UBS: Palisades shutdown by spring 2017, replacement with "cheap renewables," would benefit Entergy, CMS, & ratepayers

In a report entitled U.S. Electric Utilities & IPPs: Reacting to Retirements, UBS has advised investors that Entergy and CMS (Consumers Energy), as well as area electric ratepayers, would benefit significantly from the near-term (spring 2017) permanent shutdown of the problem-plagued Palisades atomic reactor. (IPP stands for Independent Power Producer.)

A relevant section reports:

Contracted nuclear fleet at risk as well too

Further, we see long-term contracted plants as also at particular risk of shutdown as utilities have little incentive (ratebase) and high costs attached to these typically smaller facilities. An update from ETR around its Fall EEI update on its nuclear portfolio could potentially include an arrangement with CMS on premature retirement of Palisades. We think such arrangements across the Midwest could materialize over time (depending on progress in achieving carbon goals with wind, etc). [Page 1]

The Debate at Palisades: Illuminating the Dilemma

Focus has shifted towards Michigan where the conversation revolves around ETR’s remaining single-unit plant, Palisades, which continues to run with an above-market contract with CMS. We reiterate our view that shutting down this unit early could not only save money for ETR in operating the plant and accelerating its strategic positioning away from nuclear but also reduce delivered costs to CMS consumers avoiding the cost of such a high-priced PPA. While merchant IPPs have been on the front end of the latest retirement wave, we see a trend towards regulated entities should the industry prove unable to rein in costs. We emphasize with power prices across much of the country now trending below $30/MWh – and capacity contributing an additional $5-10/MWh, the implicit value of carbon remains the key 'discrepancy' in justifying the economics of these plants.

Both sides would likely save costs

We believe a scenario in which Entergy opts to shut down Palisades nuclear plant during the spring 2017 refueling timeframe would likely be mutually beneficial for CMS/ETR later this year (~3Q timeframe for ETR decision) and envisage scope for CMS and ETR to arrive at a mutually agreeable arrangement to close the plant early and effectively replace the arrangement with a lower all-in cost solution, such as ratebasing further available merchant capacity in the MISO market for instance. This would likely result in both CMS and ETR respectively transitioning to a more regulated profile. Further, we see an early retirement scenario as likely addressing ongoing concerns around nuclear sustenance capital. An update could be provided in tandem with ETR's EEI capex update on its future nuclear strategy. Given its spring 2017 outage, we see this Fall timeframe as still providing latitude for a possible expedited retirement as soon as next year. [Page 3-4]

UBS asks, and answers, this key question:

What's changing in the equation? Cheap Renewables.

...We see the improving cost profile of renewables as adding to nuclear pressures. [Page 4]

UBS later states:

Bottom line, we would expect continued retirement in restructured markets as [nuclear] plants continue to be undermined by zero-cost renewables. (emphasis added) [Page 5] 

It should be noted that Dr. Mark Cooper, Senior Fellow for Economic Analysis at the Vermont Law School Institute for Energy and the Environment, accurately predicted, three years ago, many of the recently announced reactor closures in the U.S. One of the reactors he considered at high-risk of near-term shutdown was Palisades.

His report was entitled "Renaissance in Reverse: Competition Pushes Aging U.S. Nuclear Reactors to the Brink of Economic Abandonment." His analysis was based in part on UBS investment analyses at that time.

Included among the factors that Dr. Cooper listed as to why Palisades was at risk of near-term shutdown were: economic factors (cost, old, merchant, less than 25 years with license extension [stand alone should have been included -- Palisades is a single reactor plant]; operational factors (long term outage); and multiple safety issues. [See Exhibit ES-1, Retirement Risk Factors of the Nuclear Fleet, page iv.]