Addressing the Plight of Existing Nuclear Retirements, Part 3 RSS Feed

Addressing the Plight of Existing Nuclear Retirements, Part 3

1.While states have a major role to play in preventing nuclear retirements, regional and federal solutions offer alternative avenues to keep nuclear plants operating.

2.For ISOs, capacity market reform can reduce retirement pressure by more fully valuing the long-term benefits of nuclear generation in the overall electricity mix.

3.Direct subsidies, like tax credits, may provide further revenue but are a blunt instrument and face major political headwinds.

4.Carbon prices are an effective market-based solution but existing cap and trade systems have so far failed to support sufficiently high prices.

5.Finally, nationalizing parts or all of the nuclear fleet could prove a major long term strategy to keep plants open.
Regional or National Policy Action Offers Possibility of Broader Reform

Since mid-2016, the challenges facing the nation’s nuclear fleet have only grown more pressing. Natural gas prices, despite recent volatility, remain very low, keeping nuclear revenues in competitive electricity markets low.

Nuclear plants continue to announce retirement decisions, with the 2.2 MW 2-unit Indian Point retirement by mid-2021 being especially notable considering its current profitability. More than 10% of the U.S.’s 2010 nuclear fleet is now retired or scheduled to retire within the next 8 years.

Faced with the loss of the largest zero carbon electricity source in the country, states are taking the lead in maintaining struggling nuclear facilities. Since New York finalized its ZEC program, Illinois has provided similar targeted nuclear support as part of broader energy legislation. Other states are considering following suit.

While state action may be the most likely policy solution for struggling nuclear units, regional or federal policy solutions offer different and more comprehensive changes. Increasingly, regulatory power over utility-scale electricity generation has shifted from the states to FERC.

The evolving regulatory roles of state commissions, ISOs, and FERC constrain and inform any major policy efforts to address the challenges facing the nation’s nuclear fleet. As we discussed in Part 2, this shifting regulatory landscape limits how state legislatures and PUCs address nuclear retirements in individual states.

At the same time, the new regulatory landscape provides the opportunity for policy solutions at the regional and federal level. The U.S. Congress, ISOs, regional programs, and FERC together can all play unique roles in limiting retirements of existing nuclear facilities.

In key ways, regional and federal solutions are qualitatively different from the state solutions analyzed in part 2:

Regulatory and policy decision making happens in different venues with larger oversight and scrutiny. Decision makers need to balance more competing interests.
Any policy or regulatory actions above the state level are likely to affect more than just vulnerable nuclear units, creating the potential for windfall profits for non-threatened nuclear units.
Compared to the states, these venues are not currently major policy focuses of efforts to save nuclear units.
Critically, the ‘higher’ the regulatory avenue used, the more nuclear facilities and general power plants that are effected.

Most states only have a handful of nuclear reactors, making it possible to micro-target struggling nuclear reactors even if it brings charges of favoritism.

Comparably, regional and federal regulatory authorities have many nuclear reactors under their oversight. Due to political and regulatory constraints, any actions these regulators take may have to benefit all nuclear units, potentially increasing retirement prevention costs.

The effects of any policy will be different for deregulated and rate-regulated nuclear units. Parts 1 and 2 highlighted the key differences between these two types of reactor compensation. A quick recap:

Deregulated reactors receive revenues from wholesale electricity markets, where they face significant competition from natural gas and coal units. In practice, revenues and profits for these reactors vary along with energy prices. Low natural gas prices now and high renewable energy growth in the future will lower revenues by lowering power prices.
Rate-regulated (or cost-of-service regulated) reactors receive revenues based on traditional average cost compensation. Natural gas or renewable energy do not compete directly with these reactors. Rather, any decision to close these reactors is based on utility and commission decision making.
Of the two, deregulated reactors face the most pressing retirement risks. Nevertheless, many rate-regulated reactors face major retirement risks in 5-15 years without policy action.

In this article, we review four potential energy policies that operate primarily on the regional or federal level that could stem the tide of nuclear retirements:

Capacity market reform to increase (or create) capacity revenues
Existing nuclear subsidies
Carbon price
Nationalization of the existing private nuclear fleet
This is the third article in a three-part series on existing nuclear electricity generation in the United States. Part 1 discusses major economic and policy challenges. Part 2 examines several specific actions states can take to prevent nuclear retirements. This article (Part 3) examines potential regional and federal policy solutions.

Capacity market reform

Of the seven competitive wholesale electricity markets (ISOs) in the United States, four have some type of capacity market construct: PJM, ISO-NE, NYISO, and MISO. These markets only emerged relatively recently and are still being actively designed.

Although the rules behind each capacity market are complex, the concept is simple:

While energy only markets compensate generators for energy provided to the grid, capacity markets compensate generators for promising to provide capacity when dispatched by the ISO.

Effectively, capacity markets substitute for the traditional role of state regulators in long term system planning.

Capacity markets work to maintain long term grid reliability and adequate resource supply. Energy-only markets maximize for short term operation and, due to price volatility and market cycles, will often not provide sufficient revenue to keep power plants open in the short term even if they are economic in the mid or long term.

By providing revenues up to three years in the future, existing capacity markets provide some long-term certainty for market revenues (the extent is debated).

In the markets where they exist, prevailing capacity prices can thus shape overall market outcomes.

Indeed, they already have. Around half of retired or retiring nuclear reactors are in the three ISOs with the most developed capacity markets: PJM, NYISO, and ISO-NE. Most states in these three ISOs are deregulated. These nuclear units almost exclusively receive revenue from energy and capacity markets.

Capacity markets are still being developed, are somewhat controversial, and have notable limitations.They are not markets as most people think of them; rather, they are administrative auctions.

Based on ISO-developed and FERC-approved rules, grid operators run their own capacity auction processes. They determine the amount of capacity needed in the target year, receive bids for supplying that capacity, and determine the ultimate capacity clearing price.

Typically, if a generator clears the auction, they are required to generate electricity when called upon by the grid operator. They receive capacity revenues in a $/MW-time period format.

The rules governing capacity auctions often play as much role in setting prices as competitive bids do. The ISOs determine what level of capacity needs to be procured, generator eligibility, under what conditions suppliers can provide the capacity, how the auction price is determined, and more.

In most capacity auctions, most plants plan on continuing to operate no matter what. They are price takers, meaning that there are only a handful of plants bidding competitively into the auctions. Hence the rules of the auction effectively determine the revenues the generators receive.

ISO-NE provides a stark example: in the first seven capacity auctions in ISO-NE, ISO-wide capacity prices cleared at the administrative floor. Two of the retired or retiring nuclear units in the country are in ISO-NE, making low capacity revenues a key factor in those specific retirements. New England’s remaining plants face some of the highest retirement risks in the country.

Read full article at The Energy Collective