Entergy’s Retirement of Pilgrim: Response to Markets or Market Failure?

John Dalton, President, Power Advisory LLC

Entergy Corp.  announced yesterday that it would retire the Pilgrim Nuclear Power Plant (683 MW) no later than June 1, 2019 citing “low energy prices, little expectation of near-term market structure improvements and increased operational costs”.    Entergy noted that as of June 1, 2019 that Pilgrim would no longer participate in the ISO-NE’s Forward Capacity Market (FCM), but that it may elect to shut the unit down prior to this.   (If it did so, it would need to discharge its Capacity Supply Obligation from past participation in Forward Capacity Auctions in one of ISO-NE’s reconfiguration auctions.)

The loss of Pilgrim will appreciably increase New England’s reliance on natural gas-fired generation and would appear to strengthen the hand for those arguing that additional action is needed to address this over-reliance.    Taking a different perspective, in its Press Release Entergy noted that “wholesale energy market design flaws continue to suppress energy and capacity prices in the region” and that “also detrimental are a state proposal to provide above-market prices to utilities in Canada for hydro power”.   While the above referenced proposal clearly would have adversely affected the economics of Pilgrim if it were implemented, it would appear that Entergy’s decision was based on current economics.  These economics were appreciably worsened when the unit was placed on a list by the Nuclear Regulatory Commission that would cause it to be subjected to enhanced inspections, at an increased operating cost of $45 to $60 million per year.  Interestingly, Entergy noted that the decision to retire the unit would be neutral to positive for cash flow through 2020.

This decision is further confirmation that New England’s electricity markets are struggling to incent the desired mix of generation resources in the wake of low underlying natural gas prices, but with sustained natural gas price volatility in the winter months from pipeline constraints.    Entergy also suggested that long-term contracts for Class I renewable resources were distorting New England energy and capacity market prices.   The evidence here is clearer cut.  With Class I REC prices for some New England states in the mid $50/MWh range, but with RGGI allowance prices equating only to about $2.5/MWh for a CCGT, the value of carbon in the ISO-NE markets appears to be significantly underpriced, with long-term contracts for renewables contributing to this.   Unfortunately, for Pilgrim a fix would be too late and for Massachusetts overall there don’t appear to be any more “at risk” large non-carbon emitting resources in state that would benefit from getting these pricing signals right.   However, with a regional power market attention to these issues continues to be important.