Friday, February 6, 2015

Nuclear Industry in Decline?:

New Article Raises Questions

Ed Kee, owner and principal consultant at Nuclear Economics Consulting Group (NECG) and an Affiliated Expert with NERA Economic Consulting, just published a pair of rather depressing forecasts about the future of nuclear power:  an article in Nuclear Engineering International entitled, "US Nuclear Industry in Decline," and a piece in the World Nuclear Association's World Nuclear News entitled, "Can nuclear succeed in liberalized power markets?"

In both, he lays out rather clearly and starkly what many of us have been seeing for a long time--just as nuclear power was beginning to make a comeback in a number of countries, it has been hit by a trend toward liberalizing electricity generation and distribution markets. 

While it looks good on paper to make electricity generation and distribution more market oriented, it has had a number of unexpected consequences.  Basically, the primary organizing principle of a liberalized market is that it minimizes short-term market prices, whereas traditional regulated markets minimize long-term electricity costs to users.

This pressure has been exacerbated by a couple of simultaneous trends--the subsidies for renewable energy sources in many places, and the sudden low price of natural gas.  As a result, we have all been left scratching our heads in disbelief when we hear about negative spot prices on local electricity markets.

This in turn is putting pressure on utilities to shut nuclear power plants.  We have already seen some closures in the US in the last couple of years due to the economics of power generation in their regions.  Numerous forecasts point to several other plants that may be at risk for a similar reason.

It seems particularly criminal to lose an existing asset to economic considerations.  The investment in it has been made, so replacing it with anything comes at a cost, and since most of the replacements envisioned in the near term are natural gas plants, the new plants will produce more carbon emissions than the nuclear power plants they replace.  And despite new natural gas finds and methods of extraction (i.e., fracking), history teaches us that the price of oil and gas is very volatile and subject to sudden large fluctuations.  We ignore that history at our peril.

I found the titles of the two articles interesting--one asks a question about whether nuclear power can succeed in liberalized markets, while the other seems to suggest that the conclusion is negative.  Nevertheless, the articles suggest several options that are being, or could be, tried:  allowing extended, but temporary, shutdown and mothballing of nuclear power plants during periods of low electricity prices (he mentions the Bruce plants in Canada); some way of externalizing carbon emissions (he mentions the US Environmental Protection Agency's proposed rule and the flaws in the measures proposed); power purchase agreements; contracts for difference; and other models that improve the revenue certainty within a deregulated marketplace.

Although I'm sure that some will say that undercuts the intent of deregulation, I would take a different view.  Every institutional measure we impose has multiple ramifications, and often, unequal and unfair impacts on different segments of society or different commercial enterprises.  What we usually end up doing in such cases is going back and making "backfits" to fix the problems. 

It appears that we need such backfits to assure that liberalized electricity markets don't end up costing us more--much more--in the long term than we are saving in the short term.  Ed has laid out a number of options, but aside from the few places he mentions (all outside the US), I am not clear on what may be under active consideration elsewhere.  I hope these two articles spur some action.  



  1. I think that there is a reasonable argument that "liberalized" electricity markets are just a first step in turning the electricity supply into a traded commodity with the market structured to ensure that the commodity (electricity) is scarce and volatile in price. This will create another profit-maximizing commodity market for big banks while extracting the profits created out of the pockets of the consumers who formerly could depend on reasonably priced electricity.

    "Liberalizing" electricity markets is just a way to gouge the consumer and create profits for commodity traders. It has nothing to do with lowering prices or helping the costumers in reality.

    Evidence for this position includes the way that these proposals found uniform support across almost every state in the union simultaneously. Similar to the way that the "renewable energy portfolios" were passed through state houses all at about the same time. There was a coordinated effort to alter the energy market into one in which:

    1) Energy is traded as a commodity. "Liberalized markets"

    2) Electricity supply is scarce and volatile: Renewable energy portfolio standards.

    Nuclear energy is affordable, reliable and long lasting. It is anethema to those wishing for a profitable, volatile, commodity market in electricity.

    1. Trag:

      While I am not totally in agreement with your comment, we generally agree that electricity markets may not be the best way to run the electricity industry.

      My concern is that these electricity markets purposefully ignore long-term generation planning and have no process to think about long-term total system cost (wholesale energy plus everything else that goes into customer bills).

      The Haas study I refer to shows that U.S. regions that did NOT go down the electricity reform path have lower retail rates than regions that adopted electricity markets. Even when natural gas is at really low prices.

      The early retirement of perfectly good nuclear power plants for economic reasons is a good example of market failure.