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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EPA's Proposed Rule:

Some of the Complexities

There has been a lot of discussion since early June, when the US Environmental Protection Agency (EPA) released its proposed rules for the reduction of carbon dioxide emissions.  I have previously commented on the possible ramifications of this rule for nuclear power.

Since that time, there has been a lot more discussion on the possible implications of the proposed rules.  While I think there will be still more analysis, I thought it would be worthwhile to summarize some of the new information here.

One study comes from MIT, and emphasizes the importance of a multi-pronged approach to reducing carbon emissions.  While their study doesn't explicitly address the EPA's proposed rule, they do address some of the same issues.  According to the authors of the study, source-specific regulations are an important element of emissions reduction, but they provide only partial coverage and must be combined with other measures to have the desired impact.

The authors favor a price-based policy, such as cap-and-trade or a carbon tax.  This is a contentious area, but one argument they make is that source-specific regulations force action in particular areas, while ignoring cheaper options that may be possible, such as reducing overall energy use or cutting emissions from industry.  They also say that, “Using targeted emissions policies can actually encourage emissions increases in other areas.”  When costs to the consumer drop (such as with fuel economy standards), there is a tendency for consumers to increase their usage.

Another study comes from a joint effort of the Center for Strategic and International Studies (CSIS) and National Security Program and the Rhodium Group (RHG).  On July 24, CSIS hosted a presentation in Washington to present the preliminary findings of this study.  This study looked explicitly at the EPA rules and assessed what changes to the electric power and energy production systems in the US are likely to occur under the EPA’s proposal, as well as what the price, demand expenditures and other impacts may be.  Their full report is due out in October, but in the meantime, you can view their 1 hour 10 minute oral presentation by clicking on the image below:



Unfortunately, there are a couple of spots where the audio fades for a moment, but overall, this session provides an interesting glimpse into some of the state and regional considerations that are likely to be involved if the EPA rules are adopted.

 If nothing else, these two studies illustrate the complexity of this issue, and emphasize some of the elements we should be looking at closely to be sure that the proposed rules have the desired effect and avoided unintended negative consequences. 

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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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EPA's New Rule and Nuclear Power:

Another Renaissance?

It's been a big week.  In France, the world celebrated the 70th anniversary of the D-Day invasion.  I heard one report call it one of the most historic wars in the history of the world.  And in the U.S., the Environmental Protection Agency (EPA) released its new rules for the reduction of carbon dioxide emissions.

I am not particularly trying to draw any connections between the two events (although I am sure that some will say the EPA rules are an epic war on coal!).  I just mention this because, with D-Day being celebrated this week, it was a little hard for me to start by saying the biggest news was the EPA announcement.  It is the event of the day that is likely to have the most impact on the future, just as D-Day had a profound effect on the course of history in its time..  Well, I suppose there's my parallel.

To get serious, the pundits are now lining up to predict what effect the rules are going to have--on the coal industry, on renewables, on natural gas, and on nuclear power.  I personally think there is still a lot uncertainty about this whole initiative.  Will Congress find a way to undercut it?  Will there be legal challenges?  What will happen if the next Administration opposes it?

And even if it succeeds, it pointedly does not spell out a single, uniform solution.  It does not follow the path of some states have adopted in the past by mandating a percentage of renewables (or any other energy source).  It merely spells out the carbon dioxide reduction goals and identifies several possible approaches to reaching those goals.

In that sense, it doesn't mandate--or handicap--either renewable energy sources or nuclear power.  This looks like it should be a good thing for nuclear power.  We have just been going through a bleak period where we have seen some plant closures spurred by a flawed marketplace, and have heard warnings that there could be more such closures.  There have been calls to fix that marketplace.  This EPA rule doesn't directly do that, but it may create incentives to modify the marketplace rules in order to create a more level playing field for all clean energy sources. 

At a minimum, it should help halt the premature closures of the current fleet of nuclear power plants.  The longer-term impacts are more difficult to project.  It should encourage the completion of the current nuclear power plant construction projects, and it may revive some that are on the books that have stalled in recent years.  It could even spur the initiation of some new projects, although that is less certain.  It will probably give at least some encouragement to advanced reactor development plans.  However, realistically, the goals in the EPA plan are relatively short term, so designs that are not yet ready for prime time may not help meet the goals.

On the other hand, one prominent point that has been made about the EPA goals is that they still fall short of US commitments to the global community for greenhouse gas reductions, specifically, the broader targets of the 2009 United National Copenhagen Accord.  Therefore, if this is viewed as a first step, and if even more stringent goals are expected to follow, the incentive to develop new designs could be very strong.

As is often the case with government rules and regulations, the landscape is very complex.  There are a lot of interacting factors.  There are a lot of special interests who are going to weigh in heavily on this.  We already see the coal lobby lining up.  And although this rule is very favorable for renewable energy, we already see complaints that it has the fingerprints of the nuclear lobby on it.

Realistically, the most reliable predictions are the nearest-term ones, and the primary near-term prediction for nuclear power is that the rule will help stave off the threat of closures of operating plants.  This rule has the potential to set the stage for longer-term R&D as well--for a variety of energy sources, including clean coal, renewables, and advanced nuclear power.  But a lot of things have to happen before we are sure of just how much this rule may help longer-term projects.  It is a bit too early to break out the champagne.  But perhaps we can put it in the frig to chill.

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