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.  

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Energy Evolution:

Managing Change

Much has been made of the recent EPA carbon emission rules (which were largely validated by the Supreme Court ruling earlier this week) and whether they will mean "the demise of the coal industry."  The arguments are complex and overlapping:

• Some say that it would be OK for the coal industry to die if it is a free market "decision," but not if it is the result of government intervention.  Others point out the inherent complexities of the electricity "marketplace."
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• Some say that it will cause a huge amount of economic harm, both to those employed by the coal industry and to the states where the coal is mined.  Others see new doors opening when some doors close.
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• Still others take a different perspective and point out that delaying climate change policies may be worse  for the industry in the long run, noting that any new capacity that is constructed now might have to be shuttered prematurely, resulting in more stranded capacity.  

No one seems to have given thought to the fact that, throughout the history of industrialization, we have experienced numerous instances in which one technology has replaced another:  horse-drawn carriages, whale oil, and wood-burning stoves are just a few of the technologies and resources rendered obsolete by newer technologies.  Recently, we have seen even more rapid changes in telecommunications and related technologies.

Indeed, these changes were disruptive.  We don't have neighborhood wheelwrights and horseshoe makers anymore.  We don't have people making and selling ribbons for typewriters.  The younger generation has never seen carbon paper.

I could go on almost endlessly, but the point would be the same.  In each case, particular jobs have been lost, but new jobs have been created.  In most cases, the evolution took place over a period of time.  As a result, nimble companies were able to adapt and change their product line.  Some employees, too, shifted to other types of work, or completed their careers in a shrinking industry that adapted mainly by not bringing in new blood. 

I don't want to belittle the potential impacts of change on individuals, or even on companies.  Certainly, any change produces new challenges.  And any challenge produces winners and losers.  Surely, some companies may fail, and some people may lose jobs.  However, new companies and new jobs will be created.  With foresight, the states that are most concerned about potential job losses in the coal industry can counter those losses by attracting some of the new jobs that will be created by the replacement industries. 

In reality, the challenges presented to the coal industry by the EPA rule are really no different in nature from the challenges presented by the introduction of trains, automobiles, airplanes, digital cameras, computers, and any of a dozens of other products I could name.  In fact, coal itself is a relative newcomer on the human stage.  It was undoubtedly a disruptive technology in its early days.

I am not a Pollyanna.  I am sure there will be some companies and some employees that will not be able to adapt.  But the changes will not take place overnight, and most should be able to adapt.  In that case, the net result for most can be positive.  

Therefore, while there is certainly a potential for disruption in the wake of the new rule, there is also considerable opportunity.

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