In our group’s first two posts, we have tried to first give an overview of the nuclear sector and it’s current woes and then in the following week argued, that it might not be financially feasible to operate a nuclear plant in every location as shown by the example of California.
For this blog post, we will look east from California and check on current developments surrounding existing nuclear power plants in states like New York, Illinois, Ohio, Pennsylvania, and Connecticut. In particular, we want to highlight a new form of subsidy that is becoming very trendy in all these locations: zero emission credits (ZECs). One of the defining characteristics of energy markets, in our view, is how pervasive subsidies are throughout them, and ZECs are just a new chapter in the seemingly endless collection of subsidies already on the books.
It is widely reported in the news that the natural gas boom in the U.S. is driving coal plants out of business en masse [1]. What is less well covered, however, is that low electricity prices also severely impact the operating margins of nuclear power plants. This effect is so severe, argue plant operators, that it is becoming impossible to operate their nuclear facilities without subsidies. To hit that message home, they routinely issue press releases threatening early plant shutdowns or, at the very least, to not attempt to extend their licenses, stating financial reasons [2]. Luckily for all of us, electricity generators are a crafty bunch and have come up with a variety of ways to make ratepayers subsidize them. Let’s look at some of these policies:
The first two states I want to mention here are New York and Illinois, because both have actually already passed legislation to subsidize ailing nuclear facilities. Back in July 2016, New York passed a new 50% Renewable Portfolio Standard (RPS) that included financial subsidies to three up-state nuclear plants [3]. The subsidies total almost $1 billion over the next two years, which adds up to a healthy $2 per month surcharge on ratepayers’ bills. A few months later, in November 2016, Illinois passed similar legislation to protect two of their nuclear plants, costing ratepayers in that state $235 million per year [4]. Both of these measures now face legal challenges from competitors of the plant operators [5][6].
Now it looks like Connecticut will be the next state that passes some form of ZEC to aid a nuclear facility that is responsible for generating approximately half of all the electricity consumed in the state [7]. The subsidy in question could amount to a stunningly high $300 million every year which would boil down to $83 per person living in Connecticut [8]. And the kicker? It is not even clear whether or not Dominion Energy, the operator of the plant in question, is actually in the red while running the facility. As the chart below shows, the Millstone plant has produced positive earnings numbers for the last 12 years and is projected to continue to do so in the foreseeable future [9].
The message this sends to nuclear plant owners is crystal clear. Like sharks smelling blood in the water, plant operators in other states such as Pennsylvania, Ohio and New Jersey are now also pining for a sweet piece of the cake that ZECs promise to become [10][11][12].
Conclusion
ZECs are all the rage right now as a subsidy for nuclear power plants. While it may very well be that some nuclear power plants are currently not profitable, regulators should be very careful about giving in to the demands from lobbying by operators of these facilities. While the plants in question obviously provide a benefit in terms of reducing carbon emissions, simply lining the pockets of executives of these companies by squeezing ratepayers is not in the interest of the general public. One fairly obvious solution to this problem that would have the added benefit of getting rid of many other subsidies currently in place to support low-carbon energy sources is to tax carbon emissions on a national level. Hopefully this blog post can add something useful to this debate.
References:
[1] Bloomberg News 2016-06-29. Natural Gas Fills the Gap as Coal Drops Out of U.S. Power Market. https://bloom.bg/2p7YL75.
[2] NJ.com 2017-03-07. N.J. nuclear plants could go dark without subsidies, PSEG warns. http://bit.ly/2p7UqRk.
[3] New York Times 2016-08-01. New York State Aiding Nuclear Plants With Millions in Subsidies. http://nyti.ms/2p80mcZ.
[4] Electric Light and Power 2016-12-02. Illinois passes subsidy bill to save state's nuclear power plants. http://bit.ly/2p899eK.
[5] Utility Dive 2017-01-12. Generators call New York nuclear subsidies an 'existential threat' to wholesale markets. http://bit.ly/2p876HB.
[6] Chicago Tribune 2017-02-15. Exelon competitors file lawsuit to stop nuclear subsidies. http://trib.in/2p8egMg.
[7] RTO Insider 2017-03-14. Connecticut Moves Closer to Equating Nuclear with Renewables. http://bit.ly/2oB9FyS.
[8] Utility Dive 2017-04-06. Report: Connecticut nuclear support legislation would cost $300M a year. http://bit.ly/2oB01wn.
[9] Energyzt (2017). Report - Financial Assessment - Millstone Nuclear Power Plant. http://bit.ly/2oBk1yZ.
Given that I was not familiar with the concept of zero emission credits, this post provided me with a good framework to understand the concept of ZEC and its implications. I agree with Peter that the low electricity prices from natural gas are impacting the operating margins of nuclear power plants. In order to make nuclear survive in the competition with natural gas it becomes necessary to provide nuclear power plants with subsidies. Without subsidies, the electricity prices from nuclear would be very high. But the major issue associated with subsidies is that it increases the electricity prices for the general public. As stated by Peter, carbon taxing is one of the appropriate methods to overcome the drawbacks of subsidies. Carbon taxing will increase the electricity prices from coal and natural gas power plants. What I would like to know is, will carbon taxing make the electricity prices from coal and natural gas high enough to make un-subsidized nuclear power a competitive option? In a de-regulated sector, power plants can sign long term contracts with utilities and large scale customers who want to contribute to low carbon environment thereby securing their supply. Do you think this can be an effective way to deal with nuclear power plants’ operating margin issues? Also, the society has to bear indirect social costs due to the harmful effects associated with emissions from coal and natural gas power-plants. But these costs substantially reduce in case of nuclear power generation. It would be great if you could discuss the topic of social cost of carbon associated with nuclear compared to coal and natural gas plants and whether this difference in social cost will be enough to justify nuclear electricity prices in the long run.
ReplyDeleteYikes! ZECs! Well … there’s something I didn’t know about. Nice job. The story you tell reminds of music publishers lobbying the gov to extend copyright for say, the Beatles music publishing. Pure rent seeking from parties with political clout. Really hard to make the case for protection of IP based on innovation grounds when the innovation was done many years ago. This sounds similar in that the argument doesn’t seem to be about new R&D, or construction … just covering sunk costs.
ReplyDeleteThis being said … isn’t there a flip side of the coin? What are the costs to gov/society if a bunch of nuke operators didn’t renew their licenses? Would we have power shortages? Maybe giving them ZECs is socially optimal?
Your position isn’t super clear here, although I can imagine how this ZEC situation might get folded into a clear point by the end. “Regulators should be very careful” is not a super strong point. Neither is “don’t line the pockets of executives,” without more info about costs and cash flows. I do get your point about one firm’s earnings being positive … but my (limited) understanding is the nukes are struggling the country-over, and in other countries too. If you are making the “regulatory capture” point here, your evidence could be stronger.
Grading Rubric (badly formatted because comments don’t allow formatting)
Possible “grades:” Excellent (E), Very Good (VG), Good (G), Could be Better(CBB)
Takes a clear position: G
Substantiates the position: G
Informs the casual reader: VG
Clarity/quality of exposition: VG
Is ZEC a similar thing with Renewable Energy Credit, like they both requires coal or natural gas power plant to purchase credit from nuclear or renewable power plant, but only differs in the kind of credit? I agree with Peter that carbon taxing or ZEC is better than simple subsidies because it makes the carbon emitting power plants instead of the public to pay the money to support nuclear plants. But is that enough? Because nuclear power plants have not only high up-front capital cost but also high cost to deal with their radioactive waste.
ReplyDelete