Consultant suggests U.S. consider buying endangered nuclear units

In a recent analysis, the head of Nuclear Economics Consulting Group (NECG) says that “direct compensation” or, in some cases, government ownership might be the best way to prevent more premature retirements of financially struggling nuclear power units.

NECG head Edward Kee lays out his position in a June 24 commentary titled “Market Failure & Nuclear Power.”

When contacted by GenerationHub¸ Kee acknowledged that having the government buy endangered reactors is “a long shot” although some elected officials seem increasingly open to creative ways to keep nuclear units open.

“I think there is broad agreement that the federal government must act to stop these early retirements, because states are not able or willing to do much and because the public benefits that are lost apply to the entire country,” Kee said.

During a Department of Energy (DOE) summit on nuclear issues, Energy Secretary Ernest Moniz has said that premature nuclear plant retirements will only hurt U.S. efforts to curtail carbon dioxide (CO2) emissions.

“DOE is under a huge amount of pressure to do something to stop these early retirements,” Kee said. “My opinion is that buying the threatened plants will be an option that is considered. I see the level of difficulty for federal government action lower today than a year ago. The most likely things are those that do not need congressional action.”

“A move to federal government ownership, especially for economically-threatened plants, might be a way to address market failure in nuclear power,” Kee said in the June 24 analysis.

Kee cited a June 3 opinion column in the Washington Post where a New York attorney, Stephen Kass, advocated having the federal government buy coal-fired power plants and shut them down. Kass said in the column that the government should then pay to retrain the coal plant employees.

The Washington Post column said government purchase of coal plants would achieve the goals of the Clean Power Plan (CPP), but would be faster, more certain, and more legally defensible.

The U.S. government should consider a “Plan A for nuclear power,” Kee said in his June 24 analysis. “The federal government would buy existing nuclear power plants that are considering early retirement in order to keep them in operation. When the electricity market prices are higher, the value of these government-owned nuclear power plants will increase,” Kee went on to say.

In the commentary, Kee noted that the United Kingdom has committed to building new nuclear plants although power prices don’t necessarily justify them.

To avoid the early retirement of nuclear power plants, the UK government re-nationalized British Energy in 2005, Kee said. The consultant noted that a site license was issued a few years ago for a new nuclear plant in the United Kingdom, Hinkley Point C.

“In contrast to the UK, the U.S. government has done little to save economically-threatened operating nuclear power plants or to provide incentives for new nuclear power plants,” Kee said.

The cost of government acquisition of economically troubled nuclear plants “can be justified by the same market failure arguments used to justify U.S. federal tax credits for renewables, state renewable energy mandates” and similar measures internationally, Kee said.

Current market structures not saving nuclear units

“Market failure, an economic concept, is when the market (defined broadly) does not support activities that provide net public benefits,” according to Kee’s analysis. “This can happen when firms decline to undertake activities or investments that result in private losses, even though these activities would provide net public benefits.”

Generic approaches to fix market failure include imposing costs on negative externalities, providing compensation to support positive externalities, and government ownership of sectors likely to experience market failure. Because market failure is about maximizing public good, these approaches usually involve government action, Kee said in the commentary.

While indirect actions like electricity and capacity market improvements are one option, thus far they have yet to stop the tide of nuclear plant retirements. Nuclear power and other capital-intensive electric generation “are not a good fit with electricity markets,” Kee said in the paper.

“Carbon pricing is seen by some as a way to save nuclear power. Carbon pricing may help improve nuclear power economics, but may not be certain enough to save nuclear power,” Kee said.

Direct compensation to nuclear power plants for the public benefits they provide might be an effective way to fix the failure problem.

A power contract between a regulated electric utility and a nuclear power plant can provide stable and sufficient revenue to a nuclear power plant to prevent merchant nuclear early retirement.

“One example is the 2012 PPA extension for the [NextEra] Duane Arnold merchant nuclear power plant,” Kee said. “The Iowa Utilities Board approved this PPA extension based on the added public benefits such as no emissions, and the employment provided by nuclear plants. State clean energy mandates would require regulated retail utilities to acquire a portion of total electricity from clean sources including nuclear.”

In recent weeks, Exelon (NYSE:EXC) decided to retire Clinton and Quad Cities nuclear units in Illinois while Omaha Public Power District (OPPD) decided to retire Fort Calhoun in Nebraska. Also, PG&E has decided not to pursue license renewal for Diablo Canyon in California.

With degrees from Harvard and the U.S. Naval Academy, Kee has provided testimony as an expert witness on a range of electricity industry issues in state and federal courts, before the Federal Energy Regulatory Commission (FERC), and before other legal and regulatory bodies in the United States and internationally. Kee also provides strategic advice to companies and governments on issues related to the nuclear and electricity industries.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.