Market Distorting Policies Will Lead to U.S. Nuclear Reactor Shutdowns
In a CSIS report released in June, we projected that domestic nuclear capacity could drop sharply over the next two decades from about 100 gigawatts electrical (GWe) today to about 80 GWe—in sharp contrast to the much more optimistic Energy Information Administration (EIA) estimate that nuclear capacity will maintain its share of U.S. electricity generation during this time frame. In our assessment of the market for nuclear power, we include assumptions regarding some key issues that are absent in the EIA analysis: the negative impact of government subsidies and mandates for other energy generation, and how the decommissioning fund for nuclear plants could influence the decisionmaking process of operators. In the long term, we believe that market distortions flowing from government intervention represent a greater challenge to the continued operation of nuclear plants in competitive markets than competition from shale gas. We view the Kewaunee plant in Wisconsin as the first of these anticipated early shutdowns.
Although we remain optimistic that the nuclear power sector will experience a boom in investment if carbon regulation eventually forces substantial quantities of natural gas from the grid, we view that scenario as occurring no sooner than the 2040–2050 time frame. Between now and then, we believe that nuclear will contract significantly in the Northeast and California, while persevering in parts of the Midwest and expanding slightly in the South. Thus, by 2040, most of the nation’s 80 GWe of nuclear capacity will be centered in the regulated markets of the South and the Midwest. This development will have a considerable negative impact on U.S. manufacturing capacity and leadership in nuclear technology and services. It will also have a profound effect on the politics surrounding U.S. nuclear power, as a greater percentage of units will be located in states that are traditionally pro-nuclear.
We are particularly concerned about developments in competitive electricity markets. Currently, about half of the nuclear fleet is located in those areas—with the other half in regulated markets. All competitive markets have renewable portfolio standards (RPS) with targets varying from state to state but, in general, ramp up over time between now and 2025. In addition, many of these markets have energy efficiency mandates that result in demand destruction for electricity, as well as state subsidies for other generation sources, including natural gas.
Because of continued subsidies and mandates, we expect significant growth in the penetration of renewables, which will artificially drive electricity prices in competitive markets equal to or below zero for an increasing number of hours. According to a 2012 report from the Organization for Economic Cooperation and Development (OECD), with 10 percent penetration of wind power, nuclear operators will suffer a 4 percent loss in load and a 24 percent loss in profitability; those numbers worsen considerably for nuclear power when 30 percent of electricity is generated by wind—a 20 percent loss in load and 55 percent loss in profitability.
In response to worsening economics of operating nuclear plants in competitive markets, we expect utilities to shut down some reactors before their license expiration, reducing availability of dispatchable capacity that can cover demand when renewable generation is not producing electricity. The departure of this baseload from the grid will bring greater transparency to the true system costs of renewables—the need for backup, a cost that is often not included because of the general assumption that sufficient “backup” generation already exists.
Accordingly, we see intervention by state officials to force some nuclear plants to stay on the grid as “must run” generation, rather than roll back subsidies and mandates for other power sources. In practice, the markets in those states will therefore become more regulated, which could benefit the continued operation of some nuclear plants, albeit at a greater cost for consumers.
In our opinion, this action could preserve roughly an additional 10 to 15 GWe of nuclear power in the Northeast and other competitive markets. However, we cannot rule out the impact of local political opposition to the continued operation of those reactors—a dynamic that could overwhelm the pragmatic necessity to run them. Under this scenario, we expect some fossil-fuel power plants to remain in operation as “must runs” to maintain security of electricity supply, despite their greenhouse gas emissions.
We also recognize that the existence of the decommissioning fund for reactors that are losing money could incentivize some operators to shut down units permanently to improve the company’s cash balance. Certainly, decommissioning would reduce costs in the short run and could potentially generate cash in some cases; operators are not required to return retired reactors to “greenfield status” until 60 years from the date of decommissioning. This type of incentive does not exist with other forms of power generation. As a point of reference, the Kewaunee decommissioning fund had more than $500 million when the plant was closed.
The wild card in our analysis is the state of political affairs in competitive markets. In the near term, we believe that most state legislatures will maintain or increase subsidies and mandates for renewables, despite attempts by some legislators and free market groups to repeal them. However, we acknowledge that a number of renewable portfolio standards may be softened by broadening out qualifying sources (but not likely nuclear) or by lengthening compliance periods.
In most cases, the structure of those subsidies and mandates for renewables deters substantial private-sector investment in storage technology, because operators will continue to be paid for power generated, regardless of market demand or associated system costs. Consequently, we are bearish on the prospects for renewables transitioning from their current status as intermittent generation to baseload. Most power produced from renewables in the United States will therefore remain dependent on subsidies and mandates, maintaining an artificial market that is at substantial risk of failure if and when government policies shift.
In our evolving analysis, we are also watching events unfold in Europe, where artificial markets for renewables are collapsing (e.g., Spain) and major utilities are shutting down baseload generation because of subsidies and preferences for wind and solar power. Most of the threatened generation is natural gas–fired because the price of that feedstock is not competitive in today’s market, but German industry sources have warned that nuclear reactors could face early retirement as well. E.ON’s CEO Johannes Teyssen recently warned that shutting down baseload power plants was “unavoidable” if government renewable policies and regulation persist. Chancellor Angela Merkel of Germany has acknowledged that the growth in renewables has resulted in “huge problems for the system” and has pledged a scale-back in related subsidies if she is reelected.
Across the European continent, nonetheless, we believe that subsidies and preferences for renewables will remain as long as budgets permit the preservation of those artificial markets. Consequently, European regulators will increasingly require “uneconomic” baseload to remain on the grid. In the case of Germany, regulators have 12 months to review an announcement by a utility to decommission a power plant before it is shut down; if a power plant is deemed “systemically important,” the utility is required to continue operations for up to two years and will receive “fair compensation” from the network operator. Taxpayers, therefore, would pay to maintain the artificial markets for renewables and for the “uneconomic” baseload power generation that would otherwise be “economic” in the absence of market distortions.
Addressing this challenge is not just a problem in the United States and Europe. OECD has warned that security of electricity supply is threatened across member economies because of increased renewable penetration. OECD recommends that governments and regulators need to ensure the transparency of power generation costs when making policy decisions impacting electricity markets. In the United States, we have certainly failed to take these steps, which if not addressed in the near term will lead to long-run cost increases for power, thus undermining U.S. economic competitiveness.
Though domestic utilities in merchant markets are being squeezed significantly by market distortions, the United States has yet to feel the full negative impact of these policies because of weak economic growth, excess power capacity, and sufficient backup generation. As economic growth picks up and state renewable and efficiency targets increase substantially between now and 2025, we expect greater fallout and increased costs to the grid. Because of the gap between policymaking in Washington and the states, however, we remain pessimistic that any federal initiative in the near term will address the looming threat to a large percentage of the civil nuclear feet and the security of electricity supply.
We suggest increased dialogue between federal and state governments on the impact of energy mandates and subsidies on the grid and a transparent approach to analyzing the true costs of increased renewable penetration. As part of that conversation, we believe that policymakers need to discuss how the artificial market for wind and solar can evolve into a real market where those generation sources can operate competitively without government support.
In our opinion, renewable tax credits, targets, and other market-distorting mandates should end, which would increase incentives for private-sector investment in storage technology—the breakthrough of which is necessary to solve the wind and solar intermittency problem. Given President Obama’s plan to regulate greenhouse gas emissions across the nation’s power sector, utilities are better positioned than state and federal legislators to choose the best compliance option for meeting those air quality standards.
David Banks is a senior fellow and deputy director of the Nuclear Energy Program at the Center for Strategic and International Studies in Washington, D.C.
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