A combination of market, policy and regulatory factors have converged to squeeze the finances of the U.S. nuclear generation fleet. Among a variety of organic and external factors, low-priced natural gas is the driving force of financial pressure. A revolution in natural-gas extraction and generation technologies has dramatically shifted the competitive playing field. External policy pressures—such as the Production Tax Credit (PTC) and Renewable Portfolio Standards (RPS) —also put downward pressure on nuclear revenues.
Increased cost pressure on nuclear plants largely stems from external regulatory factors, as the regulatory burden of the average nuclear plant now stands at $8.6 million annually. Following the 2011 Fukushima Daiichi accident, increased safety-compliance costs have factored into the closure of several U.S. nuclear facilities. However, it should be noted that, as post-Fukushima safety-related expenses decline, the nuclear industry expects capital expenditures to moderate from their 2014 peak back to levels last seen in 2007-2008.
These forces have resulted in increased capital investment requirements, higher operating costs and reduced revenues in wholesale electricity markets for nuclear generators. Cost and revenue pressures have rendered some nuclear plants unprofitable. Six reactors have closed in the past five years, while 19 others either have announced their intention to close or are “at-risk” of closure, as determined by ratings agencies and financial consultants. Roughly 10 percent of the U.S. nuclear fleet has either already closed or is scheduled to close within the next 16 years. Nuclear plants owned by independent power producers, or merchants, face greater risk of retirement given their exposure to market forces (i.e., they profit from market revenues, minus costs).
For this reason, announced or at-risk nuclear retirements tend to be concentrated in restructured electricity states, including Texas, Illinois, Ohio and most of the mid-Atlantic and Northeast. These states participate in organized, competitive wholesale electricity markets administered by regional transmission operators (RTOs) or independent system operators (ISOs). Plants owned by monopoly utilities are insulated from market forces to a large degree, as they pass wholesale market revenues and costs through to retail ratepayers. In 2015, The Economist correctly noted that “where markets are freer, it is harder for nuclear-power operators to make money, and too risky for them to build plants from scratch.”
Recent and anticipated nuclear retirements have prompted blowback from a variety of nuclear advocates. The reasons they argue against nuclear retirements include adverse effects on electric-system reliability, increased electricity costs, loss of fuel diversity, local economic impacts and increased air pollution, especially greenhouse-gas emissions. Claims of “incredibly detrimental” economic and environmental consequences have led to urgent calls for policies that prevent “premature” nuclear plant retirements. Proponents have proposed or enacted various out-of-market, or “around market,” policy interventions to support merchant nuclear plants. These include subsidies, re-regulation and government takeover of private nuclear assets (i.e., nationalization). Most notably, the New York Public Service Commission recently created a Zero Emissions Credits (ZECs) program that will subsidize three unprofitable nuclear plants for 12 years or more. This is part of a Clean Energy Standard to obtain half of New York’s electricity from renewables, which will radically reshape its generation market. Once the dust settles from legal challenges, ZEC may serve as a model for other states with unprofitable nuclear plants. In December 2016, Exelon Corp. borrowed elements of the ZEC model in securing legislation that provides $235 million in annual subsidies for two unprofitable nuclear plants in Illinois.
Nuclear retirements have not only invited interest in subsidies but spurred open discussions of re-regulation and against restructuring. Discussions over vertical reintegration or re-regulation as a path to save unprofitable nuclear plants appear sincere and have staying power. Ohio utilities openly discuss re-regulation and reintegration as part of a dispute over subsidies for unprofitable merchant coal and nuclear plants. FirstEnergy Corp. announced plans to join American Electric Power Ohio (AEP) in lobbying the state Legislature to re-regulate generation assets. In Michigan, utilities have cited Ohio’s situation as a case against electricity competition and consumer choice, while pursuing legislation to eliminate it. Like Ohio, Illinois policymakers have discussed re-regulation if nuclear subsidies fail.
The market distortions posed by various interventions to preserve nuclear also have encouraged RTO/ISOs and their stakeholders to explore market-based alternatives. Nuclear subsidies in New York pushed the New York Independent System Operator (NYISO) and its stakeholders to be aggressive in exploring carbon pricing as an alternative. A variety of disruptive state interventions to spur clean energy development and retention have encouraged ISO New England Inc. (ISO-NE) and its stakeholders also to examine carbon pricing, dedicated clean-energy markets or new market rules that accommodate state policy objectives.
This report examines the merits of arguments to intervene to prevent nuclear retirements, as well as the consequences of doing so. It finds no justification for nuclear-specific interventions. The only legitimate concern that nuclear retirements are premature is that electricity markets do not fully account for the external “social cost” of pollution. Excluding external “social cost” considerations, nuclear retirements generally do not appear to be premature through a nominal economic lens. Rather, they are consistent with the underlying economics of baseload plants in the current market and regulatory environment.
Electricity markets should not explicitly value fuel diversity (a proxy slogan for benefits already remunerated in markets) or local economic protection (transfer payments). Rather, the core function of market design should remain to procure reliable electricity at the least cost. The RTO/ISO market constructs for reliability are imperfect, but do not appear specifically to disadvantage nuclear or other baseload assets. To whatever extent market design fails to account for certain reliability attributes, that failure concerns reliability service procurement alone, not an inherent need to procure a certain type of fuel or technology. Any such failure should be corrected via market-design reforms, not out-of-market compensation. Furthermore, there is no evidence of an imminent threat to bulk reliability to justify interim subsidies.
Some nuclear retirements—those that meet definitions of socially “premature” retirements—would not occur if markets fully internalized the social cost of pollution. Nuclear retirements will generally increase conventional and greenhouse-gas emissions, except for emissions regulated under a binding emissions-trading program. Socially premature nuclear retirements highlight the shortcomings of U.S. climate policy. In the absence of consistent, market-based emissions-reduction policy, what has instead surfaced is ad hoc climate policy (e.g., sporadic subsidies for particular resources, including nuclear plants). This threatens to undermine competitive electricity markets severely and is generally inconsistent with sound economic policy. If an ad hoc system supersedes American capitalism’s predictable rules-based system, the long-term economic damage will be grave.
Nuclear subsidies, re-regulation or nationalization each represent industrial policy with, at best, temporary environmental co-benefits. Industrial policy is a high-cost, less-effective path to a cleaner energy future. Providing subsidies to clean energy is not equivalent to pricing externalities like air pollution. The underlying market failure is that pollution is underpriced, not that clean power is too expensive. In theory, subsidies offer incentives to reduce emissions, but in practice, they often promote economically inefficient and environmentally unsound actions. Counteracting subsidies for certain resources (e.g., renewables) with subsidies for others (e.g., nuclear) constitutes a policy race to the bottom. Introducing new subsidies deepens the political cycle of rent-seeking handouts. The future health of electricity markets depends on unwinding the existing subsidy regime.
If subsidies are a foregone conclusion, they should be specific in purpose, minimal in duration and should be extended only where there is a valid market failure, all to reduce the likelihood of broader subsidy metastasis. Re-regulation and nationalization are economically damaging policy options that have no slimmer “diet” version to avoid severe market distortions. Electric industrial policy undermines market institutions during a politically vulnerable period and propels the uneconomical movement for government engineering of the electric fuel mix. Sacrificing policy quality for political expedience will come at high economic and political cost, with extensive long-term unintended consequences. Further sacrifices of market integrity will reverberate through the industry, chilling investment as costs escalate.
The twin political motivations of economic growth and emissions mitigation should prompt policymakers to strengthen, not undermine, competitive electricity markets. Competitive electricity markets drive environmental improvements through improved fuel management, risk management, feedback effects of lowering emissions-reduction costs, facilitating organic growth in clean-energy demand and stimulating innovation. As such, out-of-market interventions that temporarily reduce emissions may compromise long-term emissions reductions by disrupting competitive market performance.
Public policy should facilitate well-functioning marketplaces. Trimming regulatory costs could help the competitiveness of the nuclear industry. Reforming wholesale electricity markets to improve price formation (prices do not currently reflect all costs) would enhance market performance. Reducing government engineering of the fuel mix similarly would bolster markets (e.g., reducing mandates and phasing-out deployment subsidies, which distort price signals). Such actions would increase market revenues for nuclear as a byproduct.
The most important message for policymakers is to stay disciplined. The notion that the economic and environmental consequences of nuclear retirements are “incredibly detrimental” is overblown. By contrast, the adverse consequences of out-of-market policies to prevent nuclear retirements are potentially severe. The economic case for government intervention remains limited to efficient correction of market failure. The unease of socially premature nuclear retirements should motivate political commitment for a market-based, long-term strategy that drives innovation, reduces emissions at least cost and bolsters reliability. This will benefit the U.S. economy the most and prove far more politically durable than ad hoc climate policy. It also would serve as a model the world is more likely to follow.
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