Exelon has an offer for Illinois state policymakers. If customers foot a $580 million bailout package, Exelon might -- might -- keep open all of its nuclear generators in the state, avoiding $3.6 billion in costs. Deal?
Exelon, one of the largest electricity companies in the country, is losing money on at least two of its nuclear generating stations in the state. The company blames this on low natural gas prices, and more on the federal Production Tax Credit (PTC) for wind, which it sees as an unfair subsidy. It also claims its fleet of low-emissions nuclear plants are not fairly compensated for helping combat climate change, and as such, it is seeking $6 per megawatt-hour in compensation.
The company provides thousands of good jobs, particularly union jobs, in a state where organized labor remains a driving force in politics. Exelon argues these jobs could be at stake if it doesn’t receive the support requested. Exelon is also one of the largest taxpayers in a state that is currently running a $45 billion deficit.
How did Exelon get here? For one, the company bet big on nuclear power. It now owns and operates more nuclear reactors than any other company in the country. This has locked the company into enormous investments and an expensive, inflexible generation portfolio.
The portfolio does, however, have a very low greenhouse gas emission profile. As a result, the company has been a strong supporter of climate legislation. John Rowe, the former CEO, was one of the leading advocates for the 2009 Waxman-Markey cap-and-trade bill. Exelon stood to gain a substantial advantage from its clean generation portfolio, but it was not meant to be.
In the face of the federal stalemate on climate legislation, Exelon turned its attention to attacking the PTC for wind. The 2-cent credit disadvantages Exelon’s nuclear generation in wholesale markets, as nuclear plants cannot efficiently respond to fluctuations in demand. Exelon has, on occasion, had to pay for offtake of its nuclear power as a result. The campaign against the PTC was largely successful, preventing its extension.
Now, though the company would be loath to admit it, Exelon finds itself in the paradoxical position of hemorrhaging money, yet dictating policy. In Illinois, efforts to fix the state’s broken renewable portfolio standard have stalled. With these recent threats to shutter a substantial amount of clean generation and its position as the largest power company in the state, Exelon is in a position to develop new energy legislation.
At stake are not only the $3.6 billion in jobs, tax revenue and indirect economic benefits for the state, but also the potential for taxpayers to be on the hook for billions of dollars in nuclear decommissioning costs. Moreover, the policy implications could extend beyond Illinois’ borders, as many observers believe the forthcoming state energy bill expected in early 2015 will largely establish Illinois’ plan to comply with the U.S. EPA’s recent Clean Power Plan requirements. Other states and utilities are watching closely, as the political situation means Illinois will be a first mover in developing a Clean Power Plan compliance strategy.
So while Exelon fights for its financial liability, it may also play an outsized role in shaping energy policy across the country. This is increasingly true as the company seeks to acquire Pepco Holdings, which serves customers in Washington, D.C., Virginia, Maryland and Delaware. The deal was recently approved in Virginia, but Maryland customers, advocates and regulators are more skeptical.
For Exelon, the acquisition is an effort to diversify its business and open new sources of revenue. Opponents of the deal argue Exelon’s nuclear liabilities could be imposed on Pepco customers in the future. If the deal goes through, Exelon companies Pepco and Baltimore Gas & Electric would serve approximately 85 percent of Maryland customers, wielding great influence at the state house.
In addition to seeking financial support for its nuclear fleet, Exelon wants to diversify. It acquired Constellation (including Baltimore Gas & Electric) in 2012, both for its generation assets, as well as an expanded customer base. In an acknowledgement of the shifting economics of power generation, Exelon recently announced it will invest $500 million to add 2,000 megawatts of natural gas generation in Texas.
As the company’s diminishing credit rating and stock performance indicate, significant uncertainty remains. Many of Exelon’s nuclear assets are nearing the end of their operating permits, and renewal is not guaranteed. Yet customers and taxpayers cannot write the company a blank check; if any bailout or acquisition moves forward, it should come with significant strings attached.
There are efforts underway, such as the New York Public Service Commission’s Reforming the Energy Vision and Maryland’s Utility 2.0, that may guide some of the stipulations contingent to approval of a deal. How Exelon uses its political influence to salvage its business -- and how regulators and legislators respond -- has huge implications for the climate, workers and consumers. Let us hope a solution can be forged to protect all three.