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Wasting Time: Subsidies, Operating Reactors, and Melting Ice

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Logo for the Bulletin of the Atomic Scientists.

Logo for the Bulletin of the Atomic Scientists.

Abstract
Instead of having political leaders and regulators make pin-the-tail-on-the-donkey-type guesstimates of how much nuclear power we’ll need, how long we’ll need it, and how much we should pay for it, we should adjust our power markets to procure the needed low-carbon electricity. Beyond that, we can regulate emission results where necessary. We should minimize mandating the continued use of existing power plants. Instead, our power markets can prioritize low-carbon technology, just as they have proven themselves capable of doing with reliability and demand response.

Keywords
Nuclear energy, nuclear subsidies, power plants, incentives, cap and trade, carbon tax, Price-Anderson Act

In the many large states where power is sold through competitive markets and nuclear reactors must compete with other types of generators (and with energy efficiency and storage combinations), some reactors can no longer make a profit. Although they made higher profits than their regulated brethren in the years when market prices were high, those profits have long since been paid as dividends, reinvested, or paid as property taxes to fortunate host communities. Without the threat of climate change, there would be scant reason to prop these reactors up any longer.

But does climate change really justify the support now being demanded by the nuclear industry—successfully in New York and fervently in Illinois and Ohio—with more states soon to come?

Actually, no. The fate of a few endangered reactors in a handful of states means almost nothing in terms of solving the problem of global climate change. The entire 99-member US reactor fleet represents something like one percent of the low-carbon energy necessary to stabilize the climate by midcentury if it replaces the average US mix of coal and gas-fired power. Replacing a dozen uneconomic reactors mostly with natural gas during the early years of a transition to a low-carbon economy is a long way from the apocalyptic carbon debacle that the nuclear industry laments. And to the extent that the reactors are replaced by efficiency and renewables, the climate impact is nil. Polar bears on shrinking Arctic ice floes and Pacific islanders with vanishing homes must regard these fervid and time-consuming US state debates with exasperation.

The nuclear industry, however, asserts that all of its reactors are essential to the US effort to meet climate goals and commitments. Therefore, customers must be charged additional billions of dollars, and the pace of the transformation toward a more decentralized, customer-controlled electric system slowed—all in order to preserve these reactors profitably for their entire licensed lives.

This is nonsense.

But even if the entirety of the nuclear industry’s argument is indefensible, closing reactors abruptly and without planning is indeed bad climate policy. Much (though far from all) of these reactors’ near-term replacement power will come from fossil fuels—and the greenhouse gas emissions from these replacements would trap heat in the atmosphere for decades. And it is almost entirely avoidable in ways discussed below.

Meanwhile—and not for the first time—the nuclear industry may well lose its future through its present arguments. The endangered plants are already massively subsidized. The hundreds of new US reactors that would need to be built if nuclear energy is to be a pillar against climate change will need hundreds of billions of dollars in subsidies if they are to get built at all. Promises of a payback in later years (long a staple of nuclear industry justifications) ring pretty hollow while the existing fleet of 30-year-old plants conducts yet another political cattle drive for yet more subsidies in Washington and selected state capitals—even as the costs of the alternatives and of energy efficiency continue to fall. Is it too much to ask that this time regulators demand rigorous, continuing, and market-tested proof that no better alternatives are available?

A tale of two states

In California, the Pacific Gas and Electric Company (PG&E) recently came to a settlement with California unions, environmentalists, and consumer representatives, in which it agreed not to operate the Diablo Canyon nuclear power station after 2025. This settlement, which must be approved by the California Public Utilities Commission, is in many ways the most significant blow delivered to the troubled US nuclear power industry this century. A state with a larger and more diverse economy than most countries may soon conclude—as Germany has done—that it will be able to meet its climate and economic needs comfortably without any nuclear power at all.

By phasing out the operation of the two Diablo Canyon reactors over eight and nine years respectively, the settling parties have allowed time to ramp up replacement programs involving low- and zero-carbon resources in energy efficiency, renewable energy, and grid management— including electricity storage. If successful, these replacement programs would disprove nuclear industry claims that all US nuclear plants are essential to meeting clean air goals. They would instead show that any surge in carbon dioxide emissions that accompanied most recent US nuclear plant closings can be avoided, if given a reasonable lead time.

The California settlement also undercuts other nuclear industry assertions regarding nuclear plants and climate change. For example, PG&E states that Diablo Canyon fits poorly into the future California electricity market because Diablo Canyon’s size and lack of operational flexibility would impose more costs than benefits. This conclusion makes mincemeat of industry claims that nuclear plants are victims of “dysfunctional markets” that don’t reward them for being large and running all the time. PG&E states instead that in California’s grid—with its emphasis on renewable energy and flexibility—large, must-run plants would become more liability than asset.

Nor do the diverse interest groups that agreed on the California settlement accept the nuclear industry’s proposition that reactors would be competitive with renewable energy if only they were similarly subsidized. Far from saving Diablo Canyon by including nuclear power in California’s renewable energy quotas or requiring the signing of inflated nuclear purchase contracts, all those involved in the settlement have agreed to choose future resources through competitive markets unencumbered by Diablo Canyon with its various problems. Certainly a charge for carbon emissions would improve the efficiency of such markets and enhance Diablo’s attractiveness, but the nuclear industry itself says that charges for carbon emissions will not be large enough to save most threatened reactors.

The claim that nuclear power’s current troubles flow from subsidies granted only to competing, renewable technologies is preposterous in any case. Nuclear power plant operation is at least as heavily subsidized as renewables, and far more so than any one renewable. Federal law limits nuclear plant owners’ need to buy liability insurance to $300 million, despite potential accident costs shown by Fukushima to exceed $100 billion. Between $375 million and about $13 billion (in 2013 dollars) is backstopped by all other nuclear plants and their customers. For an accident doing more than $13 billion in damage, costs will be borne either by the taxpayers or, to the extent that accident victims are not fully reimbursed for their losses, by the victims themselves.

Payments by taxpayers to nuclear plant owners for the federal government’s unique obligation to take nuclear industry wastes will run to at least $500 million per year indefinitely. Without being relieved both of liability above $375 million and of responsibility for spent fuel, private nuclear plant owners have made clear that they would not build a single nuclear unit. Furthermore, in recent years the excess capital costs of many of today’s reactors were paid off through government-imposed fees to the tune of about $70 billion. Taking into account the very large subsidies to nuclear power in its early decades, a Union of Concerned Scientists’ study by Douglas Koplow points out that the total subsidies paid to nuclear plants actually exceed the value of the power the plants produced.

Despite their unpersuasiveness in California, some of the same arguments that were rejected as to Diablo Canyon have been accepted by the New York state government. Governor Andrew Cuomo trampled principles of quasi-judicial deliberation observed at the New York Public Service Commission from the early 1970s through my own tenure, which ended in 1995. Perhaps conscious of the role that the perceived neglect of the upstate economy played in his father’s 1994 gubernatorial defeat, Cuomo ordered the Public Service Commission to adopt a plan to assure continued operation of four upstate reactors for an indefinite period, regardless of whether independent assessment or market processes might show less costly combinations of alternatives.

The Commission dutifully ignored some of the principles of its widely praised previous approach, known as “Renewing the Energy Vision,” which explored ways to expand customer control and flexibility in New York State’s future regulatory framework. Instead, the Commission obediently mandated that customers pay an estimated $7.6 billion dollars expressly to support operation of the uneconomic upstate nuclear units through 2029. During the 12-year term of this subsidy, no substantial review of the availability of cheaper low carbon alternatives to some or all of the reactors will occur. The program does not commit to continuing any subsidy program after 2029, and New York’s two downstate plants at the controversial Indian Point site were not made eligible for the subsidies.

Despite opposing headlines reading “California plant closed” versus “New York plants saved,” the New York and California plans are not as different as they seem. The California plan allows reactors to operate and recover their costs from customers until 2024-25. The New York plan allows the same thing until 2029. Both purport not to count nuclear toward their long-term clean power goals. By 2030, if nuclear remains uneconomical in New York, both states could be meeting their clean power goals without nuclear energy.

But there are also important differences. The New York subsidies are calculated in ways that make them larger on a per-kilowatt-hour basis than the California subsidies (which are not explicitly acknowledged in the plan). More importantly, since California is committed to a firm closing date, resource planning will be directed toward clean power replacements from now until the reactors close. New York can achieve a similar result if at some point it announces that the subsidy program will definitely end in 2029, but for now the power planners do not have that degree of clarity.

The essentials of a sensible approach to the impacts of sudden reactor closings can be extracted from these two state stories. They include avoiding panicked overreaction to inflated industry claims and recognizing the dislocations caused by sudden closures. The fundamental decisions are not nuclear versus non-nuclear, but how much to pay for given quantities of nuclear for how long. As settlements are negotiated and adjudicated, representatives of different consumer classes—not just industry, environmental, labor, and taxing interests—need to have equal seats at the table. Using proven market principles to conduct competitive bidding for low-carbon energy over the period of the proposed closings should substitute for guesstimates of “the social cost of carbon” in determining the amount to be paid to the winning low carbon resources—perhaps operating reactors but perhaps not—especially after the first few years. The costs of the most advantageous low-carbon alternatives, including energy efficiency, should determine the cost to customers.

Despite industry caterwauling about unfair market verdicts, these markets have functioned for 20 years now without power shortages. They continue to spur significant innovation and cost reductions that regulators were never able to achieve. They do underprice carbon emissions, but undermining their remarkable record in order to preserve troubled technologies at any cost—instead of modifying them to produce desired environmental results through neutral processes—would be yet another of those expensive elevations of prophesy over principle that failing industries so often urge on credulous governments.

What is really going on here?

Like the once heated but now barely remembered 1990s debate over paying off stranded investments in the course of electric industry restructuring, today’s furor in California, Illinois, Ohio, and New York is essentially a negotiation. It is about the size of the ransom that the nuclear industry will be able to extract by slowing down the transition to an electric system that transfers control from large central facilities to the premises of the customers.

The dramas playing out in these four states are not crises of climate. They are crises of allocation. No one can say with certainty how many reactors will be uneconomic, or what the precise impacts of the closing of some of them will be. Statements like “You can’t take nuclear power off the table” or “We need an all-of-the-above energy policy” are substitutes for serious thought about how to make the hard policy choices that sensible prioritization always requires.

We have no idea where our home heating fuel will be refined in 2030 and beyond, or our food grown, or our lumber milled. This doesn’t bother us at all. The economy will provide it. Controversy may surround particular projects but rarely an entire industry. (Coal is the primary exception.)

Only when it comes to electric power do large numbers of people insist on knowing what will come from where, and on arguing about this with quasi-religious fervor. Diverse concerns have driven these arguments since they began in the Tennessee Valley in the 1920s, but by the turn of the 21st century we had developed power markets capable of producing kilowatt-hours in a manner similar to other commodities. In these markets, power supply has been adequate, reliable, and no more polluting than in fully regulated regions.

The industry perspective is straightforward. Accelerating technological change is pushing network intelligence and, with it, control of the electric grid into the hands of the customers. Combinations of storage, demand management, smart meters, a more versatile grid, and onsite generation are reshaping electricity along the lines of the telecommunications system over the last 30 years. The need for large power plants running 90 percent of the time—so-called “baseload” generation—is diminishing. The inflexibility of nuclear units puts them in the position of the rotary dial phone: reliable, but inflexible to the point of incompatibility with a changing industry. To preserve their position for a while longer, regulators and legislators will have to function—as many did for the Bell System for many years—as taxing authorities, “correcting” market verdicts through surcharges and entry restrictions.

Two vignettes

Are future events in electricity really so hard to foresee that we are better off looking to markets to allocate the risk of error than to governments to get it right? Let’s close with two vignettes and an offer to follow the lead of anyone who can prove that they foresaw them.

First: On October 24 an entity called “Environmental Progress, Illinois” (EPI) led a march and a sit-in at the headquarters of the Environmental Law and Policy Center, a quarter-century old, Chicago-based environmental organization. EPI is a creation of “Environmental Progress,” a newly minted California nongovernmental organization that marched on the Natural Resources Defense Council in San Francisco in June. Environmental Progress accused the Natural Resources Defense Council and the Environmental Law and Policy Center of having been corrupted to anti-nuclearism by money from fossil and renewable interests. This will come as a revelation to the many fossil interests that have been successfully sued and otherwise challenged by both organizations for decades.

Environmental Progress claims to hold the high moral ground in the nuclear debates. Though short on history or martyrs, it likens its efforts to Martin Luther King’s helping “to win freedom and fairness for millions of people.” Self-congratulatory photographs fly about on Twitter of a small group of sleek white people blocking office entrances and invoking Gandhi to support taxing the poor for electricity to benefit nuclear power plant owners while schools, housing, and mental health programs go underfunded.

Environmental Progress founder Michael Shellenberger scheduled himself to address the Illinois rally on “Why We Must Speak of Nuclear Power’s Transcendent Moral Purpose.” Someone persuaded him that really he must not. Instead, the rally leaders taught their followers “The Battle Hymn of the Atom” with which to enliven their doorway blockings. Having distilled the grapes of wrath to his own purposes, Shellenberger must now hope the Lord doesn’t decide to trample out their vintage anytime soon.

Second: Thirty years ago, Pacific Gas and Electric CEO Tony Earley, then-president of the Long Island Lighting Company, negotiated a settlement to close the controversial Shoreham nuclear plant in New York. Before that, as a young lawyer with a practice built around licensing nuclear power plants, he could not have imagined that his nuclear legacy would rest largely on shuttering three of the most controversial US reactors. Clearly, he has learned what a federal court told the Energy Department when it sued to overturn his New York settlement: A license to operate a nuclear power plant is not a sentence to do so.

And, as former MIT economist and current Exelon board member Paul Joskow put it a few years later: “Nuclear power is a business, not a religion.”

Funding
This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Author Biography
Peter A. Bradford is an adjunct professor at Vermont Law School, where he has taught “Nuclear Power and Public Policy.” From 1977 to 1982, he served on the US Nuclear Regulatory Commission, and he has chaired the utility regulatory commissions in Maine and New York.