Izzo explains why PSEG is asking for nuclear subsidy

Controversy has surrounded bill that would provide $300M in annual support for Salem plant

By Anjalee Khemlani
Newark | Feb 12, 2018 at 1:29 pm

Tension and criticisms surrounding a $300 million subsidy for one of the state’s largest energy providers have been building for the past two months.

Public Service Enterprise Group CEO Ralph Izzo isn’t sure how the fight started, but he said a lot of the facts have been lost amid the battle.

The subsidy bill was introduced during the lame duck session last year, and has been reintroduced in the Senate during the new legislative session.

The bill offers up to $300 million per year to the energy company to help run its two-unit Salem nuclear plant in Lower Alloways Creek, after the state Board of Public Utilities and lawmakers scrutinize the financials to ensure that Izzo’s claim — that the nuclear plant will be unprofitable in two years — is true.

The bill also ensures annual reviews of the amount the state would give the company — and allows for a review of the financial standing of the nuclear plant every three years.

But that hasn’t quelled the controversy, which involves various interest groups. Those include the AARP, which is concerned by the rising cost of utilities for seniors on fixed incomes, as well as environmental groups that want to ensure greater focus on renewable energy sources.

Izzo said the nuclear plant’s natural life cycle means it will eventually shut down no matter what, but he warns that, without the bill, that process will be sped up.

“We have already shut 4,000 megawatts of power plants, very quietly. It’s not something you typically celebrate. The nuclear plants are 3,500 megawatts,” Izzo said.

The company has closed its coal plants.

Shutting down nuclear plants is not an unprecedented move in the state, or in the country.

Exelon Corporation is powering down its Oyster Creek nuclear plant.

Nuclear plants have a finite lifespan, usually up to 30 years, and are licensed to run for a portion of that, with the possibility of extensions.

Of the other nuclear plants in the state, the Salem plant, owned 57 percent by PSEG and 43 percent by Exelon, and Hope Creek, owned by PSEG, have lifespans between 2029 and 2036.

In the past few years, the nuclear plants in the country, which supply about 20 percent of energy, have been prematurely shutting down in favor of cheaper natural gas.

This shift has occurred for two reasons, Izzo said.

First, the federal government has failed to pass legislation that would tax carbon emissions, under both former President Barack Obama and thus far under President Donald Trump. Nuclear is a zero-emissions energy source and worth the cost if carbon emissions are taxed.

Second, the Federal Energy Regulating Committee hasn’t passed regulations that incentivize fuel diversity. If PSEG received incentives from the federal level for its fuel diversity, that would reduce the annual subsidy, according to the bill.

And while Izzo could immediately shut down the nuclear plants, as he invests in building more natural gas plants, his decision not to do so relies, ironically, on the argument for renewables.

PSEG currently relies on solar for 2 percent of its energy, while nuclear provides about 40 percent. The tradeoff for shutting down the plant would require a significant supply from other sources.

“You can understand supply goes away, demand doesn’t change, prices go up,” he said.

Still, Izzo supports the move to renewables and is convinced nuclear is the best route until renewables become more affordable and efficient.

He also didn’t balk at the idea of re-regulating nuclear energy in the state.

In a meeting with members of the ROI-NJ editorial team, Izzo answered some of the criticisms and questions he is facing.

ROI-NJ: The company received an initial subsidy when the market was first deregulated; why are you coming back to the state again?

Ralph Izzo: People are saying we got paid to take those plants, once deregulated, and now we want to get paid again when the market is failing them. What people fail to realize is that the entity that got paid was (Public Service Electric & Gas), because it had spent the money. Then, they said, ‘OK, these plants, I can’t operate them anymore, I’m going to be a regulated utility. How do I get that money back that I spent or I am at risk of being in great financial peril.’ So, stranded asset recovery went to PSE&G. Now, a new entity, PSEG Power, took ownership of those plants. And some years it made a lot of money and some years it didn’t make much money. And, in fact, if you look at what it made over time, it was getting worse and worse.

ROI: So why should the taxpayer, again, foot the bill? You are asking for taxpayer money for an energy source that isn’t regulated.

RI: I hate to draw the analogy, but there is no shortage of times that ratepayer money, incentives, subsidies go to companies that do not have their books scrutinized. (Such as) $500 million to solar last year. Are they breaking even? Are they making outrageous profits? I don’t know the answer to that. (The New Jersey rate counsel) doesn’t know the answer to that. So, why the double standard?

ROI: Because people know you are the largest energy provider and believe you are flush with money? Your annual reports show billions in capital investments. Why do you need the money?

RI: There is a misperception about what the bill does. We are asking for a safety net that could be less than $300 million annually, with built-in protections. The BPU could reduce the amount if a price on carbon emissions (is developed) and they can reduce if FERC comes with (incentives) for fuel diversity. Also, if it becomes too expensive for New Jersey to pay, the state has the right to say no. The cap in our bill would be a $10 increase in the energy bills. That’s half of what New York and Illinois residents have paid (since nuclear plants have been shut down).

ROI: If there are that many protections, why are you facing this much backlash?

RI: When we look out into the future, it’s getting worse (for nuclear). So, I think the reason there is agitation is we have not been willing to put into the public domain the specific financial condition of the plant. We absolutely agree that, before one penny comes our way, whoever in state government needs to see those details should see it. But, what we thought was the bill was simply creating a tool for the state government to scrutinize our financials before giving any money. Why wouldn’t we put it out in a news outlet? Because no one would care to pore through it except for one group of people — our competitors. If they know bottom line (for selling our nuclear energy) is $34.50, they can sell short at $34.49 if they can still make a profit. They’ll maximize their profit and minimize what we can sell.

ROI: Why should the taxpayer help you stay competitive in the market? Why subsidize an energy source that performs so poorly?

RI: None of us woke up this morning saying I’m looking forward to using 1 kilowatt. I did wake up this morning saying I’m looking forward to the opening ceremony of the (Winter) Olympics. Electricity and gas is a means to an end. The world wants cleaner energy. To us, long term, that means a combination of renewables and nuclear. Near term, to manage the cost, it means existing nuclear and natural gas. Nuclear is an affordable bridge to an even cleaner future. New Jersey’s power markets are not designed to recognize that benefit. Today, to build a new nuclear plant, it is not cheaper than wind, or even solar, in my opinion. So, in that respect, we need to build a bridge to a future where we are building more renewables over time. Hands down, the cheapest thing to build over the long term? Natural gas plants. We’re building three of them, spending $2 billion. All the economics say as long as there is no penalty for carbon, as long as there is no penalty for lack of fuel diversity, natural gas is the cheapest on a long-run marginal basis.

ROI: If you are already investing in gas plants, why the fight for the nuclear plant?

RI: While I’m not critical about the abundance of natural gas, I am critical of the ease with which we can develop pipeline infrastructure to bring it to all the markets that make use. When I said nuclear is cheap, I mean the way PJM Interconnection (which owns the regional energy transmissions) operates it — they will ask for a certain amount of energy and their tariff sheet allows us to bid (three years in advance). They ask how much it will cost to produce energy. The cheapest is solar and wind, because they are free (providing into the system), the next is nuclear at $7 per megawatt hour, the next is natural gas at about $25 to $30 per megawatt hour. Then PJM will say, OK, enough. Everybody then gets paid $25 to $30. For solar and wind, that is painfully short of what it costs to build the farms. So, they add incentive payments, and that comes from New Jersey residents. The $7 per megawatt hour does not cover the cost to operate the plant with 1,500 employees. PJM didn’t turn a blind eye to that, they said ‘OK, those fixed costs that you don’t recover, we will develop a capacity market.’ That is supposed to make up for shortfall, but it hasn’t done it yet.

ROI: You mentioned 1,500 employees. Reports have shown 6,000, and critics have said that number is bloated.

RI: There are 1,500 PSEG employees. Twice a year, we do refueling. Every unit does a refueling outage. Because nuclear is cheap to operate on a short-run marginal loss basis, you bring in 1,000 people to help refuel the plant in as short a time as you possibly can. So, for 30 days, twice a year, that number becomes 2,500 or 3,000. We also employ people from Holtec Industries for our fuel cask storage, we employ people from Aramark food services because we don’t have employees in the cafeteria, we employ people to clear the snow on the 100 acres of land we have. So, the soft number is 5,800, according to one consultant.

(READ MORE from ROI-NJ from the interview with Ralph Izzo.)

ROI: OK. So, why are you rushing the process now, when you have two years until the plant becomes unprofitable? Won’t you be able to find a new source of energy, possibly renewable, by then?

RI: There is a flat-out mistaken assumption that you can replace these with renewable energy. Nuclear power is base-load energy. It runs 90 percent of the time — rain, cloud, snowy, sunny. You can’t replace it with wind, which at best runs 40 percent of the time. You couldn’t just build twice as many wind farms, you’d have to have batteries. It would just be prohibitively expensive. Solar is that much worse. Solar runs about 20 percent of the time. If we do get to a point where renewables are the majority, then other things like gas or nuclear have to be cyclable. You have to be able to dial them up or down. Nuclear plants don’t do well when you do that. Gas plants do. The cost to preserve is far less than cost to shut down.

ROI: So, you believe this is a holdover until renewables can do better?

RI: You have carbon-free energy for that period of time while solar costs come down, while wind costs come down, while battery costs come down — it makes perfect sense. I have hopes and dreams that there can be advances in nuclear technology to continue to make it a part of providing carbon-free, low-cost energy. But that’s not widely embraced by the environmental community. We weren’t planning on shutting the plants (three years ago, when bidding on the energy market). We have made $273 million in commitments in nuclear fuel. Nuclear fuel is not the type of thing you go to Walmart and buy. You have to buy the uranium-238, it has to be enriched and manufactured into the fuel rods. We don’t buy it all at once, but we spend about $30 million to $40 million per year in future fuel investments because of how long it takes. This August, our Salem team is looking at (fixing a part). It’s a $50 million project. It only makes sense if we think the plant will run for the rest of its useful life. So, there’s constantly commitments being made.

ROI: A lot of people are excited by the idea of your financials being scrutinized. How do you feel about that?

RI: That’s fine. I wouldn’t be saying this if I didn’t believe the plants were in economic peril. Think about it: Every three months, I have a quarterly earnings call. I think for the past year at least, if not longer, I’ve been warning about the risk to our nuclear plant. Usually, CEOs don’t get on an earnings call and talk about the fact that 30 percent of their assets are underperforming. That’s not the type of thing you brag about. This is the project plan for shutting the plants. (Izzo held up a stack of papers.) It’s all here in detail. We are not joking.

ROI: We know you have said you are not bluffing and that the plants will close without the bill. So, here’s the big question: Do you think the bill ultimately will pass?

RI: I believe, based on everything the Senate president said and the governor has said, this is going to get done. The issue that will require some discussion if you did just nuclear only, or if you put in some energy efficiency or some solar, then there are some other participants who have not been part of the discussion that should be part of the discussion.

My belief is that those conversations are happening now. We are not in the thick of those. We are talking to people who have a broad environmental perspective, but they are single-subject participants.

Even at the ratepayer council, (they are) not saying that plant should close, they are saying they need to ensure economic need. That’s fair. Our preference is we not make that something that our competitors get to scrutinize.

Anjalee Khemlani | akhemlani@roi-nj.com | AnjKhem