Yves here. This post contains some useful observations about the economics of the electricity market.
By Leonard S. Hyman, an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and is author, co-author or editor of six books including America’s Electric Utilities: Past, Present and Future and Energy Risk Management: A Primer for the Utility Industry, and William I. Tilles is a senior industry advisor and speaker on energy and finance. Originally published at OilPrice
Donald Trump in the White House and Theresa May in 10 Downing Street. They will open the door to more nuclear spending, no doubt. Prime minister May has already given a green light to Britain’s most expensive energy project, a heavily subsidized nuclear power station at Hinkley Point. Based on the most recent federal budgeting approvals, we expect that no U.S. nuclear weapons programs will want for funds. But, despite all the post-election industry euphoria, should we anticipate a full renaissance for U.S. commercial nuclear power? Is that just a bridge too far, so to speak? Let’s look at the what will go into some of these decisions.
1.Need for the product. With no growth in the market for electricity, the industry needs new power plants only to replace old ones and to decarbonize output in order to mitigate global warming. The Trump administration has declared an end to the so-called war on coal, which makes it less likely that the electric industry will have to close old coal fired generating stations soon and it has categorized global warming as a hoax, which removes an excuse to build non-carbon producing nuclear units. The nuclear industry will need another rationalization for expansion.
2.Economics. Nuclear power looks like an expensive means of producing base load electricity with significant known risks and ongoing waste storage/disposal issues. A new 1,000 MW nuclear plant ordered today for 2025 in service would cost about $10 billion. New renewables can produce power at no higher a cost per kwh, without the same long construction schedule and need to build so large a unit. A new base load gas fired unit of the same size capacity could be completed in a few years and cost one fifth as much per MW and produce at a lower cost per kwh. Producing a commodity like electricity at a relatively high price in a competitive market is not a winning business strategy. Nuclear has to offer something else.
3. Base load generation. Nuclear plants run as base load units, something renewables cannot do — at least not until economical energy storage comes into the picture– because of the intermittency of their output. Still, renewables, particularly wind in the U.S. midwest and Texas, will temporarily displace more large central station power generation, forcing more units to “cycle”. Nuclear plants are less well suited for this duty. Flexibility and load following may become more highly valued than base load. This also reflects a change in the electric industry itself. The former command and control or paternalistic relationship between utility and consumer is changing. At a minimum consumers are dictating how their energy is produced, agreeing for example to pay premiums for “greener” forms of electricity. In other words, nuclear has something to sell in the base load market, but that market may be in decline.
4. Power markets. Neither U.S. nor UK power markets will support unsubsidized or non-mandated new generation. To the extent that the U.S. wholesale power markets remain both deregulated and regulated in parts, this is also a negative for new nuclear capacity. Deregulated power markets, both here and in the UK, aren’t permitting wholesale prices high enough to finance new gas fired capacity much less new nukes. Regulators will want a cost benefit analysis before approving a new nuclear facility. Basically, this means that a new nuclear project in order to proceed will need a subsidy of one sort or another. A carbon tax would do the job even better. But what GOP politician would vote for that tax, especially if some of their constituents view the issue of global warning as a hoax?
5. Nuclear as infrastructure. As currently built, nuclear projects require a large contingent of well paid labor and massive amounts of steel and concrete. A handful of qualified engineering firms, the usual suspects, also build other infrastructure and one can only think that these politically connected firms can lobby for nuclear projects as hard as they lobby for new bridges or highways. Nuclear construction then could play a role as a component of the as part of the infrastructure program needed to boost the economy. The problem, however, is that nuclear infrastructure has some drawbacks.
6. Resilience needed. Infrastructure should be resilient and anti-fragile. In battle, would we rather attack our enemy in a swarm formation as part of a horde of thousands or ponderously approach the fields of honor as a monolithic “death star”. The former is anti-fragile. The latter, as we all know from the movies (no spoiler intended), is powerful but most definitely fragile. The “enemy” here approaches from two sides: technological obsolescence (which is slowly confronting all central station power generators) and simple obsolescence from a harsher operating environment. In plain terms, stuff just wears out faster. It’s a riskier business that’s for sure.
7. Investor-owned operators needed. The two major U.S. electric utilities with an outsized presence in nuclear power, Entergy and Exelon, could be characterized as the Dogs of the UTY, thanks to their less than stellar stock performances. EDF, the builder of the new British station, almost didn’t get to a positive decision on the new plant due to a revolt on the part of concerned directors. Do investors want more nuclear power? Probably not without subsidies or guarantees.
8. Coastal locations needed. One problem with commercial nuclear power is not that it produces expensive electricity via fission, but that its voracious need for cooling water requires mostly coastal or riparian sites. Ignore the technology for a moment. Rising seas, hurricanes, storm surges and the like could render an ever broader swath of coastline unsuitable for infrastructure of any sort. Even if the Trump administration sees no issues, property and casualty insurors as well as and bond investors might.
9. Using nuclear subsidies as corporate welfare. New York and Illinois both launched
programs best described as Welfare for the Nuclear Elderly. It’s heart-warming to see such generosity just prior to the holiday season aimed at aging, uneconomic nuclear plants. This sounds to us like a job creation/preservation program for rural areas (where high paying jobs are scarce) masquerading as an environmentally beneficial, carbon mitigating proposal. There is nothing inherently evil about subsidizing private sector jobs in the electric utility industry. We just wish they’d drop the low carbon fig leaf as a rationale or change the market so it pays for the supposed virtues of nuclearinstead of making this a political handout. But note that handouts to old nukes do not encourage the building of new ones.
10. Nuclear for defense. Defense spending may crowd out civilian needs.Themilitary already plans to modernize its nuclear warfare capability over comingdecades. In fact, if we think about where nuclear power as an energy source has worked best, it is in military-maritime applications, things like submarines and arctic icebreakers. If a nuclear accident on a naval vessel at sea occurs resulting in all hands lost–that is clearly a tragedy. If Indian Point goes full metal Fukushima, rendering significant parts of Westchester County, NY uninhabitable, we don’t even have the adjectives much less the liability coverage. We also doubt that military applications will take a back seat in the new administration. Beyond that, there are two big nuclear related projects in the U.S.: completion of the Yucca Mountain nuclear waste repository in Nevada and construction of a vitrification facility at the Hanford, WA site now holding significant amounts of highly radioactive materials in less than perfect circumstances. More than likely, the military, Yucca and Hanford will absorb the lion’s share of new nuclear-related infrastructure monies.
Without a rationale rooted in decarbonization or in shortage of alternative fuels or energy sources, the new administration in the U.S. can only make a weak case for commercial nuclear power. If it will not embrace direct subsidies (which the incoming Congress may be reluctant to do as a matter of principle), the administration may have a hard time finding private partners for nuclear projects. But it can, and probably will, make a strong case for completing the huge nuclear tasks already on the government’s plate. That spending could boost the economy just as much as putting up new nuclear power stations.