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: This commentary is also listed on RENEW Wisconsin’s blog:

Doyle launches Clean Energy Jobs initiative

From a news release issued by Governor Jim Doyle:

MADISON – Governor Jim Doyle today was joined by business leaders, labor, legislators and environmental organizations as he launched the Clean Energy Jobs Act, a landmark legislative package to accelerate the state’s green economy and create jobs. New industry-recognized research shows the package will directly create at least 15,000 green jobs in Wisconsin by 2025.

“Addressing climate change is not just an environmental issue, it’s about creating green jobs,” Governor Doyle said.

“The Clean Energy Jobs Act offers new standards to help accelerate Wisconsin’s green economy. I am calling on the Legislature to update renewable portfolio standards to generate 25 percent of our fuel from renewable sources by 2025 and set a realistic goal of a 2 percent annual reduction in energy consumption by 2015.”

The Clean Energy Jobs Act, State Senate Bill 450 and State Assembly Bill 649, implements the recommendations of Governor Doyle’s Global Warming Task Force to address climate change and grow the state’s green economy through several key measures:
• Enhanced renewable portfolio standards – A new 20 percent standard would be set for 2020 and a 25 percent standard would be set for 2025. The current 10 percent standard would be accelerated from 2015 to 2013. By advancing our current renewable portfolio standards, and setting new standards, we will ensure more of our energy dollars stay in the state, creating thousands of jobs for Wisconsin families in fields like construction, manufacturing, and agriculture.
• Enhanced energy efficiency and conservation efforts – Graduated statewide electricity savings goals would be set, leading up to a 2 percent reduction by 2015 and annual reductions thereafter. The cheapest way to lower carbon emissions is through energy conservation. By setting achievable conservation goals, this bill will help reduce energy costs in businesses and homes across the state.

A comprehensive economic assessment of the Clean Energy Jobs Act found that the package would directly create at least 15,000 green jobs in Wisconsin by 2025. More than 1,800 jobs would be created in the first year alone. The assessment also found that between 800 and 1,800 construction jobs would be created each year from 2011-2025, and more than 2,000 manufacturing jobs would be created once the laws are fully implemented.

Michael Vickerman, RENEW Wisconsin’s executive director said:

Wisconsin’s existing 10% Renewable Energy Standard has driven significant investment in rural, forestry and agriculture markets by encouraging the construction of large wind, biogas, biomass and solar projects. Increasing the Renewable Energy Standard to 25% in 2025 would continue to generate more of the lucrative payments to landowners and biofuel / biomass providers as well as create more jobs constructing and maintaining the additional projects are built to meet the new standards.

The bills also include three of the proposals backed by the Homegrown Renewable Energy Campaign:

• Renewable Energy Buyback Rates, also called an Advanced Renewable Tariffs, would set utility payments for small renewable energy producers who want to “feed energy” into the electric grid, enabling farmers and rural businesses to help Wisconsin become more energy independent with biopower, wind and solar.
• The Biomass Crop Reserve Program would award contracts to farmers to plant native perennial plants, which the farmer can then sell for bioenergy production, helping to solve the chicken-and-egg problem of jumpstarting the homegrown fuels market.
• A Low-Carbon Fuel Standard would be a market-based approach to promoting the cleanest, low-carbon fuels for Wisconsin, and would put Wisconsin in a position to capture the rapidly-developing clean energy market by using Wisconsin’s abundant natural resources like switchgrass.

Statements of support for the legislation came from Customers First!, WPPI Energy, CREWE, Clean Wisconsin, ACRE, MEUW, Sierra Club, and others.

Wisconsin clean energy bill moves ahead

From an article by Lisa Kaiser in the Shepard Express (Milwaukee):

Supporters of a proposed clean energy bill promise that not only will the new green energy standards help the environment, but that they will also help the state’s bottom line.

If passed by the state Legislature, the proposed Clean Energy Jobs Act would increase the amount of electricity to be generated by renewable energy, change building codes, implement new energy standards for appliances and cars sold in the state, revise the state’s requirements for new nuclear power plants, and require the state Department of Transportation (DOT) to consider greenhouse gas emissions when planning a new transportation project.

The bill, built on recommendations from the Governor’s Task Force on Global Warming, would require 25% of the state’s energy to be produced from renewable sources by 2025 and encourage businesses and residents to conserve energy and increase energy efficiency measures.

Taken together, the bill’s provisions would cut the state’s greenhouse gas emissions 22% by 2022 and 75% by 2050.

The bill will be introduced in the state Legislature after the winter break, and supporters would like to deliver it to the governor’s desk by April 22, 2010, the 40th anniversary of Earth Day.

Don't ease state's nuke power laws

From a letter to the editor by Chamomile Nusz, Amherst, and Bill Christofferson of The Capital Times:

Dear Editor: As co-chairs of the Wisconsin Network for Peace and Justice, a statewide network of 165 organizations working for social justice and a sustainable world, we ask Gov. Jim Doyle and members of the Legislature to continue Wisconsin’s long-standing and reasonable limitations on the construction of nuclear plants.

Although Doyle’s Task Force on Global Warming recommended changes to the nuclear power plant law, we believe that the current law provides vital protections to Wisconsin’s consumers, environment, and future generations — protections the proposed change would remove.

Current law requires that before the Public Service Commission can authorize the construction of a nuclear plant, “a federally licensed facility … with adequate capacity to dispose of high-level nuclear waste from all nuclear power plants operating in this state will be available, as necessary, for disposal of the waste.”

For more than 50 years, the nuclear industry and the federal government have failed to solve this critical problem.

Christofferson and Nusz co-chair the Wisconsin Network for Peace and Justice.