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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.

22 thoughts on “Is US Climate Policy Killing Nuclear Power? Leave a comment

  1. 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.

  2. 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.

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