Sunday, November 21, 2010

Will Entergy Get an Offer On Vermont Yankee? Three Myths Dispelled

Right after the election, Entergy announced Vermont Yankee was on the market. The local response was completely predictable: "Nobody in their right mind would buy that plant!" I disagree. I think someone will buy it.

I need to point out that I have no insider information on this. I only know what I read in the paper.

Myth One: Nobody will offer for that old rustbucket.

In the eighties and early 90s, it became clear that a company that owned only one nuclear plant could not run it well. Some nuclear plants in this situation were closed (Rancho Seco, Trojan). Most nuclear plants were purchased by big companies. Today, a company owns more than one nuclear plant, or it owns no nuclear plants at all.

In other words, the only companies that might offer for Vermont Yankee are companies that already own nuclear plants. These companies know how to judge a nuclear plant, and they know that Vermont Yankee is a good one:
  • Green rating from NRC
  • Recent power runs of more than 500 days each
  • Good relationships with the on-site union
  • Industry-wide award for innovative inspection equipment
  • Caught and repaired its tritium leak much faster than many other plants which had similar leaks.
Anyone who owns a nuclear plant would like Vermont Yankee.

Myth Two: Vermont Yankee doesn't have a license to operate past 2012, so nobody will want it.

A buyer can make a contingent offer. We made a contingent offer on a house at one point. Buying our new house was contingent on selling our old house for a certain sum by a certain date. Such offers are very common in all sorts of contracts. Our house offer was accepted, and the next phase of the purchase was called clearing the contingencies. Then we closed on the house. We owned it.

You can do this with a power plant, too. "We offer you this much, contingent on having license renewal approved."

Can the new utility clear the contingencies? Or will it be an offer with no closure? Nobody can completely predict the outcome of contingent offers, or they wouldn't need to be contingent. But I think the purchasing utility will sweeten the deal for the legislature and clear the contingencies. Perhaps the new utility will supply more money for the Clean Energy Development Fund. Perhaps it will make a one-time tax payment or cut a really good deal for a power purchase agreement.

In any case, there will be a new set of money on the table, and Vermont has a $112 million budget shortfall next year. I think a new utility can finalize the deal. However, nobody really knows about a contingent deal until it is near closing. That's why I headed this post "Will Entergy get an offer" rather than "Will Entergy sell the plant." I feel confident Entergy will get an offer.

Myth Three: The shortfall in the Decommissioning Fund means nobody will buy the plant

The decommissioning fund contains about $350 million, and decommissioning is estimated to cost about $800 million. This isn't actually a killer. If the plant operates for another 20 years, it will be easy to fill the fund completely with money from electricity sales.

Some opponents take the position that the customers buying nuclear electricity should not have to pay for decommissioning. They believe that decommissioning money needs to fall like a golden rain from heaven, or be some sort of charge against Entergy stock in the future. That is a very unrealistic view of finance. Luckily, neither golden rain nor charges against stock will be necessary. Nuclear power plants can provide the cheapest power on the market and still put a few mills per kWh away for decommissioning.

I don't know how the deal will be structured, but I know it is possible.The status of the decommissioning fund will not deter a buyer who plans to operate the plant for another twenty years.

In short, I predict that Entergy will receive an offer on Vermont Yankee.

Currency image and golden eagle dollar image from Wikimedia Commons.

18 comments:

Jeff Schmidt said...

I get the impression that a lot of the motivation to not re-license VY comes from a loss of faith by the Vermont public and VT Legislature in Entergy, specifically, not so much Vermont Yankee, because they feel that Entergy lied to them about water pipes being underground? Is that a valid impression?

Do you think that an offer from a nuclear operator with no bad history in Vermont, and in particular, no bad operational history anywhere (hopefully), might change to political discussion in Montpelier? Do you think that the prospect of a new owner might convince people to give VY another chance?

Meredith Angwin said...

Jeff. I think so. I even said so, back in May, in this post.

http://yesvy.blogspot.com/2010/05/entergy-communications.html

Mike Mulligan said...

The mistakes of the past, such as the excess profits coming from the PPA…nobody ever specified the appropriate cost of maintenance and plant upkeep.

We are making the same mistake as we have in the past, with not talking about plant maintenance and upkeep.

Martin Langeveld said...

I agree that there's a deal to be made, and that it would be hard for our new governor, all campaign statements notwithstanding, to turn down an offer from a new operator with four components: (a) a solid plan for funding the decommissioning so that it's guaranteed to begin in 2032; (2) a long-term power contract at an attractive rate, (3) some kind of accelerated tax payments as sweetener, and (4) commitments on various confidence-building technical improvements (which might include, for example, putting those below-grade pipes into human-inspectable tunnels to eliminate all chance of future leaks into groundwater).

So, what I would like to know is: how much do you think VY with a 20-year renewal is worth?

Meredith Angwin said...

Martin

Great question!

I was going to post about that, and then I found myself wound up in so many knots trying to figure it out that I decided "how much should be offered" would just have to be a different post!

One of the problems is that everything is interrelated. How much the plant is worth depends on how good a deal the new utility can cut for power.

I think they might follow the HQ lead, and give a lovely deal...but for less power delivery. Renewable people would be happy (plenty of room for our power!). Legislators would be happy (look at the terrific rates we got for Vermont!) And the plant would be happy, because plenty of their power would be going at merchant levels, and making tons of money.

Anyhow, I hope to do more of this later. It ain't easy.

Howard Shaffer said...

Great blog.

What makes it tough now is the projected price of natural gas.

When Entergy bought the plant, it was a bet on the future price of natural gas. Now, with the new discoveries, the game has changed, I think.

Meredith Angwin said...

Catching up with the comments:

Mike. I think Martin has a comment along the same lines...for example, requiring the new owner to reroute the pipes and make them easy to inspect. As I have said before, you and I disagree about the state of the plant. I don't think it has been neglected. I think the power runs show that. But neglected or not, the plant can always be better.

Howard. Yes. Natural gas prices are low right now. They were low in 2002, as I recall, which is why Entergy made a deal for 4.2 cents/kWh. 2002 was not a good economic year. If you look at the chart on this page, you see how the prices were mostly 2 cents to 4 cents in 2002. You will also see how much they change over time.

http://www.tradingeconomics.com/Economics/Commodities.aspx?Symbol=NG1

New gas discoveries. It's always quite cyclical. New discovery means cheap gas means using more gas means expensive gas. I don't think the new discoveries are a game-changer, though I admit they might be.

Jeff Schmidt said...

I wonder if the NG drilling pollution protesters will have any impact on this discussion? About 6 months ago, there was a lot of media interest in a documentary which one of the cable channels aired, called, I think it was Gasland, showing how ground water was getting polluted by the natural gas drilling operations.

I'm not anti-gas, but I do think that the Natural Gas producers should be subject to an adequate environmental protection environment, similar to other drilling and mining operations. If Congress does that, I can't see how that wouldn't raise the price of natural gas a bit as well (regulation always costs money, but is also, usually, necessary, to prevent the sorts of problems illustrated in Gasland).

Mike Mulligan said...

VY knows about the long list of stuff they have to upgrade, like the main condenser and other issues outlined by the legislators. As a show of faith they should take a early upgrade shutdown, say for 6 months and spend some big bucks before 2112. They should start with a clean slate for their relicense period.

Nobody will be able to take a ten year period of plant upgrades post relicense...that they been putting off for the last decade.

It is common practice across our energy sector…they have been making so much money and their business structure…they don’t compete anymore to make our lives better, they compete to sabotage each other, better yet they sabotage us and our nation. At the end of the day, this economic accommodation benefits all the CEOs because it drives up prices for all of us.

Meredith Angwin said...

Mike,

Thank you for bringing up the issue of upgrading. It is very important. However, I doubt it will be done before 2012, and here's why.

I heard the distribution utilities testify before the Vermont House Natural Resources Committee about two years ago. The utilites wanted the House to make sure that VY did NOT shut down to do the upgrades before 2012!

Their reasoning was as follows: VY has a contract to supply us with electricity at 4.2 cents/kWh from now until 2012. After that, assuming they continue to operate, they will get a new contract, and it will almost certainly be for a higher price. (HQ contracts run around 6 cents, for example.) If VY goes off line, they will want to lose the least money possible. They'd rather give up 4 cents than 6 cents.

So, we think they will try to upgrade sometime in 2011 and be off-line for months, denying us our expected inexpensive power. The utilities asked: Please don't let them do that! Make them wait till 2012, when the replacement power we buy will be closer to the costs we would have had to pay them.

When should VY go off-line to upgrade? I'm glad I don't have to make that decision, because I suspect SOMEBODY is going to be mad, whenever it happens!

Jeff Schmidt said...

Would it really take 10 years to upgrade? It doesn't make sense to take 10 years to upgrade a plant that's only being re-licensed for 20 years - half the time would be spent upgrading!

If the 20 year period took effect *after* the upgrade outtage, that might make sense.

Is there any possibility for further extensions after this first 20 year relicensing? If I was an investor looking at upgrading a facility, I'd want to have the possibility to make the argument that, "Hey, we spent X dollars upgrading and modernizing the facility; due to the investment, we feel it would be safe to allow the plant to continue to operate for an additional 20 years, after the first 20 year re-licensing, and we would like the state to consider our request."

Meredith Angwin said...

Jeff

So far, no plants have been relicensed after sixty years operation, and I have no idea if it is possible. I know there is some talk about "life after sixty" in the industry. My own hope is that we have a nice shiny new fleet of reactors by then!

Ten years to upgrade? It certainly would not be ten years. In general, we are talking about a longish (six month?) shut-down to upgrade some major components, such as the condenser.

Jeff Schmidt said...

Meredith, thanks for your response. I didn't think 10 years sounded like a reasonable timeframe for upgrades, but that was in response to Mike Mulligan's comment. . .

"Nobody will be able to take a ten year period of plant upgrades post relicense"

However, that comment is open to some interpretation. Perhaps what he means is a 10 year period during which the plant has periods of being offline for upgrades - maybe 5 or 6 upgrade projects happen, once per year or year and a half, but not continuously offline for 10 years?

Meredith Angwin said...

Jeff. I am sorry. I don't know what Mike meant. Perhaps several longer outages over a ten year period while various upgrades are done?

From testimony I heard, the majority of upgrades could be done in one fell swoop, with the plant offline for a few months. But honestly, I don't know. And they wouldn't want to be offline during the high-use season (summer) so they might well choose to be off-line only for sixty days at a time, spring and fall. They could get it done that way. Upgrade planning at this level is getting beyond my expertise, but I do know that it wouldn't be a ten-year, full-time project.

Martin Langeveld said...

In any case, we are talking about a long-ish, mostly sequential timeline here.

Right now, various possible buyers are kicking the tires. Let's assume it takes 3 months to get offers on the table, and 3 more months to hash out a conditional purchase agreement.

Then, there has to be an agreement with Vermont. That has to include a power deal, upgrades deal, tax deal, and decom fund deal. And it doesn't just have to get past the governor, but through the legislature as well. Figure 9 months, minimum, for that one.

Meanwhile the NRC has to approve relicensing as well. Even if that happens totally concurrent to the above, we're basically at the start of 2012 now. Then, there has to be a lot more lawyering to get the actual deal done, because the agreements with Vermont are bound to require all kinds of modifications to the conditional purchase & sale agreement. Figure another 3 months. By that time, it's essentially shutdown time.

Presumably, at that point, the sale goes through and the new owner gears up to do the upgrades. And there has to be a refueling in their sometime, too. I would guess that for everybody to be happy that means a 12-month shutdown, not 6.

So if everything clicks, the new owner powers up the plant mid-2013.

Meredith Angwin said...

Martin, your timeline for the purchase seems reasonable to me. However, nuclear plants have gotten fast-like-bunnies at doing upgrades. I remember when the first steam generator had to be replaced. Oh my! It took somewhere around 10 months. When it was over, all us EPRI folk trooped in to the auditorium to watch a film about "lessons learned" in the replacement. It was a big deal. Now, I think replacing steam generators adds about another 30 days on to a refueling outage.

I may be exaggerating a bit. Replacing a steam generator may well be longer than sixty days elapsed time from when the plant goes off-line. But the point is the same, even if my numbers are not totally correct. Nuclear plants are getting very fast at refurbishing themselves, and they are doing amazing outage planning. I think the VY upgrades will be closer to six months than to 12.

Jimmy Carter, nucular engineer said...

I started reading this article and thought it might actually have a piont. Then, I saw Mike Mulligan posting -- time to move on.

Meredith Angwin said...

I posted your comment, "Jimmy Carter". I posted it this time. I wouldn't post a similar comment again. I dump this sort of comment.

You posted anonymously. You used your post to attack another commenter for being who he is, rather than respond to the contents of his comments.

In short. Mike contributed to the discussion, and you didn't.