Part II of IV: Short and Long-term Solutions for Struggling Commercial Nuclear Energy Generators in Restructured Wholesale Markets

Background on the History of Commercial Nuclear Power Generation in the U.S. and How Restructured Electricity Markets Developed

To understand how market forces currently threaten the viability of nuclear power generators, it is important to know how the electricity sector itself has evolved over the years. Part II of this blog series briefly summarizes the development of the electricity sector, from the early advent of public utility law and cost-of-service regulation, to the expansive restructured wholesale markets through which most Americans receive their power. With that background, subsequent subsections discuss the particularities of nuclear power generation and how it fits into, and is struggling because of, these wholesale market structures.

A. About Commercial Nuclear Generation in the United States

Commercial nuclear energy generation from the nation’s current fleet of 99 reactors accounts for nearly 20% of the country’s electricity fuel mix, and represents nearly 63% of our emissions-free generation.1 In addition, commercial nuclear power is a large source of efficient base-load generation for the entire grid;2 thirty of the 50 U.S. states have a nuclear reactor, and among them, New Hampshire, New Jersey, and South Carolina generated more than half of their electricity from nuclear power in 2014.3 Currently, there are only four new nuclear sites under construction in the United States – all of which are in traditionally-regulated states.4 Although a permanent waste storage solution remains a long-term concern for the industry – a topic outside the scope of this series of blog posts – the more acute problem, is nuclear energy’s lagging competitiveness in restructured wholesale markets due to pricing distortions and the peculiarities of nuclear regulation.

1. The Beginnings of Commercial Nuclear Power in the United States

The origins of the commercial nuclear power sector in the United States stem from the political, cultural, and scientific consensus of the 1950s and 60s.5 Advancing nuclear energy research was seen as a national security imperative during the cold war as well as another means of competing with the Soviets. Added to this patriotic fervor were near record-high public opinion levels for government regulation and corporate leaders,6 as well as a stalwart belief that science and technology could solve even the most intractable societal and economic problems.7 The conventional wisdom of the day was that not only would nuclear energy provide “power without end[,] [p]ower to do everything man is destined to do,” as argued by the Westinghouse corporation,8 but that it would also – in the words of former US Atomic Energy Commission Chairman Lewis Strauss – provide a fount of “electrical energy too cheap to meter.”9 Thus, beginning with a small 60 megawatt reactor at Shippingsport, Pennsylvania in 1957,10 the commercial nuclear power industry surged forward with great promise of providing cheap and abundant electricity.

Despite this initial optimism, by the 1970s, public support for nuclear power began to decline due to a host of factors. Early cost studies and technical assessments underestimated the engineering and technical difficulties in store for nuclear power plant construction projects,11 which led to ratepayers having to pay for substantial cost overruns. Concerns over human health and safety became more prominent following nuclear accidents at Three Mile Island and Chernobyl,12 and more recently in Fukushima.13 Appetite for nuclear generation fell yet further as activists began drawing more attention to the nuclear waste storage problem and the environmental toll from waste hot water runoff on fisheries adjacent to plant cooling structures.14

More recently, however, growing attention over global climate change has caused the public and policymakers to take a second look at nuclear power generation. This renewed interested prompted predictions of a “renaissance” for the industry in the early 2000s,15 an optimism that quickly lost momentum following the 2008-09 recession, the 2011 Fukushima accident, and – as discussed more thoroughly in this blog series – cheap natural gas brought on by hydraulic fracturing.16 Although a new wave of nuclear generators may not come in the near-term – the current construction of four plants notwithstanding – preservation of our existing nuclear generation fleet is essential if the United States wants to stay on track to meet its carbon emission reduction goals.

2. The Regulatory Scheme for Commercial Nuclear Power

Before addressing in Section B the current market distortions driving commercial nuclear generators from competitive markets, it is important to first explore the unique characteristics of nuclear energy regulation. This comprehensive scheme partly accounts for why today’s nuclear energy industry has such an admirable safety record.17 However, this scheme is also partly responsible for the high price of nuclear-powered electricity because it aims to internalize the costs of externalities like decommissioning and waste storage, unlike other competing energy fuel sources.

The Atomic Energy Act empowers the U.S. Nuclear Regulatory Commission (NRC) to license and regulate the civilian use of radioactive materials in the United States.18 A significant portion of NRC’s work lies in regulating U.S. nuclear power plants to ensure “adequate protection to the health and safety of the public.”19 To this end, the agency sets standards for the design, construction, operation, and security of the nation’s fleet of reactors.20 This process is extensive, strict, as well as time- and resource-intensive.21 Applicants must have the resources to endure not only the front-end costs of the licensing process, but must also purchase the maximum amount of liability coverage,22 pay for on-site waste management, as well as provide “reasonable assurances” that decommissioning costs, which can run into the hundreds of millions, will be covered when the plant closes decades in the future.23 Throughout the life of a nuclear reactor, the NRC remains free to modify or revoke a license to ensure the Commission’s “adequate protection” mandate is met without regard to costs.24 And of course, as plants age and come up for license renewal, installing replacement parts and upgrades can also pose significant costs on the licensee.25 All of these requirements translate into higher capital costs, longer construction timelines, as well as specialized equipment and workers required to construct nuclear reactors, ultimately resulting in a higher levelized cost of energy for nuclear power as compared to most other energy sources.26 What it also means, however, is that unlike fossil-fuel energy sources bidding into wholesale markets, nuclear generators are internalizing more of their environmental externalities, as exemplified through the NRC’s decommissioning and waste management requirements.27

Congress intended this internalization of environmental externalities, but the continued financial viability of nuclear generators largely depends on market forces that appropriately value this internalization,28 as well as the fact that nuclear energy provides significant amounts of emissions-free power. To make nuclear energy truly cost-competitive, the playing field must be leveled to correct against this inherent imbalance either through a long-term market solution, or a short-term policy approach that can assist the most financially vulnerable nuclear generators.

B. The U.S. Electricity Sector and Wholesale Markets

The seeds of the current financial crisis facing commercial nuclear power generators were first sown at the advent of electric utility deregulation, and began to take root and flourish as wholesale electricity markets developed across the country. This section provides the backdrop for understanding the current market conditions driving many nuclear power generators toward financial ruin and closure.

1. Early history and the advent of traditional regulation

The dawn of electricity in the late 19th century ushered in a new era in industrial development for the United States. Quickly seen as a fundamental service that was “affected with a public interest,”29 states began granting vertically integrated utilities service territory monopolies in exchange for providing universal service and submitting to cost-of-service rate regulation.30 Through this type of regulation, state public utility commissions become the ultimate gatekeepers for what costs utilities are entitled to pass on ratepayers. With the Constitution’s Takings clause as the ultimate backstop, a robust body of caselaw and regulatory standards has developed over the past hundred years, and to date, this regulatory compact between states and utilities still forms the basis of utility regulation in many parts of the country. However, beginning in the late 1980s and 90s, several states began experimenting with competitive wholesale markets, and in the process, started exposing the electricity generators within their borders to competition.

2. 1980s to Today: Restructuring and the Beginning of Regional Wholesale Power Markets

Due to the economic inefficiencies inherent in allowing competition for utility transmission and distribution services, for most of their history, utilities were vertically integrated, that is, they provided all the generation, transmission, and distribution infrastructure in their respective territories. Much like transmission and distribution, it was similarly assumed that the electricity generation sector was likewise incapable of sustaining competition. Then, prompted by the passage of the Public Utility Regulatory Policies Act of 1978 and following a series of federal laws and regulatory orders from the Federal Energy Regulatory Commission, many states passed laws to allow competition among electricity generators.31

This deregulatory trend was further facilitated by federal-level requirements that regional grids provide “open access” to non-incumbent providers and encouragement for transmission owners form nonprofit “independent system operators” (ISOs) and “regional transmission organizations” (RTOs) for ensuring reliable and efficient transmission service and managing regional wholesale power markets.32 Today, there are seven RTOs and ISOs in the country,33 which collective manage about 60% of the country’s electric power supply.34

3. How Wholesale Power Markets Function and How Nuclear is Disadvantaged

Each of the RTO and ISO competitive wholesale markets functions differently, but in sum, generators bid into their respective market and the RTO/ISO administrator then matches supply with demand by dispatching generators from the lowest to highest bids.35 Although each RTO or ISO may have additional markets for ancillary and capacity services, generally they have a two-stage system for their energy markets: a day-ahead market that seeks to arrange for most of the demand based on historic use-patterns, and a real-time market to meet demand needs as they occur.36 Regardless of the order that the generators are dispatched in these markets, they will each be paid the “market clearing price,” which is the bid price of the last unit of energy acquired to meet the market demand for a particular auction.37 Natural gas units are particularly well-placed to take advantage of the market clearing price rules because they have low marginal costs, which allow them to keep their bids lower, ensuring the likelihood that they’ll be accepted.38 Furthermore, natural gas plants are quicker to ramp-up and down to meet demand, which also makes them more likely to set the market clearing price.

In contrast to the quick-acting “peaker” units like natural gas plants that can respond during peak demand, nuclear generators are considered “baseload” resources because they operate most efficiently when run continuously. Therefore, under market rules, baseload plants like nuclear, and coal-fired plants as well, are considered “price takers”, that is, they are given whatever the market clearing price is.39 The lower-priced the resources bidding into the market, the lower the market clearing price will be. If the clearing price drops too low, nuclear generators risk not recouping their operating costs. As established earlier, nuclear plant operating expenses are considerable because they take into account costs for upgrades, insurance payments, fuel management, a highly-trained labor force, and, importantly, costs for decommissioning and waste disposal.40

When wholesale markets do not properly value the internalization of an energy resource’s environmental externalities – as nuclear does with its decommissioning and waste disposal costs – then those resources cannot compete fairly in the marketplace. As a result, nuclear generators are forced to accept low market clearing prices driven by cheap natural gas, making it often impossible to recoup their fixed operating expenses, and driving them closer to early retirement.

There have already been four nuclear reactor early retirements since 2013, with another three plants expected to close in the coming years.41 Illinois, Ohio, and New York, each have some of the most financially vulnerable nuclear reactors in the country currently. In Illinois, Exelon is contemplating early closure of about five different reactors due to uneconomic market conditions: Quad Cities 1 and 2 and Byron 1 and 2 in the PJM region, and its Clinton plant in the MISO market.42 Similarly, Ohio’s Davis-Besse nuclear plant and New York’s Ginna nuclear reactor are also at risk of premature closure.43

Not only is there a strong likelihood that air pollution will increase in states that close down their nuclear reactors,44 but the climate change impacts are also compelling enough to warrant addressing the current market forces noted above. With the existing nuclear power fleet representing two-thirds of our nation’s total emissions-free generation, the prospect of more plant closures should alarm citizens and policymakers concerned about climate change. Indeed, by the estimation of one study done by a centrist policy think tank, a large-scale wave of retirements would create a generation gap that would be most likely filled by natural gas, making it very difficult to achieve EPA’s Clean Power Plan goals, if not all-together impossible.45 So, if preserving our existing fleet of nuclear generators is important for meeting our climate change objectives, then how can we provide these reactors with the revenue necessary to keep them operational? That question is explored further below.

1Nuclear Energy Institute, Status and Outlook for Nuclear Energy in The United States (Nov. 2015), available at http://www.nei.org/CorporateSite/media/filefolder/Policy/Papers/statusandoutlook.pdf?ext=.pdf [hereinafter Status and Outlook Report]; Third Way, When Nuclear Ends (Aug. 2015) http://www.thirdway.org/report/when-nuclear-ends-how-nuclear-retirements-might-undermine-clean-power-plan-progress; Nuclear Energy Institute, U.S. Nuclear Power Plants: General U.S. Nuclear Info, http://www.nei.org/Knowledge-Center/Nuclear-Statistics/US-Nuclear-Power-Plants.
2Status and Outlook Report, supra note 1 at 2 (noting that the average capacity factor in 2014 was 91.7 percent, and that the industry has sustained a 90-percent range capacity factor for the past 15 years).
3U.S. Nuclear Reg. Commission, Information Digest 2015-2016, 28, 30 fig.12 (showing a map of the net amount of electricity generated in each state by nuclear power).
4 Nuclear Energy Institute, New Nuclear Plant Status, available at http://www.nei.org/Knowledge-Center/Nuclear-Statistics/US-Nuclear-Power-Plants/New-Nuclear-Plant-Status (noting that the four nuclear reactors are Summer 2 and 3 in South Carolina and Vogtle 3 and 4 in Georgia).
5Steven Mark Cohn, Too Cheap to Meter: An Economic and Philosophical Analysis of the Nuclear Dream 17-20 (1997).
6Id. at 18 (describing the results of two public opinion surveys on the question of “You can’t trust government to do right most of the time,” to which 22% agreed in 1964, whereas 70% agreed in 1980).
7Id. at 18, 107 (describing the optimism surrounding presentations by industry experts and government officials like President Eisenhower’s “Atoms for Peace” speech in 1953).
8Id. at 19 (quoting an excerpt from a 1967 Westinghouse pamphlet: “[nuclear energy] will give us all the power we need and more. That’s what it’s all about. Power seemingly without end. Power to do everything man is destined to do. We have what might be called perpetual youth.”).
9International Atomic Energy Agency, 50 Years of Nuclear Energy, available at https://www.iaea.org/About/Policy/GC/GC48/Documents/gc48inf-4_ftn3.pdf.
10Joseph P. Tomain, Nuclear Futures, 15 Duke Envtl. L. & Pol’y F. 221, 225 (2005) (describing the origins of the commercial nuclear power sector).
11Cohn, supra note 5 at 107-13; T.L. Fahring, Nuclear Uncertainty: A Look at the Uncertainties of A U.S. Nuclear Renaissance, 41 Tex. Envtl. L.J. 279, 285 (2011).
12Fahring, supra note 11 at 288-89,
13See, e.g., Stephen G. Burns, The Fukushima Daiichi Accident: The International Community Responds, 11 Wash. U. Global Stud. L. Rev. 739 (2012). By and large, nuclear accidents raise the most public concerns over most other kinds of energy generation or extraction accidents. Hope M. Babcock, A Risky Business: Generation of Nuclear Power and Deepwater Drilling for Offshore Oil and Gas, 37 Colum. J. Envtl. L. 63, 139-47 (2012) (comparing the widespread public health fears following nuclear incidents as opposed to more tempered concerns following oil industry accidents. “The bottom line is that the public is afraid of radiation; it is not afraid of oil and gas.”).
14Fahring, supra note 11 at 288-89.
15See, e.g., Hope Babcock, Can Vermont Put the Nuclear Genie Back in the Bottle?: A Test of Congressional Preemptive Power, 39 Ecology L.Q. 691, 694 (2012) (“The recent concern about climate change and energy independence has rekindled an interest in rebooting the commercial nuclear industry.”); Third Way, supra note 1; World Nuclear Association, The Nuclear Renaissance, http://www.world-nuclear.org/info/Current-and-Future-Generation/The-Nuclear-Renaissance/.
16Paul Barrett, What Killed America’s Climate-Saving Nuclear Renaissance?, Bloomberg Businessweek (Oct. 27, 2015) http://www.bloomberg.com/news/articles/2015-10-27/what-killed-america-s-climate-saving-nuclear-renaissance-; Status and Outlook Report, supra note 1.
17Emily Hammond & David Spence, The Regulatory Contract in the Marketplace, __ Vanderbilt L. Rev. __ (2016) (forthcoming) (manuscript at 25, n163), available at scholarship.law.gwu.edu/cgi/viewcontent.cgi?article=2369&context=faculty_publications; id. at 27(describing the risk mitigation philosophy underpinning the NRC’s redundancy and contingency planning as part of the licensing process).
1842 U.S.C. § 2131 (2012); see also U.S. Nuclear Reg. Commission, Information Digest supra note 3, at xi (describing the mission of the NRC).
1942 U.S.C. § 2232.
20U.S. Nuclear Reg. Commission, Information Digest supra note 3 at 37.
21Hammond & Spence, supra note 17 at 24-26 (describing the licensing process).
22The Price-Anderson Nuclear Industries Indemnity Act, 42 U.S.C. § 2210 (2012).
2310 C.F.R. § 50.75; see also Pennington v. Zion Solutions LLC, 742 F.3d 715, 716-17 (7th Cir. 2014) (detailing the trust fund requirements, and how expensive the decommissioning process can be); Hammond & Spence, supra note 17, at 24-26.
2442 U.S.C. § 2232(a); 50 C.F.R. § 50.109 (describing the Commissions “backfitting” regulations, whereby the Commission can modify license requirements to ensure “adequate protection”). Although a cost-benefit analysis is required for any license modifications that go beyond ensuring “adequate protection.”
25Hammond & Spence, supra note 17, at 25-26.
26Id. at 11-15. See also id. at 15 (“Taking all of the above data into consideration (not only variable O&M), it stands to reason that in competitive energy markets the cost criterion will point investors toward new gas-fired, wind and solar power, and away from coal-fired and nuclear power.”).
27Id. at 25-26.
28Id. at 23 (“Congress and the nuclear agencies developed this regulatory regime, however, against the implicit assumption that the traditional regulatory contract would make this regime economically feasible.”).
29Munn v. Illinois, 94 U.S. 113 (1877) (holding that private industries may become so critical to the functioning of society as to become “affected with a public interest” thereby justifying government regulation).
30See, e.g., Scott Hempling, Regulating Public Utility Performance 13-69 (2013) (describing the traditional utility monopoly model, which is still in place in about half of the states today).
31Id. at 71-76 (summarizing the legal and regulatory changes that preceded electricity market restructuring from 1978 to present day); Fed. Energy. Reg. Comm’n, Energy Primer 39-41 (July 2015), available at https://www.ferc.gov/market-oversight/guide/energy-primer.pdf
32Hammond & Spence, supra note 17, at 7-9.
33The country’s ISO and RTO regions are the New England ISO (ISONE); the PJM Interconnection (PJM); the Midcontinent ISO (MISO); and the Southwest Power Pool (SPP). New York, California, and Texas have their own single-state ISOs, respectively, the New York ISO, California ISO, and the Electric Reliability Council of Texas (ERCOT).
34U.S. Energy Info Admin., Today In Energy: About 60% of the U.S. electric power supply is managed by RTOs (April 4, 2011) http://www.eia.gov/todayinenergy/detail.cfm?id=790.
35See, e.g., Hammond & Spence, supra note 17, at 9-11 (describing the operation of wholesale markets); Electric Power Supply Association, How Wholesale Electricity Prices Are Set, https://www.epsa.org/industry/primer/?fa=prices
36Fed. Energy. Reg. Comm’n, supra note 31 at 53.
37Electric Power Supply Association, supra note 35.
38Hammond & Spence, supra note 17, at 34.
39Id.
40 Supra Part II.A.2; Hammond & Spence, supra note 17, at 34.
41 Status and Outlook Report, supra note 1; Third Way, supra note 1.
42 Status and Outlook Report, supra note 1.
43 Id.
44 Hammond & Spence, supra note 17, at 35 n 250 (citing reports from Illinois that predict an increase in GHG emissions and other air pollutants following anticipated nuclear reactor closures, as well as an article about how air pollution has increased in Japan following the Fukushima accident and subsequent moratorium on nuclear power).
45Third Way, supra note 1; Jesse Jenkins, Nuclear Retirements Would Sabotage Clean Power Plan Carbon Reductions, The Energy Collective (Sept. 1, 2015) http://www.theenergycollective.com/jessejenkins/2266234/nuclear-retirements-would-sabotage-clean-power-plan-carbon-goal.
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