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Indian Point Closure Has Implications For Regional Power Markets, Corporate Business Strategy, and Public Policy

The following post was written by research groups within our Energy offering, including Research Associates, or RRA, and our Power Forecast team. For further information on the full reports, please request a call.

Indian Point, a two-unit, 2,071 MW, nuclear plant, located in Westchester County, NY, with its long history of operational, safety and environmental concerns, and close proximity to Manhattan, has frequently been referred to in political circles as "a catastrophe waiting to happen." Its closure has long been a top priority of New York Governor Andrew Cuomo.

On January 9, Indian Point owner Entergy Corp. announced an agreement under which Unit 2 would close in 2020, Unit 3 would close in 2021, and the state would drop all legal challenges and support the renewal of operating licenses for the units. The licenses for units 2 and 3 expired in 2013 and 2015, respectively.

From a market perspective, closure of the plant(s) could trigger a round of new generation infrastructure in the region over the next couple of years. If the Indian Point retirement is confirmed, the loss of more than 2,000 MW of nuclear generation will affect New York ISO, or NYISO, reserve margins, capacity markets, and regional CO2 emissions.

For Entergy Corp, the planned closure serves to eliminate growing uncertainty surrounding the viability of the units and reduces the company's forward-looking business risk profile. However, the move will also result in the loss of hundreds of millions in revenue and raises questions about how Entergy will fill any hole in cash flow resulting from the cessation of operations.

NYISO Market Implications

Due to its recent history of low load growth and surplus generation, NYISO has not been an active market for generation development. Peak demand growth in NYISO is projected to be nearly flat; through our Power Forecast tool, we estimate demand will grow by only 138 MW from 2017 to 2020, with additional generation need being driven by 531 MW of announced retirements.

NYISO supply and demand balance 

This modest need for generation is more than offset by new renewables and a single new combined-cycle plant, the CPV Valley Energy Center, which is jointly owned by Global Infrastructure Mgmt LLC's Competitive Power Ventures and Mitsubishi Corp.-UBS Realty Inc.'s Diamond Generating Corp.

Therefore, we forecast modest reserve margin growth, despite surplus capacity.

However, absent replacement generation, the retirement of Indian Point 2 and 3 in 2020 and 2021, respectively, will cause the NYISO to fall below its statewide reserve requirement of 17%.

Furthermore, the loss of 2,071 MW of net operating capacity in a single location may cause local generation deficits in the both the NYISO Control Area, or NYCA, and NYISO G-J capacity zones, creating substantial upward pressure on capacity prices.

With all other factors held constant, the retirement of Indian Point would increase the average notional summer capacity prices from 2020 to 2025 for the NYCA and G-J zones by approximately 80% and 190%, respectively. The NYCA Winter and G-J Winter prices would rise approximately 100% and 300% over the same period.

While current capacity markets in NYISO do not cover the 2020 to 2021 period, the prospect of higher capacity prices may incentivize generation proposals in upstate New York. Projects to offset the retirement of Indian Point could move forward by 2020.

Entergy Business Strategy

The Indian Point settlement eliminates uncertainty with respect to contentious cooling water issues, and the need for Entergy to incur re-licensing costs and invest more than $1 billion in Indian Point cooling towers to comply with state demands.

Entergy estimated revenues

However, closure of the plants represents certain challenges as well. The Indian Point station is estimated to generate almost $850 million in revenue in 2017, according to the financial and operational forecast model within our SNL Energy database.

Total energy sales revenue for the two units is forecast at $681 million, while revenue from capacity payments is estimated at $168 million. The facility's operating margin after the deduction of total operating and maintenance expense is forecast at $375.3 million. SNL Energy forecasts a 26% drop in operating margin in 2018.

The plant closures are forecast to result in a $1.5 billion after-tax, noncash charge that would be recorded in the fourth-quarter of 2016, and additional charges totaling $180 million for severance and employee retention costs over the course of the shutdown.

Regulatory/Public Policy implications

Advanced planning associated with the potential retirement of the Indian Point nuclear plant has been underway since late 2012, when the New York Public Service Commission, at the behest of Cuomo, directed Consolidated Edison Inc. subsidiary Consolidated Edison Co. of New York Inc. and the New York Power Authority to develop a contingency plan to address reliability needs that would arise in the event the Indian Point units are shut down.

The state's support for the closure of this "down-state" facility provides a stark contrast to the PSC's Clean Energy Standard, or CES, that was adopted in August 2016, and calls for 50% of New York's electricity to be procured from renewable energy sources by 2030; the plan also creates a zero-emissions credit, or ZEC, framework designed to preserve the environmental attributes of zero-emission nuclear-powered generating facilities operating within the state.

Owned capacity of operating NY nuclear plants

The CES order lays out a path for continued operation of the certain "at-risk" upstate nuclear facilities including the 852 MW James A. FitzPatrick plant, the 582 MW R.E. Ginna plant, and the 1,937 MW Nine Mile Point.

By contrast, in its Indian Point order, the PSC determined that the facility's "zero-emissions attributes" were not at risk and therefore, would not be considered for such subsidies. According to the PSC, Indian Point is located in an area of higher electric system constraints and has a much higher level of market revenues. Even so, the PSC left open the possibility for ZEC compensation in the future.

The closure of the Indian Point plant and the need to obtain replacement power raise interesting and in some ways conflicting implications for transmission development in the state. Given New York's emphasis on renewable energy, as exemplified in its Reforming the Energy Vision program, one course of action could be to replace or offset the loss of generating capacity with distributed generation resources and demand reduction/conservation initiatives. However, since the state is also pursuing the importation of hydro capacity from Canada, additional transmission capacity would likely need to be constructed, especially to deliver this capacity to downstate load centers.

Nationwide, a handful of other states have demonstrated an interest in taking steps to forestall the potential closure of nuclear facilities or to remove obstacles to the construction of new facilities. In addition, calls to action to preserve the nation's existing nuclear generation fleet and the economic, environmental, and reliability benefits that they provide have been articulated at many forums including the Edison Electric Institute, the National Association of Regulatory Utility Commissioners, and Legislative Summit held by the National Conference of State Legislatures.

Over the past few years, efforts to protect various types of non-nuclear plants deemed to be at-risk have met with limited success due to legal challenges that raise questions with respect to the boundaries between federal and state jurisdiction. It remains to be seen how the nuclear initiatives will fare.