Thursday, October 10, 2013

The Cost of Generating Electricity:

When the Free Market Isn't

I have been slow in commenting on the closure of Vermont Yankee announced a few weeks ago by Entergy.  This is because it is hard for me to know what to say.

In the end, it seems that the closure was triggered mainly by economics, and that some of the economic issues are so bizarre they simply make my head spin.

There are some economic issues I do understand.  Sort of.  I understand that the recent developments in the gas industry are leading to low costs for gas, making almost every other source of energy non-competitive.  I can argue that this is a short-sighted view, and I could wish the business world didn't have such a short-term view, but I understand that they do.

However, there are other economic issues that simply make no sense to me at all.  The fact that renewable energy suppliers are so heavily subsidized that they can bid negative numbers and still make money just doesn't make sense to me in a country that is supposed to be based on a free market.  Honestly, if I were Entergy, I would have given up long ago!

I have seen some very good coverage of this issue in other sources.  All the sources I respect feel, as I do, that something is irrational about what is happening.  Examples include a recent article in the New York Times by Matthew Wald, and a discussion on the American Nuclear Society (ANS) blog by Jim Hopf.

I do understand the government role in providing incentives to help new technologies get started, but the impacts of these incentives should be monitored to make sure they don't have unintended consequences.

As I see it now, we have subsidized renewables because we want to assure the viability of solar and wind power in the hopes of replacing dirtier and more polluting forms of energy supply, such as coal.  That might be a good idea--if that is what we actually accomplished.  However, what has really happened is that we have forced the closure of another source of clean power--that is, a nuclear power plant.

In the long run, the current situation is in no one's interest.  It will not lead to a cleaner environment and it will not lead to lower real costs for energy supply.  I do not know if the energy markets are as bizarre in other parts of the country, but if they are, it does not bode well for our national energy future.



  1. Dr. Marcus,

    I myself am totally perplexed by the lack of economic realities involved with the renewable energy markets. I am not a believer that Germany's subsidized system can continue yet there are many decision makers here in the US who are being influenced by the short term gains we now see in Germany.

    I fear that due to the US tax system that rewards inefficiency (wind and solar direct cash payments for power produced) and a belief in a service based economy, we will continue to see events such as the mind bending decision by NE-ISO to "reward" oil generators with capacity payments.

  2. This is the result of leaving it all to the market. Are gas prices low? Then build gas electrical generating plants. That's the way to get a good showing on the quarterly report. As long as business has to show good quarterly results, nuclear and other long-range solutions to global warming are outside the box. Far outside the box.

    It would be nice if there were some long-range planning involved and tax incentives set beyond what will benefit congressional representatives in the next election, but we're not doing that either.

    Will be interesting to read the history books a hundred years (or even fifty!) from now.

  3. Actually today the marginal cost of gas is already higher than coal :

    This means, as nuclear is competitive to coal, that market distortions had a bigger role in this situation than actually the gas price.