjar at 608-267-9537

Documents associated with WEPCO's application can be viewed on the PSC's Electronic Regulatory Filing System at http://psc.wi.gov/. Type case numbers 5-UR-106 in the boxes provided on the PSC homepage, or click on the Electronic Regulatory Filing System button.

-end-

To view online version, click here.

Natural Gas: Wrestling With Reality

August 10, 2012
A commentary by Michael Vickerman, RENEW Wisconsin, Director, Policy and Programs:

After skidding below $2.00/MMBtu this winter, wholesale natural gas prices are now creeping toward the $3.00 mark. This upward movement is the result of below-normal volumes of natural gas going into storage for the winter heating season. The latest report, released August 16th, marks the 16th straight week where injection volumes lagged significantly behind the five-year average.

Notwithstanding this mild rebound, everyone in the energy industry, including the traders themselves, knows that $3.00/MMBtu is well below the cost of producing natural gas, and cannot deliver a return that can support future drilling efforts. This is particularly true with shale gas, the so-called “game-changer” that industry flacks contended would topple King Coal’s reign over the electricity sector.

High-profile shale gas producers like Chesapeake Energy are now running out of ways of concealing their financial distress. Consider the following developments that occurred over the last fortnight.

• Chesapeake Energy announced plans to reduce domestic gas production in 2013 by 8%; 
• BHP Billiton wrote down $2.84 billion on the value of Fayetteville shale gas assets it had acquired in 2011; and 
• The most recent count of rigs drilling for natural gas in the United States is 495, down 70% from the record-setting levels seen in September 2008.

“Write down” is a fairly bloodless way to describe the loss of $3 billion; “carnage” is better at conveying the pain that now grips the natural gas sector. This begs the question: why are wholesale natural gas prices still under the $3.00/MMBtu level?

Valley plant could switch to gas

From an article by Tom Content in the Milwaukee Journal Sentinel:

We Energies plans to take initial steps toward converting its Milwaukee coal-fired power plant to burn natural gas, the utility's chairman told shareholders Thursday.

The Milwaukee utility has been under pressure to address air pollution from the power plant located south of downtown in the Menomonee River Valley.

To comply with new federal pollution rules, the utility has been studying whether to convert the plant to natural gas or to add environmental controls that could allow it to continue burning coal.

"We believe we will need to convert the plant from coal to natural gas," Chairman and Chief Executive Gale Klappa told shareholders at Wisconsin Energy Corp.'s annual meeting at Concordia University Wisconsin in Mequon.

We Energies will file an application with the state Public Service Commission in the second half of this year for an initial project that would be needed for that conversion to take place.

"That first step would be to put in a larger natural gas pipeline that could . . . supply natural gas to that facility," Klappa said. "That will be a significant project. It will require PSC approval, it will require City of Milwaukee approval, and it will require us to update a 1949 natural gas line that runs through the area."

Klappa did not announce a timeline for converting the plant from coal to gas. Utility spokesman Brian Manthey said the utility needs to ensure it has the approval and the ability to supply gas to the power plant before it makes a final decision.

"The (Cleaner Valley) coalition encourages We Energies to move as quickly as possible," said the Rev. Willie Brisco, president of Milwaukee Inner City Congregations Allied for Hope. "People's lives are impacted by Milwaukee's dirty air each and every day."

Built in the late 1960s, the Valley plant is the utility's only major coal-fired plant in Wisconsin that lacks modern pollution controls. A much smaller coal plant in Wauwatosa provides steam to businesses at the Milwaukee County Grounds.

Environmental groups and a consortium of other groups in the Milwaukee area formed the Cleaner Valley Coalition to urge the utility to clean up the plant. In addition, the Sierra Club and Clean Wisconsin challenged an air pollution permit for Valley, saying it doesn't go far enough to protect public health.

"We're very happy to hear that they're taking a step in the right direction," said Emily Miota of the Sierra Club. "The biggest concern now is that they move quickly to make this happen."