Carbon Pricing is Key to Economic Viability of Xcel’s Nuclear Power Plants in Minnesota

November 8, 2018 | 12:01 am
Photo: Source: Nuclear Regulatory Commission/Flickr
Steve Clemmer
Director of Energy Research & Analysis

A new UCS report released today found that more than one-third of U.S. nuclear plants–representing 22 percent of total US nuclear capacity–are uneconomic or slated to retire over the next decade under current market conditions. The UCS study, The Nuclear Power Dilemma, shows that the economic viability of the nation’s nuclear plants is threatened by low natural gas prices, the declining cost of renewable energy, investments in energy efficiency, and the costs of upgrading aging plants to ensure safe operation.

The uneconomic plants include Xcel’s Monticello and Prairie Island nuclear power plants, which provided 23 percent of Minnesota’s electricity generation in 2017 and about half of the state’s low carbon electricity. A key reason why these plants appear to be uneconomic compared to cheaper alternatives is because current market prices do not include the costs and damages inflicted on the climate and society from burning fossil fuels.

Without strong policies such as a meaningful economy-wide cap or price on carbon emissions, the study found that natural gas and coal would largely replace the lost generation from closing at-risk nuclear plants before their operating licenses expire, resulting in an increase in US power sector carbon emissions over the next two decades. In stark contrast, the Intergovernmental Panel on Climate Change (IPCC) released a sobering report last month showing that to limit global average temperature increases to 1.5o Celsius (2.7o Fahrenheit) and avoid some of the worst impacts of climate change, the US and other countries will need to achieve net zero global warming emissions by 2050, with half of those reductions coming by 2030.

US nuclear power plants at risk of early closure or slated for early retirement

More than one-third of existing plants, representing 22 percent of US nuclear capacity, are unprofitable or scheduled to close.

What does this mean for Minnesota?

The UCS study analyzes the economic viability of the nation’s nuclear plants based on how much revenue they could earn from selling electricity into the wholesale market and from providing capacity to the electricity system during times of peak demand compared to how much it costs to operate them. The study’s methodology and results are consistent with several recent studies by MIT, Bloomberg and others, that also showed Monticello and Prairie Island are more expensive than cheaper energy alternatives available in market.

The risk of closing of these plants early is lower than nuclear plants owned by “merchant” generators that sell their power in states and regions with competitive markets. This is because regulated utilities like Xcel are typically allowed to recover the costs of operating their plants from customers, along with a return on investment, subject to approval from state Public Utilities Commissions (PUCs).

While the risk might be lower, regulated utilities are not completely immune from the market pressures of lower cost alternatives. For example, the fact that regulated utilities have also historically received cost recovery for coal plants hasn’t stopped Xcel and other regulated utilities across the country from retiring and replacing them with lower cost alternatives such as natural gas, wind, solar and efficiency. And like many utilities that needed to make investments in pollution control equipment to reduce public health impacts from coal plants, Xcel and many other utilities are planning on making major capital investments to upgrade their aging nuclear plants.

Earlier this year, the Minnesota legislature rejected a bill that would have pre-approved $1.4 billion in new upgrades over the next 17 years to keep Xcel’s nuclear plants running until their operating licenses expire. UCS and many Minnesota groups opposed this legislation because it would have circumvented the state PUC, which provides important oversight to make sure any new utility investments are prudent for ratepayers compared to other alternatives. Retaining the PUC’s authority to oversee these investments is especially important given the over $400 million in cost overruns and delays Xcel experienced when they made the last major upgrades to Monticello in 2013.

A meaningful value for low-carbon generation makes Xcel’s nuclear plants profitable

Today, the price of coal and natural gas does not reflect the costs inflicted on society from climate change that results from burning fossil fuels. The UCS report recommends national or state policies that put a cap or price on carbon emissions as the best approach to address this market failure and level the playing field for all low carbon technologies.

Our analysis shows that a national price on carbon dioxide (CO2) emissions that starts at $25 per metric ton in 2020 and increases 5 percent per year would be enough to make Monticello, Prairie Island, and all of the other uneconomic nuclear plants in the country profitable. While Minnesota currently does not have a carbon price, the Minnesota PUC has required Xcel and other utilities to include a range of CO2 prices in their Integrated Resource Plan (IRP) modeling since 2008. Working with other clean energy groups in Minnesota, UCS played an important role in advocating for this.

The PUC updated these values earlier this year, requiring utilities to model scenarios that include a range of $5-$25 per ton of CO2 starting in 2025 to reflect the likelihood of future CO2 regulatory costs. The PUC also requires utilities to include in their modeling a range of environmental externality costs of $8.44-$39.76 per ton of CO2 in 2017, increasing to $15.20-$69.48 per ton of CO2 in 2050, based on the federal social cost of carbon.

Xcel is counting on nuclear to meet its 2030 carbon-free vision

Xcel is in the process of conducting modeling for its next IRP to determine the mix of electric generating technologies they will invest in between 2019 and 2034 to meet electricity demand, while maintaining reliability and minimizing costs to customers. The plan is due February 1, 2019, but Xcel recently requested a five-month extension to July 1.

Xcel is counting on running both of its nuclear plants until their 60-year operating licenses expire (in 2030 for Monticello, and in 2033 and 2034 for the two reactors at Prairie Island) to meet the utility’s goal of 85 percent carbon-free electricity by 2030 across its system in the Upper Midwest. To achieve this goal, Xcel is retiring and replacing most of their coal plants in Minnesota with energy efficiency, major new investments in wind and solar power that would increase renewables to 60 percent of their electricity sales by 2030, and a new natural gas plant that was recently approved by the legislature. At the same time, Xcel is projecting an increase in electrification of vehicles and buildings that will result in greater electricity demand and the need for more low carbon generation.

Source: Xcel CEO Ben Fowke presentation to Minnesota PUC, October 17, 2017

Replacing an additional 1,770 MW of capacity from Xcel’s nuclear plants in the next decade would be challenging to do, without increasing natural gas use and carbon emissions. In addition to making it difficult for Xcel to achieve its emission reduction targets, an overreliance on natural gas would pose economic risks to consumers. But with more time and continued cost reductions for clean energy, it’s more likely that Xcel could replace its nuclear plants with renewables, efficiency and other low carbon technologies when their licenses expire.

Xcel is required to consider these tradeoffs as part of its IRP. The IRP process at the PUC is the appropriate venue to evaluate these complicated tradeoffs—including whether the $1.4 billion Xcel wants to invest in upgrades for its nuclear plants is the best way to spend ratepayer money compared to other low carbon alternatives. The legislature is not the place to address these complex issues.

Time for the next generation of climate and clean energy policies in Minnesota 

It has been more than a decade since Minnesota has passed major climate and clean energy legislation. The Next Generation Energy Act of 2007 required Minnesota utilities to meet a renewable electricity standard of 25 percent by 2025 (and 30 percent for Xcel), achieve energy efficiency savings targets to reduce electricity and natural gas usage by 1.5 percent per year, and adopt a statewide goal of reducing global warming emissions at least 30 percent below 2005 levels by 2025 and at least 80 percent by 2050.

As I have mentioned in previous blogs, these policies have made Xcel and Minnesota national clean energy leaders. But since 2007, six states have adopted higher renewable standards of 50 percent or more by 2030 and other leading states have adopted stronger energy efficiency standards that reduce electricity use by 2-3 percent per year. In addition, the cost of deploying wind, solar, and battery storage has fallen dramatically over the past decade, while many energy efficient technologies, such as LED lighting, have also improved.

Despite progress, Minnesota still has a long way to go to meet its statewide emission reduction targets. Reducing emissions 80 percent by 2050 will likely require increased electrification of vehicles and buildings with zero carbon electricity sources to achieve reductions in other sectors. Stronger climate and clean energy policies will be needed to meet these targets and to ensure that when Xcel’s nuclear plants are eventually retired, they are replaced with low carbon technologies.