By Scott DiSavino
(Reuters) - Dominion Resources Inc plans to shut its Kewaunee plant in Wisconsin next year, the first U.S. nuclear plant to fall victim to the steep drop in power prices as rising natural gas production makes some plants uncompetitive.
After claiming hundreds of coal-fired plants, the boom in U.S. shale gas output is now starting to grind down the nuclear industry, with smaller older plants like the 566-megawatt (MW) Kewaunee plant first to be affected.
The surge in U.S. shale gas has upended the domestic power market, and this year combined with flagging demand due to the struggling economy to send prices to near 10-year lows. For the nuclear industry, it means the Dominion plant -- which had been up for sale since April 2011 -- will be the first U.S. reactor to shut since the late 1990s.
The closing, which did not catch many in the industry by surprise, highlights the struggle of the U.S. "nuclear renaissance."
A decade ago, the nuclear industry talked about a nuclear renaissance due to rising fossil fuel prices and concerns about meeting greenhouse gas emissions, but the revival did not occur in the United States as the cost of fossil fuels like natural gas fell and the federal government has been slow to put a price on carbon.
Recently, the rush of domestic gas into the U.S. market and public concerns following the Fukushima disaster in Japan have helped to scuttle some plans to build new reactors.
Natural gas' share of total U.S. generation has increased to 30 percent this year from about 20 percent in 2006, while the percentage from nuclear has held steady at about 20 percent.
Power prices in the PJM grid, the nation's biggest power grid, for the first nine months of 2012 were down almost 30 percent from the same period last year and the lowest since 2002.
For Virginia-based Dominion, the decision to decommission the plant, in the second quarter of next year, was "based purely on economics," according to Thomas Farrell, Dominion chairman, president and chief executive.
Attempts to find a buyer failed, even thorough the plant had a renewed license that did not expire until 2033. With natural gas prices expected to remain under pressure from rising shale output, the company decided to take a third-quarter after-tax charge of $281 million to decommission Kewaunee.
"Dominion was not able to move forward with our plan to grow our nuclear fleet in the Midwest to take advantage of economies of scale," Farrell said in a statement.
The station will remain under the oversight of the U.S. Nuclear Regulatory Commission (NRC) throughout the decommissioning process.
Following the station's shutdown, Dominion said it plans to meet its obligations to the two Wisconsin utilities -- Integrys Energy Group Inc's Wisconsin Public Service unit and Alliant Energy Corp's Wisconsin Power and Light unit --that buy power from Kewaunee under power purchase agreements expiring in December 2013.
"Kewaunee's power purchase agreements are ending at a time of projected low wholesale electricity prices in the region," said Farrell.
Kewaunee is located on Lake Michigan, about 35 miles southeast of Green Bay. It began commercial operation in 1974 and has a Westinghouse pressurized water reactor.
Dominion is one of the top U.S. power generating companies, with about 27,400 MW of capacity. It serves close to 6 million utility and retail energy customers in 15 states. Shares of the company ended regular trading on Monday down 1 percent at $52.96.
SMALLER, OLDER PLANTS IN TROUBLE
While nuclear plants can still produce power more cheaply than natural gas, analysts say future capital investments, which could run into the hundreds of millions or more at existing reactors, might prompt operators to shut some units.
"A number of nuclear units won't run their 60-year licensed lives if current gas price forecasts prove accurate," said Peter Bradford, a former member of the U.S. Nuclear Regulatory Commission and current professor of energy policy and law at the Vermont Law School.
"The determining factor is likely to come at the point at which they need to decide on a major capital investment."
Bradford pointed to Duke Energy Corp's Crystal River reactor in Florida, which may need a new containment dome that could cost more than $3 billion, and Edison International's San Onofre reactors in California, which may need new steam generators.
Especially vulnerable under this scenario would be small, old single reactor sites.
Other units that could be on the hit list because they fit the profile include Exelon Corp's Oyster Creek in New Jersey, Xcel Energy Inc's Monticello in Minnesota, and Entergy Corp's Palisades in Michigan, Vermont Yankee in Vermont and Pilgrim in Massachusetts.
"Future decisions will be made on a case by case basis determined by the circumstances unique to each facility, just as is the case for fossil-fueled power plants," said Steven Kerekes, a spokesman for the Nuclear Energy Institute, an industry trade group.
Kerekes noted that so far coal-fired plants had borne the brunt of the competition from cheap gas, as they collectively face billions of dollars worth of investment to upgrade systems to meet increasingly strict federal environmental regulations.
Generators have already announced the retirement or fuel conversion of more than 35,000 MW of coal-fired power plants, which is more than 10 percent of the nation's total coal-fired fleet.
NOT THE END FOR ALL
Despite the planned shutdown of Kewaunee, Farrell said Dominion, which also owns reactors in Virginia and Connecticut, still firmly believes nuclear energy must play an important part in the nation's energy future.
"The situation Dominion faces at Kewaunee is the result of circumstances unique to the station and do not reflect the nuclear industry in general," Farrell said.
"The nation will be hard-pressed to meet its energy needs, let alone do so in a secure and affordable manner, without a robust and growing nuclear energy program,"
Analysts also insist larger nuclear plants, which have better economies of scale, will remain profitable and in business.
"We agree that the economics of Kewaunee were uniquely challenged given its small size and regionally depressed power prices," said UBS Research.
(Reporting by Scott DiSavino; additional reporting by Joseph Silha; editing by John Wallace and Jeffrey Benkoe)