Vermont Yankee Nuclear Power Plant to Close

Power Plant

Entergy’s decision to close Vermont Yankee in 2014 was based on a number of financial factors, including:

— A natural gas market that has undergone a transformational shift in supply due to the impacts of shale gas, resulting in sustained low natural gas prices and wholesale energy prices.

— A high cost structure for this single unit plant. Since 2002, the company has invested more than $400 million in the safe and reliable operation of the facility. In addition, the financial impact of cumulative regulation is especially challenging to a small plant in these market conditions.

— Wholesale market design flaws that continue to result in artificially low energy and capacity prices in the region, and do not provide adequate compensation to merchant nuclear plants for the fuel diversity benefits they provide.

Making the decision now and operating through the fourth quarter of 2014 allows time to duly and properly plan for a safe and orderly shutdown and prepare filings with the NRC regarding shutdown and decommissioning. Entergy will establish a decommissioning planning organization responsible for planning and executing the safe and efficient decommissioning of the facility. Once the plant is shut down, workers will de-fuel the reactor and place the plant into SAFSTOR, a process whereby a nuclear facility is placed and maintained in a condition that allows it to be safely secured, monitored and stored.

“We are committed to the safe and reliable operation of Vermont Yankee until shutdown, followed by a safe, orderly and environmentally responsible decommissioning process,” Denault said.

Energy Market Trend for April-May 2013

A month ago NYMEX futures broke out of their range and exceeded $3.60 per MMBtu for the first time in four months.  A month later those prices look like a bargain as prompt month gas futures have broken $4.20 for the first time since July 2011.  Why?  The primary reason was the weather as March was COLD.  Heating demand depleted storage inventories to levels not seen since the last time that gas was over $4.10 – no coincidence there.  But the long-term picture is a bit different and not as grim.   Gas futures for 2014 are up significantly less than the near-term and 2015 and 2016 are down.  The bottom line is that the rally is being driven by near-term fundamentals while long –term prices have stabilized thanks to shale reserves resulting in a much flatter forward curve.  The detail is in the numbers below:

Prices as of 4/12/13        Change since 3/7/13

Prompt month natural gas           4.22                                        +0.64

12-Month Strip                                 4.37                                        +0.52

Calendar 2014                                   4.26                                        +0.15

Calendar 2015                                   4.27                                        -0.03

Calendar 2016                                   4.36                                        -0.09

($ per MMBtu)


Details on the Fundamentals:



The short story is that we had a winter this year while last year we did not.  Although nowhere near record cold, it was dramatically colder than the record warm winter of 2011-12.  And March was especially cold while last March was especially warm, so winter’s last gasp resulted in a strong surge of demand and storage withdrawals that stoked the market rally.  So now the market can breathe for a month and get ready for summer.  Early forecasts are calling for above normal temps as well as an above normal hurricane season.  But temps are tremendously difficult to predict this far out and storm direction is more important than count.  So for now, summer should be categorized as a critical and imminent point.

Natural Gas Storage :

The impact of weather on gas demand and gas prices is very evident through the trends in natural gas storage.  Over the last month we have seen the culmination of the gradual deterioration of the huge natural gas storage surplus that peaked in April 2012 at the same time that prices hit 10-year lows.  Storage inventories are now far below levels from a year ago and even below the 5-year average.  Here is the data:  current inventories equal 1,673 Bcf which is 804 Bcf or 32.5% below a year ago and 66 Bcf or 3.8% below the 5-year average.  The reduced inventories will result in additional summer gas demand to refill storage reservoirs in order to prepare for next winter.  This increase in demand pushes prices up for this summer and the possibility that we will go into winter with reduced inventories has increased prices for next winter.  But storage has limited impact on prices for the beyond next winter and this is a key reason that prices for 2015 and beyond have not been part of the recent rally.


Despite the rally, shale gas remains the dominant factor in natural gas prices.  Prices plummeted from 2008 to 2012 while crude oil prices eventually rebounded after the global recession.  And limits to recent price upside and the stickiness of long-term prices have clearly been partially attributed to the enormous shale gas reserves in the US.  At the same time, when the market found a bottom in 2012 and rebounded, one cause was producer reaction to low prices.  The market was just too low and drilling economics are likely to limit both upside and downside in prices for some time to come.  So while production remains strong, it has declined by close to 1 Bcf/day since the peak last November – an indication that producer did react to low prices of 2012.  But new estimates of US recoverable gas reserves were just increased by 20% to 2,384 (close to 100 years of supply at current usage levels) by the Potential Gas Committee, primarily driven by updated data for shale in the Eastern US including the Marcellus.  Although the economics of much of these reserves is uncertain, the amount certainly limits price upside.

Other Factors:

There are numerous other factors driving prices and most remain unchanged.  EPA regulations and LNG export both are highly likely to impact gas demand as soon as 2015.

In addition to impacts of trends in the NYMEX, both regional gas basis and regional power issues are driving power prices:

  • New England – winter gas basis volatility remains a hot topic with forward prices remain elevated as supply challenges due to pipeline constraints and reduced LNG imports expected to continue for the next several years.
  • New York – gas basis will get some relief thanks to pipeline expansions.
  • PJM – this market has seen the least volatility due to impacts of Marcellus shale, but capacity prices are changing significantly and are much higher for some parts of the ISO.
  • ERCOT – summer is around-the-corner and so are concerns about adequate reserves and risk of hitting the higher price caps.  Summer prices and heat rates are high.
  • California – Cap & Trade regulations have changed the market and uncertainty regarding generation from the San Onofre Nuclear Generating Station (SONGS) have ended California run of consistently low prices.

Market Outlook

The first question that we can answer with high confidence is that a repeat of the spring dip of 2012 is very unlikely to repeat.  The change in storage inventories from surplus to deficit is enough to prevent any such market crash.  Beyond storage, the market is “smarter” in 2013 by knowing the price points that require changes in supply and demand.  Power generator and gas producers behaviors have limited both upside and downside in the market.  This limits upside risk and this is apparent as long-term prices have stabilized, but also reduces chances for a big dip.  And the result has been an end to the seemingly never-ending prices declines from 2008 through 2012 and a flat price curve.

So what will trigger price spikes or buying opportunities?  Weather is critical as always, so watch out for the impact of summer heat and hurricanes.  It will be interesting to see whether producer activity picks up due to rising near-term prices.  And consumer demand from the industrial sectors has increased due to the US’s low natural gas prices compared to abroad.  The net effect is apparent in storage activity.  And key an eye on regional gas and power fundamentals and heat rates – watching the NYMEX alone is risky – ask customers in New England after last winter.

For the long-term, EPA regulations, LNG exports, Natural Gas Vehicles and the US economy will remain key drivers of the shape of the forward curve.

Fixed Price Customer Considerations

  • It is very difficult to buy in a rally and many customers are certainly frustrated as they have been waiting in vain for the supposedly “inevitabledip that the spring would bring.
  • Overall, higher prices are inevitable for most. It is possible that a dip is forthcoming, but targets from a month ago must be revised upward because any downward move before will be limited by the storage deficit.  Summer brings both potential risk and reward – so have a strategy to deal with both possibilities.
  • Budgets with year-over-year rate declines may be unrealistic depending on the timing of your previous contract and can result in undue risk by setting targets that are unlikely to occur.
  • Short-term contracts are a strategy to buy time, but do not recognize the possibility that current prices levels will be sustained or could move higher.
  • And long-term prices may still present a good value as they have risen much slower than the near-term.  And the flat forward curve provides opportunity for stable prices.

Consider Layering your contracts

  • Although they do not provide an escape from higher prices, products that allow layering have significant advantage during period of price strength by allowing initial layers to be utilized to mitigate risk with subsequent layers being utilized to take advantage of market dips, if they occur.
  • Hedging strategies will depend on both market fundamentals and customer risk tolerance.
  • Be careful of using prices from 2012 to form price targets except for final layers.
  • Even aggressive customers should be executing layers for the upcoming layers.
  • And initial layers should be considered if not already in place for 2014.
  • Recognize that the flat forward curve may provide significant value for layers into 2015.
  • Utilize seasonal layers to address regional concerns such as winter gas basis spikes in New England and summer price spikes in ERCOT due to heat.

 Customer message:  The overall message is actually the same as a month ago except that prices are higher and likelihood of a big dip in prices before summer has declined.  And this may be difficult for customers to accept since may have had consistent year-over-year declines since the peak of 2008.

    • Year-over-year declines in gas have stopped with 2012 likely being the bottom.
    • Range-bound gas behavior for the near-term with modestly higher prices possible for 2014.
    • Regional fundamentals are causing significant regional risks that must be considered.  If you only focus on natural gas, you are exposed to significant regional risks such as New England winter spikes and ERCOT summer spikes.

Increasing Use of Natural Gas May Lead to Infrastructure Issues

Natural Gas Pipeline

Inexpensive natural gas is affecting the traditionally favorable cost of coal-fired power plants. With increased shale production, estimates of recoverable domestic gas reserves have surged in recent years.

Natural gas should continue to increase its use in power plants as the EPA creates greenhouse gas regulations for new power generation that will “effectively ban new coal-fired power plants,” ScottMadden said.

“The electric industry is beginning to adjust its generation complement accordingly, as the shale gas boom makes gas-fired power compelling for new generation, at least for the moment,” the firm said.

The nuclear power industry is also facing new concerns as the Nuclear Regulatory Commission moves forward with new requirements move than a year after the Fukushima Dai-ichi meltdown in Japan.

The natural gas industry faces its own concerns, however, These concerns range from public pushback over fracking, to the need to address “aging pipes,” according to the consultant’s report.

Potential unknowns facing the natural gas industry include regulation of expanded exports of liquefied natural gas (LNG). With so many of its nuclear plants closed post-Fukushima, Japan is seen as a growing market for LNG. Meanwhile, back in the United States, there is the potential for natural gas to play a growing role in transportation fuel for motor vehicles.

Pipeline flow capacity constraints are emerging issues for the natural gas and power sectors. To meet a possible doubling of natural gas demand, an additional 24,000 miles of pipeline could be required in the new future. Gas companies will be major players in this future build-out of transportation infrastructure for power generation.

Electricity and Gas Energy Market Update

Natural Gas PipelineAfter reaching a recent high in late July, NYMEX gas prices fell for the first two weeks of August as weather moderated.  Prices have stabilized, but remain low overall.  One big customer question is whether there will be a fall dip in prices similar to 2009, 2011 and 2012.  Understand that electricity prices are influenced, in great part, by natural gas prices.

NYMEX Prices as of 8/22/12

Prompt (September):    $2.82 (we are down today due to bearish storage report)

12-Month Strip                 $3.31  (this is used for pricing 12 month contracts)

Cal 13                                    $3.54 (Calendar year 2013

Cal 14                                    $3.94

Cal 15                                    $4.15

Reasons for market movements

NYMEX prompt peaked on 7/31/12 at $3.27.  Calendar Strips also hit highs since February on or near that date.  Anemic storage injections and hot weather were key drivers.Note that through July 31st, this summer was hotter than last and 2012 was the hottest year on record.

    • However, August weather has been much milder and demand has dropped, leading to lower prices.
    • Prompt gas fell swiftly from $3.25 to near $2.75 by August 10th, but has been unable to sustain a move below $2.70 due to technical support and coal-to-gas switching.
    • Natural gas storage inventories remain on pace for a new record by the end of the injection season, but the likelihood of a storage glut has greatly diminished by below normal injections. Weekly injections have averaged 23 Bcf/week less than a year ago thereby reducing the surplus from 888 Bcf to 442 Bcf compared to a year ago.  At this pace, inventories will finish the season well below estimated national capacity of 4,100 Bcf.  (see storage chart for more detail and graphical illustration) .  Remember that based on national capacity of 4,100 Bcf, the surplus must decline to at least 248 Bcf since last year reached 3,852 Bcf
      • Last week’s storage report was larger than expected and prices are testing $2.70 support again.
  • Rig Counts – natural gas rig counts are down 45% versus a year ago and horizontal rig counts (mostly shale) are only up by 1%.  Production is relatively flat over the last few months – this may be due to improving shale technology, a backlog of wells that have been completed but not connected to the pipeline grid and the lag impact of placing rig versus starting production.  And rig counts are not always a reliable metric, but they are a trend indicator and lead to concerns about ongoing supply growth into 2013-14.
  • Coal-to-gas switching peak in the spring when gas prices were below $2.00.  For the first time since tracking began in the 1970’s, gas fired generation matched coal fired generation in the US supply stack.  This was due to economics – not EPA.  We expect ongoing strong switching, although not as much may be needed due to the shrinking storage surplus.  This is a factor that has allowed prices to move into the $2.75 – 3.25 range.  In the long-term (2015), EPA Mercury rules will be large driver of coal plant retirements in addition to low gas prices.
  • Hurricane season – the season is less of a concern as US supply migrates onshore due to shale gas, but there is still some risk.  So far 2012 has been quiet, but we are now in the peak of the season until mid-October.  Overall expectations for this season are not for an active season. Tropical Storm Isaac is currently in the Caribbean and is a threat to Florida and the Eastern Gulf of Mexico.
  • Where will prices go from here?
    • Short-term – there is still potential for a fall dip, but we do not expect new lows ($1.90 in April) due to shrinking storage surplus and reduced chance of a storage glut.  Breaking through $2.70 gas support is a first step and will depend on coal-to-gas switching and short-term weather.
    • Long-term – Prices for 2013 and beyond are likely to move directionally with the prompt month, but any extreme dip will have a muted impact on long-term because weather’s impact is mostly on near-term and there is limited ability to carryover storage surplus from 2012 to 2013 due to limited capacity.  Going into 2013 with a smaller storage surplus, flat or even declining gas production, and increased demand due to coal-to-gas switching all point to higher prices.  So outside of weather, the fundamentals are bullish compared to last year.  Furthermore, winter 11-12 was the warmest on record and is unlikely to be repeated.  This does not mean that prices will skyrocket as shale gas still limits upside, but it does point towards higher prices in 2013 compared to 2012 and the possibility that we’ve seen the bottom.
    • Power – gas relationships remain critical, but heat rates are up nationally over the last year and this relationship has eroded.  However, heat rates are down over the last month and this is worth noting to customers.
    • What else?
      • EPA Regulations:  Just last week the Cross States Air Rule (CSAPR) was vacated.  This is a big win for coal and will, at minimum, delay implementation for a few years.  However, market impacts were modest as gas prices did sustain declines after the announcement and some regional heat rates are down.  ERCOT and PJM are the markets most impacted – stay tuned for more information.  The bigger EPA rule is MATS (Mercury and Air Toxics Standards) and this rule is unaffected and has a much broader impact starting in 2015.  Most coal-to-gas switching in 2012 has been due to gas versus coal economics and this has not changed.  Please reach out to the Market Intelligence or Regulatory Affairs team for more information.
      • Message to Customers:
          • If you are looking for a fall dip, it is possible, but you should not expect new market lows due to changing fundamentals over the summer.  It is also difficult to time this dip (September in 2009, October in 2010, while prices fell into winter in 2011 due to mild weather).
            • So customers must ask:  Will there be a dip?  When will it happen?  And how deep?
          • For long-term, it is still not time to sell fear as prices should remain at levels low based on long-term history (great value), but it may not be a simple as waiting for the last minute and locking in a year-over-year decline.  There is clearly risk that 2013 and 2014 prices will go up from here and even if they do fall, they may not fall as low as 2012.  So be careful setting targets.
          • For customers that expect never-ending price declines, a key point is that we did see market participants react to low prices in 2012.  Producer cuts and increases in gas generation demonstrated that market participant will react to low price in a way that pushes prices higher. So outside of abnormal events such as the record-warm winter, the warm does have a bottom.
          • For index product customers, there is still great value in the index markets and customers should continue to participate.
          • And gas-power correlations remain critical, but not as strong as in the past so be careful basing strategy on gas along.  There are many regional issues that I have not covered in this email.

        Did you find this posting a bit challenging to understand?  If so, this is one more reason you will benefit from an electricity/energy broker such as Better Cost Control.