Coal, Nuclear

Dark, Spark, and Quark

Issue 7 and Volume 117.

Brian Schimmoller   By Brian Schimmoller, Contributing Editor

It’s getting tougher and tougher to be a successful nuclear plant these days. Beyond the challenges posed by aging equipment, Fukushima-related upgrades, and the threats posed by renewables and natural gas, nuclear plant profitability is now threatened in some cases by a market metric with a funny name: the quark spread. And while the quark spread is not a causal factor in the travails of nuclear power, it’s definitely a symptom.

The quark spread is the difference between the wholesale price of electricity generated by nuclear power and the price of the fuel (uranium) used to generate that electricity, measured in $/MWh. In effect, quark spread is a proxy for the profitability of a nuclear plant. It is analogous to its more well-known cousins – the dark spread and the spark spread – which capture the theoretical profitability of coal and natural gas plants, respectively. Dark and spark spreads are terms that have become more familiar in the past decade because coal and gas units have historically been much more likely to be operating on the dispatch margin in wholesale electricity markets.

That market condition is now changing. With ample natural gas supplies and low natural gas prices, wholesale electricity prices have fallen, taking quark spreads down with them. As shown in the accompanying graph from the Energy Information Administration (EIA), quark spreads in the Midwest and Mid-Atlantic regions – which house a number of nuclear units – are getting thinner.

quark spreads

There are two main differences between quark spreads and spark and dark spreads, according to the April EIA analysis:

  • Nuclear fuel costs are more stable than fossil fuel costs. Natural gas, and coal to a lesser extent, experience more short-term volatility than nuclear fuel costs.
  • Nuclear power plant fuel costs are much lower than coal and natural gas fuel costs. In 2011, for example, the coal and gas costs averaged $25/MWh and $36/MWh, respectively, compared to $6/MWh for nuclear. Given the same wholesale electricity price, therefore, nuclear power plants produce more net revenue.

What does the narrowing of the quark spread mean for nuclear plant owners? In some cases, it may impact investment decisions related to major capital expenditures or even decisions such as premature shutdown. Nuclear plants owned by vertically integrated utilities may be in a better position to recover capital investments by passing them through to ratepayers; in contrast, merchant plants are more directly reliant on the wholesale market to recover these costs, and much more exposed to the quark spread.

In other cases, the thinning quark may mean considering the pros and cons of operating at least some of the time in a cycling fashion to take advantage of (or respond to) market conditions. These market opportunities may not just be the filling of load valleys caused by varying electricity demand. It also may mean providing ancillary services such as spinning reserve to back up intermittent renewable energy.

Taking such actions is not something a nuclear plant would necessarily like to do, but it’s not something outside the technological envelope, either. Despite their baseload history and reliable baseload performance for decades, many nuclear plants were designed with at least some capacity to cycle. So don’t be surprised to see nuclear plant owners dusting off their original design and performance specifications and exploring non-baseload operation.

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