Are Nuclear Plant Closures Due to Market Manipulation and Decommissioning Fund Rules?

By Jim Hopf

DC PerspectivesMost of you are well aware that Entergy recently announced it will permanently close its Vermont Yankee (VY) nuclear plant. The primary reasons given were continued low natural gas prices, the cost of post-Fukushima upgrades, and “flaws” in the local wholesale electricity market that suppress prices and harm the profitability of baseload facilities like VY. VY was close to breaking even this year, as well as the last few years, but was projected to become unprofitable in the future—over the next few years, anyway.

Questions

vermont yankee evening 201x126Many of us are having a hard time understanding this decision, especially given that the utility had just spent a lot of money on plant upgrades as well as legal battles with the state of Vermont, which had been trying to close the plant. Why would Entergy do all that if the plant was marginal, or if they weren’t planning on keeping it open for a long time?

Some have speculated that they went to the trouble of fighting (and winning) the legal battles in order to set legal precedent for other, larger, more important plants in the region that face similar legal challenges (e.g., Indian Point). The investments in the plant, however, remain harder to explain.

Others have more general questions about the closure decision itself, as opposed to the recent expenditures. Many expect natural gas prices to rise in a few years, for many reasons. The decision to close a plant over a few years of (slight) unprofitability seems short-sighted. Is it just a case of extreme short-term mindset? Or is it, as some have speculated, a means of increasing the utility’s overall profitability in the region by raising market electricity prices, by reducing supply and having gas be the last incremental supplier a larger fraction of the time?

Finally, it could have to do with the way decommissioning funds are treated, financially. It seems that closing a plant and accessing the decommissioning fund can actually financially benefit a utility—on the books, anyway. It’s not clear to me how this works (I’m not an accountant).

Market design

wind turbine 142x200One growing issue in the United States is “negative pricing,” where the market price for power, in deregulated markets, can fall below zero. That is, some suppliers will actually pay the grid to take their power. Most of the time, the suppliers in question are wind farms that receive heavy subsidies in the form of federal tax credits (of 2.2 cents/kW-hr) and, in the case of New England, regional Renewable Energy Credits that can be as high as ~6 cents/kW-hr, as discussed in Meredith Angwin’s very informative post at Yes Vermont Yankee.  This allows them to still be profitable, even at a negative price.

As Meredith points out, one of the factors that affected Entergy’s decision was the fact that the regional grid operator had just decided to allow negative pricing. That is one source of the projected decline in VY’s profitability in coming years. Another factor was Vermont’s decision to not buy any power from the plant, even though the plant was offering power at ~5 cents/kW-hr and Vermonter’s pay almost 20 cents/kW-hr for power. That required the plant to sell (export) its power elsewhere in the regional market, which presumably reduced the price they could get. Finally, the market did not provide VY with any credit for the capacity it provides for the benefit of grid stability and margin, or for the non-polluting, non-CO2 emitting nature of its power. In fact, the grid operator will provide $78 million in capacity payments to keep some old (polluting) oil-fired generators in the region on-line and available. If $78 million per year were given to VY, that would equate to a benefit of ~$16/MW-hr, enough to make a huge difference.

Political motivations?

golden-dome-200x150Many of us can’t help but see some political motivation in these electricity market design decisions. The VY protestors and the state’s direct legal challenges may have lost their battles, but it seems that the war was won by different means and (perhaps) by people in even higher places. The direct challenges failed, but the state and regional grid operator managed to render the plant unprofitable through power market manipulation and the state’s refusal to buy the plant’s power.

Changes are being made to rules governing power grids that seem to be deliberately designed to harm the profitability of baseload (i.e., coal and nuclear) power plants. John Wellinghoff, the head of the Federal Energy Regulatory Commission (which is involved with issues related to power grids and markets), has often proclaimed that baseload power is a thing of the past that is no longer needed. Well, it seems like his vision may be coming true, some of this likely due to the policy changes discussed above. These changes will act to reduce the role of coal and nuclear baseload plants and replace them with “flexible” gas generation capacity.

The “plan” is as follows:  Erect a large amount of intermittent renewable capacity (mainly wind), essentially by government fiat, through heavy subsidies and/or mandates. Then, when these intermittent sources dump large amounts of power on the grid (most often at times of low demand), this will drive market prices down to zero (or lower). Due to large operating subsidies, these sources can continue to profit at zero/negative prices. Then, allow negative pricing on the grid. This will significantly harm the finances of baseload plants (nuclear especially) that have significant fixed operating expenses that remain nearly constant even if the plant is turned off.

Negative pricing will never affect gas plants, since most of their operating cost is fuel. When power prices go to zero (or negative), they simply shut down, at little financial loss. Natural gas plants would never bid zero for power in the first place, so allowing negative pricing clearly was never going to affect them. It does, however, affect nuclear and coal plants.

Despite all the above, the New England grid operator claims that it is concerned about over-reliance on natural gas generation in the region, and has said that the negative pricing was allowed to increase fuel diversity. Ostensibly, the argument must be that it provides some (more) encouragement for the use of renewable sources, in lieu of gas. But for anyone with any real understanding of the power markets and the impacts of such policies, those statements sound outright dishonest. They must know that the real, main impact of policies like negative pricing is to drive coal and nuclear generation down and replace it with gas, making the dependency on gas higher, not lower. The grid operator’s decision to provide capacity payments (financial support) of $78 million to oil-fired backup capacity, but not to VY, also seems highly suspect in this context.

Broader issues

gas well 150x200While we claim to care about global warming and health impacts from power production, policies in the United States, and even more so in Europe, essentially only support renewable energy production, through heavy subsidies and outright mandates for their use. Policy makes no distinction among non-renewable sources no matter how great the differences are between them in terms of health or environmental consequence. The moment a coal plant is even 0.1 cent/kW-hr cheaper, it is turned on in place of a gas (or nuclear) plant, no matter how much higher its environmental costs are. While nuclear has to spend enormous amounts to minimize its potential negative impacts, it receives no financial credit at all for its non-polluting benefits, as the industry policy organization Nuclear Energy Institute points out.

One of the main paradigms for future power generation involves using renewables to the highest extent practical (largely by political mandate) and to use natural gas plants that can ramp up and down quickly to back up the highly variable renewable power for most of the rest. Renewables’ practical limitations will likely limit them to ~25 percent, so gas would be used for up to ~75 percent of overall power generation (way up from the ~20 percent it used to be). This approach is loved by “environmentalists” and also by the oil/gas industry, which happens to be by far the most powerful and influential of the energy industries.  They would have a significant interest in taking market share now provided by nuclear and coal. A renewables-heavy future would not diminish, but rather increase and enshrine gas (and oil’s) role in power generation, in that only their plants can back up intermittent renewables. The removal of fossil fuels from the power generation sector, as happened in France, would be avoided.

Perhaps unsurprisingly, everything seems to be going the wind/gas paradigm’s way recently. Coal is being significantly affected by environmental rules for new and existing plants promulgated by the Obama administration (that I also support). Meanwhile, nuclear is subject to even more (post-Fukushima) requirements and is treated to an endless stream of hyped up reporting by the media (on Fukushima, etc.) that portray minor nuclear risks/impacts as existential threats, while ignoring vastly larger health risks from fossil fuels. Nuclear is also required to spend large amounts on security to be able to repel a large group of attackers, with some trying to argue that even this is not enough. No such requirements are placed on hydro dams, chemical plants, tall buildings, or events where large numbers of people are gathered, despite the fact that a successful attack on any of those structures/venues would actually lead to a greater loss of life. Meanwhile, significant reductions in regulatory requirements (i.e., blanket exemption from the Clean Water and Safe Drinking Water Acts) have resulted in a significant reduction in the price of natural gas through fracking. As expected, this all has resulted in large market share gains for gas and renewables.

What can help?

gas plant 200x137Policies that aid renewable sources, in the name of reducing air pollution and global warming, will not help those goals if they result in non-emitting nuclear production being shut down. Even the replacement of nuclear with an equal amount of renewables provides no net benefit. However, it seems that these policies (especially ones like negative pricing) may result in the retirement of far more nuclear generation than the amount of any increased renewable generation they stimulate. Thus, their effect may be negative.  Policies must be modified so that this doesn’t happen. Also, while the seemingly short-term focus of these utilities is unfortunate, financial incentives to keep such plants open are called for. In terms of reducing CO2 emissions over the long-term, I can think of no more cost-effective investment than incentives to keep marginal nuclear plants open through (brief) periods of low natural gas and market power prices.

The fundamental problem is that while nuclear pays dearly to reduce any potential negative impacts/risks to negligible levels, it gets absolutely no financial credit for the fact that it emits no pollution or CO2. Ideally, policy should treat both new and existing nuclear capacity the same as renewables. (I formerly thought that existing plants didn’t need any support since they would continue to operate anyway; something which appears to not be the case.) Also, ideally we would tax negative impacts like air pollution or CO2 emissions, as opposed to subsidizing or mandating sources that are politically determined to be clean. Either of the above would eliminate all the problems that these old plants are having, or any issues associated with zero/negative pricing (which would never occur).

The above policies may be a long time coming, so here are some more practical ideas:

Negative pricing simply needs to go away. It’s unjust and does not accomplish its goals. It may even increase air pollution and CO2 emissions, by causing nuclear plants to close, and it definitely reduces fuel diversity by fostering an over-reliance on gas. Nuclear should also definitely qualify for any “capacity payments” in the market.

Subsidies for renewables, wind in particular, should be phased out, especially given the maturity of the wind industry. The wind industry even offered to have subsidies phase out over the next six years, but no action on such a proposal has been taken yet. The credit should be phased out for both new and existing wind turbines.

Steps should be taken to reduce the fixed costs of nuclear plant operation. Some utilities are starting to focus on ways to reduce costs (and yes, this means reducing staffing, with nuclear’s staff levels being far higher than other sources). As I discuss above, I feel that nuclear’s security requirements are unjustly strict. However, cost saving from any reductions will only be on the order of a fraction of a cent/kW-hr. Many requirements (including security) appear to be independent of plant size. Perhaps the Nuclear Regulatory Commission could consider scaling back some requirements for smaller plants, based on their smaller potential release.

Decommissioning fund rules should be revised so that it never actually helps the utility, financially, to close a plant and “officially” tap into the decommissioning fund. I’m a bit vague on what the details would be, as it’s somewhat arcane and I’m not an accountant. But I know what the result should be. The decommissioning fund should not provide any kind of artificial incentive to close a plant.

Finally, various types of financial support for marginal nuclear plants could be considered by federal, state or local governments. I discuss these options in a previous ANS Nuclear Cafe post. If the decision is marginal, a relatively small amount of financial support could make the difference, and it may be in the interests of state or local governments to do so (to retain employment and local tax base). The incentive for the federal government would be that it would constitute just about the cheapest way ever imagined to reduce CO2 emissions over the long-term (much more effective than renewables subsidies).

Mothballing plants

vermont yankee reflection 210x103Finally, changes need to be made so that it’s economical and practical to mothball a nuclear plant and restart it later, as Rod Adams discussed in this ANS Nuclear Cafe post. Giving up a plant’s operating license causes the NRC fee of $4.4 million per year (per plant) to mostly disappear. I believe that a similar reduction should also apply for a mothballed plant, but that fee only costs a plant, like VY, on the order of 0.1 cents/kW-hr, so the reduced fee is not likely to be a significant factor.

Theoretically, staffing costs (including security) should not be much different between a mothballed and a permanently shutdown plant, since the physical plant configuration (and any risks, etc.) is no different. The only difference would be additional costs from decommissioning activities at the shutdown plant, which would be paid for by the decommissioning fund.

If NRC requirements demand much higher staffing levels for a mothballed plant than for a permanently closed plant (simply because it still officially has its operating license) those requirements need to change. They are unjustified, since there are no actual differences in the plant. The only additional burden I can see for the mothballed plant would be some inspections and maintenance to keep the plant components in operable condition, but I can’t see that being a very large cost.

As Rod suggests, if a plant is mothballed, they should be able to defer any industry-wide (e.g., Fukushima) plant upgrades until they want to start the plant. However, a mothballed older plant should not be required to “bring itself up to the latest standards” that would apply for a new plant, in order to restart. Upgrades should be limited to what the NRC would have demanded of the plant if it had never stopped operating. Again, theoretically they wouldn’t have to do any such things if they maintained their operating license and paid the $4.4 million fee.

Given all the above, it continues to be difficult to see why a utility would close a nuclear plant and give up its operating license, given that the (fixed) costs for a mothballed plant shouldn’t be much higher than those of a permanently shutdown plant. The reduction in the ($4.4. million) NRC fee doesn’t seem to be enough to explain it. Signs point to the decommissioning fund, and the apparent financial benefits (on paper) of tapping into it. Perhaps some specific changes to decommissioning fund accounting rules should be the highest priority for near-term policy adjustments.

vy reflection

______________________

Hopf

Hopf

Jim Hopf is a senior nuclear engineer with more than 20 years of experience in shielding and criticality analysis and design for spent fuel dry storage and transportation systems. He has been involved in nuclear advocacy for 10+ years, and is a member of the ANS Public Information Committee. He is a regular contributor to the ANS Nuclear Cafe.

11 Responses to Are Nuclear Plant Closures Due to Market Manipulation and Decommissioning Fund Rules?

  1. James Greenidge

    This article ought be plastered with the ads on every bus and subway car. Everything vital in a nutshell. What should also be called on the carpet is the science and validity of Climate Change and the $$ research bucks and grants governments are dumping to curb it; If the science is so credible then why stand by and watch a major remedy go down the toilet, especially if these CC claims come catastrophically true? Aren’t nukes — mothballed or not — like civilization insurance in the bank in this event — even with Fed subsidy or takeover? Just why isn’t the government and media so hot about CC as it was pre-Fukushima anyway? The scare ads have all melted away! Is it because a “failing” nuke market takes the heat off the need of using them to fight CC so the alarm isn’t needed anymore — a cynically fatalistic view if fossil fuel companies are indeed behind pulling the plug on CC ads! I also would at least love to see a law school test case on why nukes are required to have excessively extensive security and county-wide sirens and mandatory evacuation plans while historically blood-on-their-hands-by-thousands chemical and gas/oil plants and depots whistle on by with nada? You’d think Elizabeth NJ needs these rules far more than Indian Point, ESPECIALLY since fossil fuels and chem industries have a notorious track record of not just occasionally evacuating whole neighborhoods but even putting them away! The economic/safety/environment hypocrisies against nuclear must end!

    James Greenidge
    Queens NY

  2. Jim, you said “The only additional burden I can see for the mothballed plant would be some inspections and maintenance to keep the plant components in operable condition, but I can’t see that being a very large cost.”

    I dont know what that totals to, but it is basically the maintenance budget, plus a large part of the operations dept time. That’s what all those employees are doing every day! Surveillances and periodic maintenance. Giving up the license relieves the need for all that ongoing work.

  3. gmax,

    You’d think that at least some of the staffing requirements are related to actual operation of the plant systems, as opposed to just doing periodic maintenance and inspections. Also, you’d think that systems are more prone to wear or malfunction during operation, vs. just sitting in a mothballed state, which should result in reduced requirements for maintenance and inspection. You would also think that security requirements would taper off as the core decays and cools (and the potential attack consequences go down).

    I also have to ask what such staffing requirements are (to keep plant components in operable condition) for non-nuclear plants (even operating, let alone mothballed ones). I’m assuming that they’re much less than that of nuclear plants, which begs the question why. I acknowledge that nuclear plants are somewhat more complicated, with more components, but I believe that at least part of the difference is the nuclear industry simply being held to vastly higher standards.

  4. I followed the link on “negative pricing”, and what really scares me is the plan to allow near real-time (hourly) pricing that can go negative, rather than day-ahead pricing. This is clearly meant to benefit intermittent sources. But in addition to promoting grid instability, I think this will also result in financial instability as grid operators start gambling on an hour-by-hour basis. The idea is to pass cost savings on to customers, but who do you think pays those subsidies! When there is a sudden shortage because of a lack of base-load supply, customers will get nailed by high prices. It’s all going to come crashing down eventually, and customers and taxpayers will be paying in the end to clean up the mess.

  5. Dennis Mosebey

    The issue with both Vermont Yankee and San Onofre is that the NRC just will not stand up to the public and continues to have hearing after hearing thus forcing utility executives to make such decisions. There was NO reason an ASLB should ever have reopened San Onofre restart to public hearings. It was political. The NRC’s job is to regulate nuclear power not advocate for it and especially NOT to kill it, but as long as you have a commission led by appointees of poltical parties this will not change. Both Kemeny and Rogovin after TMI II said the NRC should go under a separate administrator–this is the only TMI II action that was never enforced or implemented because it takes a change to the Atomic Energy Act and Energy Reorganization Act and Congress is not going to do it because it removes 5 more political positions of patronage a President can award. In the early days of the AEC when their primary job was making bombs it made sense to have a Commission. But ask yourself this question, Today the people who oversee the bombs have one single administrator while the people that oversee the peaceful uses deal with this political thing called the NRC. Does that make sense to you? Of course not. The NRC needs abolished. In recent years their quest for “safer and safer” in Security alone has cost many millions of dollars each year and it continues. Then there is the pursuit of the elusive hot short and spurious actuation during fire which to date has only been produced in the carefully controlled atmosphere of research labs. Basically at my plant my entire control room is slowly being distributed throughout my plant again for many millions of dollars and while you have to have them by law, no credit is allowed for fire brigades, breech control, impairment of fire protection systems, none of it is credited and you cannot even take credit for any operator action. Regulation is to blame for Vermont Yankee and San Onofre pure and simple. And it will remain so as long as a Commission with political sentiments exist. If we are going to keep the Commission one firm requirement to be named should be that you never served on the staff of any member of Congress! Had that been a requirement Jaczko would never have been made Chairman. That is how I see it. Dennis Mosebey

  6. Dennis,

    Another solution to the NRC over-regulation problem would be to require them to justify all (proposed and existing) regulations with cost benefit analyses. I discuss that idea in my last post.

    http://ansnuclearcafe.org/2013/07/18/cost-benefit-analyses-of-nuclear-requirements/

    The fact is that the nuclear industry is required to spend several orders of magnitude more money per life saved (or per unit of public health or environmental benefit) than competing energy sources, or pretty much any other industry.

    Another possible angle is that NRC regulations are ostensibly there to “protect public health and safety”. Well, at Fukushima we learned that even a worst case meltdown at several large reactors poses little if any threat to public health and safety. If that’s too much of a stretch, clearly the maximum possible source term from a SMR, which is probably a few percent that of a large reactor, is clearly not a threat.

    Given this, one may have grounds to question the (legal?) basis for all NRC regulations, especially for SMRs. Just make the owner responsible for any economic damages, and remove NRC authority. I would trade Price Anderson for NRC.

  7. I would like to point out to everyone that a very informative blog post on all these VT Yankee and New England power market design issues (from which I got a lot of information for this article) can be found at Meredith Angwin’s “Yes Vermont Yankee” blog. It is an August 29 post titled “Questions I Frequently Ask Myself about Vermont Yankee Closure”, which can be found at the link below:

    http://yesvy.blogspot.com/2013/08/questions-i-frequently-ask-myself-about.html#.UjySRCko61s

  8. Blaming everyone else because VY makes power when not needed and isn’t given corporate welfare to be first in line shows the problem with power one can’t turn off economically.

    The article blames RE but facts are most RE is made when needed naturally or on demand.

    Facts are cheap Canadian nukes, hydro are more to blame in it’s case.

    Fact is baseload is cheap because it’s not flexible. The valuable is power made when needed like hydro, solar, biomass, Solar CSP, etc.

    Even wind in many places like the whole east coast, happens at peak power needs most of the yrs from the land and sea breezes caused by land/water heat difference, matching grid load almost perfectly.

    And solar follows A/C load near perfectly thus both these are far more valuable than present nuke.

    The only ones to blame is the nuke industry that won’t change to better, smaller, lower cost, safer gen 4-5 nukes. Blaming it on others isn’t becoming.

    Large PWR’s are obsolete, deal with it.

  9. Large PWR’s are obsolete, deal with it.

    Vermont Yankee is a modest-sized BWR.

  10. It is RE that’s receiving “welfare” and is placed “first in line”. As shown in the post, RE sources in New England receive up to ~8 cents/kW-hr in subsidies. That subsidy is more than the market price for power (or Vermont Yankees total price). Much of that is a renewable energy credit that is part of a portfolio standard that mandates the use of RE, regardless of cost or practicality (with the renewable energy credit (subsidy) value rising as high as it needs to to produce the mandated amount of RE use). RE isn’t successfully “competing” with anything.

    As for RE producing power when most needed, it is true that solar tends to produce power at times of peak demand, and therefore is of somewhat higher value. But, for that very reason, solar does not compete with baseload sources like nuclear. Instead, they compliment each other quite well. Solar shaves the demand peaks, and the baseload plants cover the remaining, relatively flat demand profile. Gas plants have generally been used to cover the demand peaks, as a compliment to the baseload plants. Thus, solar would tend to displace gas generation, not baseload generation like nuclear. Solar would never lead to negative pricing.

    However, most of the RE being deployed in New England is wind, not solar. For wind, the notion of producing power “when needed” (and thus it being more valuable) is ludicrous. It produces power randomly, not when most needed. It also generally produces power at off peak times (when it’s least needed). That is what results in negative pricing. Unlike solar, wind competes with, and tends to suppress, baseload sources like nuclear. After the intermittent, usually off-peak wind generation is accounted for, the remaining demand profile is a radically variable profile that is can only be practically covered by gas plants, as opposed to baseload plants like nuclear.

    You may say that not being able to accommodate such a radically varying remaining (post-wind) demand profile makes baseload (nuclear) electricity less valuable. But most of us have the view that it means that intermittent, wildly varying wind-generated kW-hrs are less valuable (they are actually the source of real problems for the grid).

    It is clear that your statement about wind usually generating at times of peak demand is wrong. If that were the case, negative pricing would not be occurring, and this entire issue wouldn’t be happening. If that were true, wind (like solar) would be complimenting baseload sources like Vermont Yankee wonderfully, and it would be displacing gas generation in the region, resulting in gas use falling. Instead, we are seeing baseload sources suffer, and the use of gas sharply increasing in the region.

    The whole issue is that the large amount of politically-mandated wind generation is dumping large amounts of power at times of minimum demand, resulting in negative pricing and an artificial, negative impact on busload plant economics.

  11. Experience with wind power in CA indicates that it is NOT available when needed the most. A few years ago there was a bad heat wave in CA and power demand was approaching record levels. The capacity factor for wind generation during that time was about 5%. If it were any other power source other than wind operating at 5% capacity factor, they’d be laughed out of the business. But because wind is THE CHOSEN ONE, THE SAVIOR, it is still favored, even though its performance during periods of peak demands is worse than miserable.