Is US Climate Policy Killing Nuclear Power?

These are strange times for competitive power markets in the United States.  Baseload power plants, many of them nuclear, are reportedly struggling to stay out of the red. About 10 years ago, plants like these were thriving with high wholesale prices set by (then) high natural gas prices. These nukes were such blue chip assets that many consumer groups cried foul about the process of deregulating them. Now, in places like Illinois and Ohio, it is the owners of base load plants who are, in effect, seeking to return to the warm bosom of cost-based pricing by seeking regulatory approval for long-term contracts at what many see as above-market prices.

Normally, someone with a market-oriented perspective on all of this would simply roll their eyes and point out that it is just one more example of trying to use regulatory restructuring to arbitrage the difference between average (i.e. regulated) and marginal (i.e. market) costs. It’s a game that has been played by both customers and suppliers for much of the last 20 years. Beyond the normal political arguments about maintaining local jobs, that certainly seems to be a large part of what is going on with nukes today.  However, some of these machinations also reveal another trend that illustrates how climate policy is interacting with restructured markets in ways that are counter-productive for both the markets, and for the climate.

Most of the authors on this blog would agree that putting a price on CO2, while not perfect, is a better way to approach climate policy than many of the alternatives currently being tried around the US. Certainly a non-trivial carbon price would be a boost to a deregulated nuclear power station. Whatever your position on the other attributes of nuclear power, it is a zero carbon source of electricity.  A $20/ton CO2 price would translate to about an $8-10/MWh increase in power prices, assuming the marginal plant were a natural gas station emitting roughly 1/2 a ton of CO2 per MWh. For a 1000 MW nuclear plant with a 90% capacity factor, that would translate into almost $80 million in extra annual revenue.

However, as almost everyone who follows this blog must know, we don’t have a carbon price in most parts of the country, and even where power plant emissions are capped, prices have been soft leading some to apparently conclude that carbon pricing has failed. California’s price has been supported by a price floor set by a reserve price in California’s quarterly allowance auctions. If there aren’t enough buyers at the reserve price, California simply sells less permits. This floor only binds if someone needs to buy allowances in the auction, and that’s looking somewhat shaky at the moment.  If we get to the point where there are already enough allowances in circulation so that the auction is not necessary, the auction floor price will be irrelevant.

Outside of California, therefore, meaningful climate policy will in the near term largely play out through the U.S. EPA’s Clean Power Plan, and various programs that support the development of renewable electricity. Neither of these policies may be good news for supporters of nuclear power.

Lets start with the Clean Power Plan. One key aspect of this regulation is the flexibility given to states over how to comply.  The two market-based options are either the implementation of cap-and-trade (called a mass-based approach by EPA), or a system that would focus on the average emissions rate from power plants within a state.  This latter approach (called a rate-based approach by EPA) looks a lot like other intensity standards such as the CAFE standards on vehicle fuel efficiency and Low Carbon Fuel Standards for transportation fuels.

Like carbon caps, intensity standards make “dirty” sources look more expensive than cleaner sources of electricity, but unlike caps, intensity standards do this by effectively subsidizing the sale of energy that is better than the standard.  A state can meet its EPA targets by either reducing its output from dirty sources or by increasing output from cleaner sources.  One of the effects of intensity standards that concerns environmental economists is that they do not pass through the cost of pollution to consumer goods (e.g. electricity or gasoline).

Under  the Clean Power Plan the price effect of intensity standards can be even more dramatic.  According to recent work I’ve done with Stephen Holland,  Jon Hughes, and Chris Knittel, if states adopt the rate-based approach, wholesale power prices may not just be lower than they would be under cap and trade, they could easily be lower than they would be under no regulation at all.  This is because the CPP, in addition to increasing the cost of coal plants, will provide additional incentives for states to increase renewable energy production.  The figure below describes three different supply curves for the Western US under a cap-and-trade, a rate-based standard, and business as usual.   supply_curve1

The dashed green line is the rate-standard and the red line assumes no regulation.  The left side of the green line shows a large amount of new renewable investment, which is being subsidized by the rate standard giving it a negative marginal cost.  From the blue line you can see that about the same amount of renewables get built under a cap, but it’s financed by the fact that electricity prices are higher, rather than through the internal subsidy provided by a rate standard.  It’s not just renewables that would get subsidized under a rate-based standard, however, many natural gas plants would also receive some level of implicit subsidy (to make them look cheaper than coal).  This is why the dashed green line is below the red (no regulation) line for most ranges of output, the plants on the right hand side are mostly natural gas.

Retail prices probably would not come down, as any above market cost of renewables would have to be paid for through other charges on retail rates, but wholesale prices would show the effect of an influx of zero marginal cost renewable energy and subsidized gas output.  Renewables largely come out the same under either caps or rate standards, the difference is in wholesale prices.  The big losers (other than coal plants) would be existing hydro and nuclear facilities that sell power at these lower wholesale prices but for the most part would not be eligible for the implicit subsidies provided by a rate-based standard under the clean power plan.

The details are a bit complicated, but under a rate-based standard “new” sources of zero carbon power can be part of the emissions rate average used for the standard.  Existing sources (including renewables built before 2012) would not count toward the emissions rate averages.  This means generating zero carbon power from existing sources would be substantially rewarded under a mass-based standard but receive no credit under a rate-based standard.

I assume that these provisions were intended to avoid giving additional rewards to plants like nuclear and large hydro for production they were expected to provide anyway.  This is why new nuclear facilities can qualify for benefits under a rate-based approach, but not existing facilities.  This perspective, however, assumes that these plants will in fact be around to produce.  Perversely, the regulations targeting carbon emissions could make that less likely.

This kind of effect is not confined to rate-based standards under the Clean Power Plan, however. We are also starting to see the cumulative effects of the combinations of tax credits and portfolio standards that have been contributing to the rapid expansion of grid-scale renewables in the US. Across the country, renewable portfolio standards are increasingly adding new energy and capacity to systems that are already fully resourced. One effect is a growing glut of capacity and energy in some markets that is depressing wholesale prices. Not coincidentally, renewable mandates and other policies are also likely depressing carbon prices in places like California and Europe. Unlike a carbon price, these renewable policies, through lower wholesale prices, threaten all incumbent generation no matter how clean or dirty that existing generation may be.

And now there are more and more stories about the tenuous position of nuclear power in today’s power markets.  Although fuel costs are low, ongoing fixed costs can be quite high, making early retirement a serious economic option.  If this were simply a story about low natural gas costs, such a trend could just be the market responding exactly as it should by closing expensive plants to make way for newer more efficient ones.  Natural gas is not the only story, however, when carbon emissions are also considered.  Large scale retirements of nuclear generation stations would make compliance with the CPP much more difficult.

This is where the choice of tools for combating CO2 emissions makes a big difference.  Not only is the lack of  carbon pricing not rewarding nuclear plants, by combating CO2 emissions through renewable energy mandates and intensity standards, we are also actively accelerating the demise of nukes, another zero carbon resource. For some who object to nuclear for other reasons, this may be the intention, but for climate policy it’s two steps forward, one step back.

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17 Responses to Is US Climate Policy Killing Nuclear Power?

  1. Arthur Winer says:

    The problem of storing nuclear waste safely for centuries if not millennia has never been solved. Hence the true societal and “energy” costs of nuclear power are not being addressed adequately and are conveniently overlooked in discussions of this kind. Interestingly, this problem of nuclear waste disposal is posed on the same time scale as the impact of the longest lived greenhouse gases, and is an important reason to indeed hasten the demise of nukes until a national waste repository is selected, engineered and shown to be effective. We have a large array of tools and strategies with which to reduce GHG emissions whereas storing nuclear waste “temporarily” at dozens of different power plant sites throughout the country is certainly not a viable strategy to address the waste storage problem.

    • Karen Street says:

      When I started reading about nuclear power 2 decades ago, nuclear waste was my concern. Scientists, though, asked how waste streams compare. In a few hundred or thousand years, nuclear waste is no more radioactive than the original ore. Fossil fuel waste has impacts that endure much longer. It will take a long time before we return to 350 or 280 ppm atmospheric CO2—indeed, CO2 must drop well below 350 or 280 to return to that world, because of hysteresis. Predictions of the number of species committed to mass extinction this century are at such a level that scientists worry that it may take a million years or more to return to times of high biodiversity.

      Finland and Sweden both have plans in place, eg, see, Finland, Used Waste Disposal http://www.world-nuclear.org/information-library/country-profiles/countries-a-f/finland.aspx

      When I read 2 decades ago, waste problems were described as social, not technical.

      On the other hand, no one believes we have a grasp on what to do about fossil fuel waste. I now favor addressing the bigger problem.

      And a friend who traveled in China last year says that our solar waste problems today may exceed our concerns about nuclear waste out to forever. How do waste streams compare?

    • Tom Johnson says:

      Nuclear waste is a trivial problem if we build new nuke plants. Modern plants can be designed to use our current nuclear waste for power. And the end of the waste’s cycle it has a half of 100-200 years rather than thousands of years

      • You are absolutely correct….. But don’t let GreenPeace, Sierra Club and other like minded agencies find out…… they are counting on no real solutions to improve their empire building efforts.

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  3. Karen Street says:

    I am confused about how solar, wind, and nuclear are compared. They are in different niches, with nuclear supplying baseload. Solar helps in regions where electricity use is greater in the summer. Wind helps in regions where there is fossil fuel baseload.

    Life cycle GHG emissions of natural gas, the main backup for solar and wind, are more than 500 g/kWh. So GHG emissions in wind/solar plus the effect of backing up with natural gas run inefficiently, comes out to 125+ g/kWh in actual use (http://pubs.acs.org/doi/full/10.1021/es801437t), much more than for nuclear (has this been updated?) Batteries add a comparable GHG penalty. Life cycle emissions for hydro are more complicated, and more site dependent.

    Explain to me why we are subsidizing solar and wind and not nuclear. Either add an upstream GHG cost, the best, or subsidize clean energy either at the same level, or at a level determined by GHG emissions reduction.

    Is there some reason why solar and wind GHG emissions in actual use are not discussed routinely?

    • Bryan Chesebrough says:

      Karen, you are not the one who is confused, your comments are spot on. Although I am sure you know that and are using rhetorical flourish to amplify the irony of the current circumstance. Nuclear is clearly the energy that provides the safest, most efficient means of achieving baseload power with minimal GHG and other noxious emissions. Nuclear also has the most comprehensive controls of its “waste” stream (actually it’s Un-spent Nuclear Fuel which will power the next generation of reactors) Renewables do have a niche space when an exhaustive variety of factors converge to make one of them the technology of choice, but that is not prevailing thought presently. It is not we who are confused over the benefits of the technologies available to address the problems but find the confusion of others incredulous.

  4. Gene Preston says:

    Well the problem is getting too dependent on natural gas. Then guess what happens. Its price shoots back up. These roller coaster rides make it hard to meet long range goals on CO2 reduction. Burning natural gas is like a bunch of loggers racing through a forest seeing how fast they can cut down the trees. There are so many loggers the price of lumber is very low. But then they run out and you can’t find trees at any price. Is that any way to treat the Earth and its natural resources? I hope you say no.

  5. James Dodenhoff says:

    Thanks for the article. Very Interesting and provocative.

    Aren’t we seeing similar market “twists” in Germany? There the primacy of renewables and subsidized pricing of same has also disrupted wholesale pricing for energy from baseload plants. In Germany, most of these baseload plants are fossil fuel fired (rather than nuke powered); nevertheless, the utility industry is struggling mightily to have those plants be financially viable.

    There are surely many who would welcome the death of U.S. nukes (I don’t happen to be one of them); however, I don’t believe CPP was intended to be the policy hammer to put the nails in the nuclear coffin. It will be interesting to see how this plays out.

  6. mcubedecon says:

    “zero marginal cost renewable energy” – This statement is true only for short-run energy costs. As marginal costs are measured over the long-run, these marginal costs equal the capital and O&M costs for these plants. The engineers at the utilities too often fail to see this important distinction.

  7. Jim Hopf says:

    Climate policy, what climate policy? Real climate policies (whose real, actual focus is to reduce CO2 emissions) are not present in any of the developed countries (USA, Europe, Japan, etc..). No, what we have are renewables (only) policies. Renewables are heavily subsidized and outright mandated, and in most cases those are the ONLY policies. Other existing non-emitting sources, like nuclear and hydro, as well as other means of emissions reduction such as coal-to-gas switching, get no support/incentive at all.

    The only sort-of counter examples are places (CA, Europe, etc..) that have weak cap-and-trade policies alongside strong renewables subsidy/mandate policies. The problem is that all effects of a cap-and-trade system are neutralized by strong pro-renewables policies, in that the entire clean energy market (created by the cap-and-trade policy goal) is handed, by govt. fiat, to renewables. There is no competition between emissions reduction options (which was supposed to be the intent of cap-and-trade policies). This dynamic is reflected in the near-zero carbon prices that develop in these markets (since meeting the, separate, renewables requirements is enough to meet the CO2 reduction requirement all by itself).

    The US Clean Power Plan is not overtly a renewables-only policy, but it essentially has the same effect. It is a complicated set of policies that were quietly tweaked (in the details) by “environmental” groups whose goal is to abet renewables only and *reduce* the use of nuclear power, even if it is replaced by fossil fuels. How can it be that a policy intended to reduce CO2 emissions provides NO financial incentive to keep existing nuclear plants open (and indeed, may actually incentivize nuclear plant closures and their replacement with natural gas plants). Defenders of the CPP would try to argue that the CPP does not subsidize existing renewables projects either, but, you see, all existing solar and wind projects in the US are ALREADY operating under significant subsidies (e.g., production tax credits), and in most cases are outright mandated. Thus, they don’t need support.

    The result is large amounts of subsidized/mandated renewable energy generation entering the electricity market, even if no additional generation is needed. This creates a market glut and suppresses wholesale market prices. Note that existing nuclear plants must get ALL their revenue from wholesale market sales, whereas renewables get most of their revenue from other sources (taxpayers and retail ratepayers). This in turn results in nuclear plants that generate emissions-free power 24/7 being replaced by renewables that only generate power some of the time (i.e., the nukes are replaced with a combination of ~2/3 gas and ~1/3 renewable generation).

    The net result of all these policies, therefore, is often to *increase* emissions, as nuclear is replaced by gas and renewables (mainly gas). The politically powerful oil/gas industry sure likes that. So do the supposed “environmental” groups whose actual goal is solely the maximization of renewable generation. They don’t care that emissions may go up. And they don’t care what provides all the non-renewable generation (coal, even lignite, fine!). And they hate nuclear more than anything else, even if they won’t admit it openly. The policies that they have helped craft clearly show this.

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  9. Pingback: Week in review – energy and policy edition – Enjeux énergies et environnement

  10. Rob Bradley says:

    A ‘politically incorrect’ but worthy analysis would be to show how wind power, selling for a minimal or even negative price (worth selling to get the tax credit), is part of the price computation ruining the marginal economics of nuclear power.

  11. Over the last several weeks if not months, a number of nuclear power plants proved unable to clear organized electricity markets’ capacity auctions. This in turn led to the announcement or threat of early retirement of a number of nuclear power plants in the near future. While this to a large extent can be attributed to climate policy, this should be interpreted as indicative of the mounting challenges facing baseload power plants in general and nuclear power plants in particular. Notwithstanding the role climate policy plays, the challenges posed by baseload power plants should be attributed in the main to: major developments in combustion gas technologies over the past twenty years, an extended period of low natural gas prices, increasing share of renewables in the generation mix particularly wind and solar resources, continuing low growth or a downward trend in electricity demand overall, significant growth in distributed generation, and fairly significant progress in energy efficiency. The combined effect have resulted in turn in: significant change in the structure of demand for electricity, major improvement in the competitive position of gas fired power plants whether combined cycle or peaking units and the ascendency of both wind and solar to a position of almost must run on the power plant dispatching merit order. This in turn have led to lower wholesale electricity prices, deterioration in baseload electricity plants load profiles, and increases in their operating costs. As a result, the challenges meeting nuclear power plants are in part only the result of deregulation, generation divestiture, market restructuring, entry of organized markets, and climate change.

    In meeting their challenges, the solution nuclear power plants are to seek is not in the return of cost-based pricing nor is it in seeking regulatory approval for subsidies and long term contracts. The adoption of a rate based approach along with current climate initiatives may lead to further lowering of wholesale price providing further incentive for investments in renewables and put nuclear plants at further competitive disadvantage. While the above analysis reflects the interaction of climate policy, restructured markets and divestiture of generation, analysis of this interaction is insufficient to help us identify the public policy and regulatory framework options needed to address the nuclear power plants dilemma. A key question to be considered is a reassessment of the value baseload generation and nuclear generation in particular bring the reliability of the generation mix and in meeting climate change objectives. A plausible hypothesis that can be posed is that nuclear power plants can still provide a counterweight to intermittent renewable generation, a safeguard against spikes in fossil fuel prices, and a reliable low marginal cost of electric power.

  12. On the other hand, if the nuclear industry is relegated the role of residual power and ancillary services supplier, the nuclear industry has a lesser chance to survive given present technology, unit size, and mode of operation.

  13. Pingback: Addressing the Plight of Existing Nuclear, Part 1 - Spark Library

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