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Testimony for the Record, Michael McGarey to the Ohio House of Representatives

Testimony for the Record
Michael McGarey
Senior Director, State and Local Government Affairs
Nuclear Energy Institute
Washington, D.C.
to the
House of Representatives
Committee on Policy and Legislative Oversight
State of Ohio
October 15, 2013
The Nuclear Energy Institute  appreciates this opportunity to share the industry’s perspectives on the role nuclear energy plays, and must continue to play, in helping to ensure the reliability and affordability of electricity in Ohio and throughout the nation going forward.  We commend Chairman Dovilla and the Committee for recognizing the critical importance of reliable, zero-emission baseload electricity as an essential part of the foundation of sustained economic growth, and for examining the challenges to current and future electrical system operations we now face.
Nuclear in Ohio
It may be useful to begin by pointing out that Ohio’s two commercial nuclear reactors, FirstEnergy’s Davis-Besse and Perry plants, generate 11 percent of all electricity produced in-state.  Ohio’s two reactors prevent the emissions of tens of thousands of tons of air pollutants and they generate virtually no carbon emissions or greenhouse gases, accounting for 92 percent of the carbon-free electricity produced in Ohio.  
Davis-Besse’s and Perry’s combined capacity factor of 87 percent puts them right near the nuclear industry’s fleet-wide standard for extraordinary efficiency.  Both plants figure prominently in FirstEnergy’s portfolio going forward – each having undergone power uprates, with Davis-Besse having already applied for a 20-year extension of its original 40-year NRC operating license while Perry prepares its license extension application for submittal in 2015.
Equally important, nuclear facilities in Ohio employ more than 1,400 highly-skilled workers.  Ohio is also an important link in the worldwide commercial nuclear supply chain, with 1,350 Ohio companies generating more than $194 million in annual sales of materials, services and fuels.  There are many reasons for confidence in the significant role that nuclear will play in Ohio in coming decades, based in part on a full appreciation of what nuclear energy provides today.
Nuclear Energy’s Total Value Proposition
The nuclear industry anticipates a continuing strong role for nuclear energy going forward, here in Ohio, throughout the United States and indeed throughout the world.  The industry’s confidence in a bright future stems from a variety of important attributes – we refer to them collectively as the Total Value Proposition of Nuclear – that no other generating source can replicate exactly today, or in the foreseeable future.
That value proposition starts with production of large quantities of electricity around the clock, safely and reliably, when needed.  
But the value proposition does not end there.  Nuclear power plants also provide unmatched clean air compliance value.  In a cap-and-trade system, or in responding to carbon limits on existing or new power plants, nuclear energy reduces the compliance burden that would otherwise fall on emitting generating capacity, and we can demonstrate that value analytically.
Commercial nuclear reactors provide voltage support to the grid, helping to maintain grid stability.  They provide forward price stability and are not subject to the price volatility associated with gas-fired generating capacity, in particular.
They contribute to the fuel and technology diversity that is one of the bedrock characteristics of a reliable and resilient electric sector.
And they provide large numbers of high-paying jobs (larger numbers and higher-paying than other sources of electricity) and anchor the local tax base. When the Kewaunee plant in Wisconsin closed earlier this year (for reasons that will be detailed later in this statement), the State of Wisconsin lost 556 megawatts of emission-free electricity.  In addition, the plant represented almost 15 percent of the employment in Kewaunee County and contributed 30 percent of the county’s revenue.
These are some values of nuclear energy that are not often fully appreciated. They are not monetized by markets. They don’t show up in net present value calculations.  But these values exist nonetheless.
As our nation’s economy recovers, as we build new generating capacity to meet new electricity demand and to replace our aging electricity infrastructure (including coal, oil- and gas-fired steam capacity, even nuclear units), as we continue to replace direct burning of fossil fuels with electricity in manufacturing and in our transportation sector, as we continue to limit emissions of criteria pollutants like SOx, NOx, mercury and particulates and reduce the electric sector’s carbon footprint, this value proposition will become increasingly self-evident, and will drive a solid long-term future for nuclear energy.
Steady, Safe Industry Performance and New Nuclear Construction
Consistent with the strong performance of the Ohio reactors cited above, the U.S. commercial nuclear fleet continues to perform extremely well, with an average capacity factor of just over 90 percent.  We are seeing signs for potential progress on used fuel storage and transportation. The nuclear industry invested $8.5 billion in our plants last year to sustain high levels of safety and reliability.  U.S. reactor operators responded effectively and efficiently to the lessons learned from the Fukushima accident in Japan, and they are well along with the FLEX initiative – adding more portable, backup safety equipment at each plant so that we can respond to extreme natural events, regardless of the ause.
A number of states restructured their electricity markets in the late 1990s, and the business of producing electricity has turned into two distinctly different enterprises.  In those states still subject to traditional regulation, companies and regulatory agencies evaluate resource options and project economics over a 40-year time horizon, as is appropriate when you’re building 40-year assets, and they assign value to real (but qualitative) factors like fuel and technology diversity, price stability and environmental attributes.  Restructured merchant states have not yet developed mechanisms to value these “public goods” and internalize them in their decision-making.
Regulated states, on the other hand, have been able to create the conditions under which companies can undertake long-term, capital-intensive projects and preserve fuel and technology diversity.  In the south and southeast, state legislatures, governors and regulatory commissions provide assurance of cost recovery necessary for capital-intensive projects.  This is why the Vogtle and Summer nuclear projects are underway in Georgia and South Carolina.
That makes four new reactors under construction in Georgia and South Carolina, with 3,500 construction workers on site in each state, due on line in 2017 and 2018, along with Tennessee’s Watts Bar Unit 2 now under construction and due for completion in 2015.  There are another 60 new reactors under construction worldwide.  Plus, there is a new generation of small modular reactors coming along right behind them, and the industry is working its way systematically through the licensing and regulatory issues that must be addressed.
The U.S. government is also working with industry to improve our nuclear export capability, so that American-based companies are better positioned to compete in world markets, which are growing.  The U.S. Commerce Department estimates the worldwide market for commercial components, technology and services will be $740 billion over the next decade. 
Recent Plant Closures – Coal and Nuclear
As noted earlier, the Nuclear Energy Institute believes broad portfolio diversity is the strength of the U.S. electricity system.  NEI shares the Committee’s concerns about recent wave of coal plant shutdowns in Ohio and elsewhere and the prospects for more coal plant closures, and the challenges they pose for the electrical sector and public policy-makers.  In an earlier hearing, this Committee amply documented these coal plant closings and others that will follow in Ohio and throughout the country.  Every U.S. nuclear utility has extensive fossil generating assets – both coal and natural gas – along with a variety of renewable holdings and efficiency programs, so we don’t view these developments in a vacuum.
The nuclear sector has experienced some recent plant closures, or announced closures, as well.  NEI is grateful for an opportunity briefly to provide the Committee with some perspective on the four nuclear plant shutdowns that have occurred this year and the one plant shutdown that has been announced for the end of 2014.  None of these plants are located in Ohio, but it is important to provide some context on the business and market environment in which several of these events are occurring.
It is certainly true that a handful of older, smaller nuclear power plants – like older, smaller coal-fired plants – are vulnerable to weak market conditions, particularly in unregulated merchant markets.  Older, smaller plants that face major capital investment requirements are the most vulnerable.  Oyster Creek is the poster child here.  The State of New Jersey insisted that Exelon build a cooling tower – a billion-dollar investment that exceeded the value of the asset.  So the company and the state negotiated an agreement under which the plant will operate until 2019, then shut down.
How many additional nuclear plants shut down, if any, will depend on a number of factors, all difficult to forecast with any confidence, including energy and capacity prices in the market in which the plant operates, natural gas prices, regional growth in electricity demand, economic growth in the region, political sentiment about the plant, and – perhaps most important – whether and when policy-makers and political leaders address the defects in market structure, design and performance that will be discussed shortly.
The common thread at Florida’s Crystal River 3 and California’s San Onofre 2 and 3 was steam generator replacement.  Since the Surry nuclear power plant in Virginia replaced its steam generators in the early 1980s, approximately 110 nuclear reactors around the world have replaced their steam generators, in what has become a routine practice.  Of all the reactors that have replaced their steam generators, three have ended badly.  That does not represent a trend.
Crystal River 3 is a case study in how uncertainty over repair cost can force shutdown; San Onofre, a case study in how open-ended regulatory uncertainty can produce the same result.
Of the five, Kewaunee in Wisconsin and Vermont Yankee are the only ones that were the victims of economic pressure.  And they are the greatest concern, particularly because both plants were – and are – solid performers.  Kewaunee had an average capacity factor of 94.3 percent for 2010-2012; Vermont Yankee was 90 percent.  There was – and is – nothing wrong with these plants.
Clearly, one large factor in the closure of coal capacity is the range of environmental regulation which, but for some pending power plant cooling water rules, do not impact zero-emission nuclear energy.  But another factor, historically low natural gas prices driven by large new domestic supplies, has impacted coal and nuclear alike.  There are also fundamental problems with the U.S. electricity market.
Dash to Gas
In the U.S. electric power sector, this fuel and technology diversity which we properly value and strive for is at risk.  Since 1995, approximately 75 percent of all capacity built in America was gas-fired – almost 350,000 megawatts.  Coal and nuclear, the two sources of electricity that can produce electricity around-the-clock at stable prices with virtually no price volatility, represented a scant six percent of the total.
And it appears that this “Dash to gas” will continue:  At least 50,000 MW of gas-fired capacity – and, by one estimate, as much as 100,000 megawatts – is expected to be added this decade.
The United States has about one million megawatts of generating capacity.  Roughly 400,000 megawatts of that is coal and nuclear.  They supply roughly 60 percent of U.S. electricity.  These are the two sources of electricity that provide the greatest price stability but, looking forward, less than 10,00 megawatts of new coal-fired and nuclear capacity is expected by 2020.
There’s something wrong with this picture.
In addition, a large amount of U.S. fossil-fueled generating capacity is expected to shut down in the next 5 – 7 years, partly due to low gas prices, but mostly due to increasing environmental requirements.  Consensus estimates suggest that 100 – 110 gigawatts of generating capacity – approximately 10 percent of installed capacity – will be retired this decade.
There are several reasons to be cautious about over-dependence on natural gas.
First, volatility.  Last year’s low natural gas prices (in the range of $2-3 per million Btu) were not sustainable.  Natural gas prices are already increasing.  So far this year, the average price of natural gas delivered to electric generators is 44-percent higher than the first six months of 2012.  For the first six months of 2013, spot gas prices at major trading hubs were up significantly from the same period last year – by 50-percent-or-so in most of the nation, to over 100-percent higher in the northeast.
And because natural gas prices set the price for power in most of the country, electricity prices at all the trading hubs are up significantly this year, too.
Power prices are higher across the country for different reasons.  In the northeast, higher natural gas prices have driven power prices up.  In the Pacific Northwest, gas-fired generation was higher during the first half of the year because hydro production was down – to about 80 percent of normal – because snowpack in the Cascades was lower than normal.  In California, gas-fired generation has filled the gap left by the shutdown of approximately 2,200 megawatts of nuclear generating capacity at San Onofre.  This, too, has had an impact on prices.  From 2003 to 2011, the spread in on-peak prices between Southern California and Northern California averaged about 40 cents per megawatt-hour (MWh).  The spread jumped to nearly $3 per MWh in 2012 – the first year San Onofre’s Units 2 and 3 were offline – and is projected to average $7-10 per MWh during 2013-2017.
Several major markets in the United States have had dire warnings about what can happen when states or regions find themselves over-dependent on natural gas.  New England in early 2013 was the most recent example.  New England depends on natural gas for over 50 percent of its electricity supply (almost double its dependence in 2000), and found itself skating on thin ice several times in January and February 2013, with reliability of electric service at risk and spot prices for natural gas and electric power spiking dramatically.
Gas prices in the region soared above $30 per MMBtu at times in January and February.  Electricity prices reached $250 to $260 per megawatt-hour.  This is a market that typically clears in the mid-$40-per-megawatt-hour range.  The total value of New England’s wholesale electricity market – the cost of all the electricity produced and consumed – in January and February 2013 was estimated to be about $2 billion.  By comparison, the value of the region’s electricity market totaled about $5 billion in all of 2012.  So in two months, the region spent on electricity 40 percent of what it spent in an entire year in 2012.
An after-the fact assessment by the organization that operates the grid in New England is littered with stark descriptions of what happened:  “Persistent reliability concerns …. the region needs to develop immediate solutions to avert serious threats to system reliability next winter … a condition that is unsustainable.”
New England is not the only vulnerable part of the country.  In 2000, Florida relied on natural gas for about 18 percent of its electricity supply.  Today it is 70 percent and that will increase further with the Crystal River reactor shut down.
In New York, gas-fired generation increased from 29 percent of electricity supply in 2000 to 44 percent in 2012.  Nuclear energy represents only 13 percent of New York’s generating capacity, but those six plants produce approximately 30 percent of the state’s electricity.  New York Governor Andrew Cuomo is dedicated to closing down the 2,000 megawatts of nuclear generating capacity at Indian Point – which is at best very short-sighted, since it would only exacerbate the state’s dependence on natural gas.
Second, gas demand is increasing in other sectors besides electricity.  By 2020, new demand from the electric power sector, the industrial sector and for liquefied natural gas (LNG) exports could represent a 20-30 percent increase from today’s consumption.
The chemicals industry, in particular, is making a big bet on low-cost natural gas.  There is approximately $100 billion of capital investment in new production capacity now underway in the United States.  This would have been unthinkable five years ago, and it explains why some of the large chemical companies – like Dow – are extremely nervous about LNG exports.
Can the U.S. natural gas resource base support this production level?  Of course, it can; that’s not the issue.  The resource base is huge.  In many states, including numerous communities throughout Ohio, discoveries of new natural gas reserves are transforming local and regional economies with terrific benefits.  The shale gas boom here in Ohio and elsewhere has delivered almost unimaginable opportunities to America’s energy, transportation and manufacturing sectors, creating thousands of jobs.
The question is whether the necessary infrastructure – pipelines, gathering systems, gas processing facilities and so forth – will be built precisely at the right time and in the right places to match growing demand.  The answer is probably not.  And that means periods of volatility, as demand in one or more regions outruns supply during periods of extreme heat or cold.
What happened in New England last winter didn’t happen because the resource base was inadequate.  It happened because the region has too little gas transmission, no gas storage and electricity generators that do not typically pay the premium for firm gas transmission service.
Problems with U.S. Electricity Markets
The U.S. electric sector is experiencing a period of wrenching disruption and sustained stress – the product of virtually no growth in electricity demand for the last several years (thanks to the anemic performance of America’s economy), low natural gas prices and “soft” power markets.  Demand for electricity in the United States has not yet returned to the level seen in 2007, before the financial crisis.
In 2012, U.S. natural gas prices slipped briefly below $2 per million Btu (MMBtu) and, since gas-fired generation sets the price in many power markets, electric power prices dropped substantially as well.  Wholesale spot prices across most regional power markets last year were at 10-year lows.
The combination of no growth in electricity demand, excess generating capacity, low natural gas prices and low power prices challenges the economic viability of many power plants, including certain nuclear power plants.
The electric power industry is struggling with a number of major issues – low growth and thus reduced revenues at a time of high capital spending; the disruptive effect of distributed generation; a patchwork of federal and state subsidies and mandates that distort the market, and other issues.
We have mentioned the worrisome over-dependence on natural gas for electric power production.  There also appear to be chronic defects in the merchant markets that make up about one-half of the country.  These markets do not provide sufficient value to justify investment in a diverse portfolio of generating technologies or, in some cases, to support continued operation of existing assets.
To some extent, the amount of nuclear generating capacity that might shut down in the next several years depends on whether the federal and state governments and regional entities recognize – and address – the serious stresses building below the surface of the U.S. electricity industry.  And the extent to which governments address these issues depends, to some extent, on the industry’s success in focusing attention on them.
All fuels, all technologies carry some level of risk.  A diverse portfolio – coal, nuclear, natural gas, renewables, efficiency – is the core strength of the U.S. electric power supply system, or indeed any electricity system.  This fuel and technology diversity serves as a hedge against price volatility or supply disruptions in any part of the portfolio.  As with a financial portfolio, risks are lower and returns higher with a diversified mix of assets.
As mentioned earlier, the electricity sector has turned into two distinctly different enterprises, with some states retaining traditional regulation and others relying on merchant markets.  Regulated states are seeing investments in new generating capacity.
By contrast, fifteen years of experience with deregulated markets suggest that these markets are not producing price signals sufficient to stimulate investment in new generating capacity, or to support continued operation of existing capacity.  This is clear from assessments of these markets by the independent companies commissioned to monitor market performance.
Here you see what the independent market monitor says about the New England market.
Here is the judgment on MISO – the Midcontinent Independent System Operator, the market in which Kewaunee nuclear plant in Wisconsin was operating.  This is a market, like Texas, that provides no value for capacity.
Understand that there are two components to the wholesale cost of electricity – the energy charge (which covers O&M and fuel) and the capacity charge (which covers the capital cost required to have generating capacity available when needed).
The problems with all these markets start with inadequate capacity payments – sometimes called the “missing money” problem by economists.
This is ERCOT – the Electric Reliability Council of Texas.  ERCOT has no capacity market.  It relies on scarcity pricing – brief periods of extremely high prices – thousands of dollars per megawatt-hour – to stimulate investment in new generating resources.
It doesn’t work.  Texas has run its reserve margins down to about 13-14 percent, below the minimums considered necessary for reliability.
The situation in Texas has deteriorated so far that the North American Electric Reliability Corporation (or NERC) took the unprecedented step of asking ERCOT how it planned to correct the situation.  This is a quote from a letter to ERCOT from Gerry Cauley, the president of NERC, in January of this year.
And finally, PJM, which serves the mid-Atlantic region and part of the Midwest.  The CEOs of two large, Ohio-based utilities who operate in the region have detailed the challenge of maintaining capacity and reliability.
During a recent earnings call, CEO Nick Akins of American Electric Power – one of the largest coal-burning utilities in the country – said: 
There is no long-term pricing structure for anyone to go out and build and construct and finance new capacity.
This is from Tony Alexander, CEO of FirstEnergy, also during a recent earnings call:
There are significant and fundamental flaws in the process.  These flaws will not only impede investments in competitive generation resources and the development of a robust competitive market but will also, ultimately, impact reliability.
It is also clear that the short-term surplus of electric generating capacity is temporarily masking the inevitable consequences of inadequate price signals and short-run decision-making.  Texas, for example, dodged the bullet this summer because weather was significantly milder than usual.
But what happens when you have to replace a Kewaunee or a Vermont Yankee?  Here you see (in the green bars) the all-in total generating cost of those two nuclear plants – $52 and $49.75 per megawatt-hour, respectively (three-year average.)
The red bars represent the cost of replacement power from the gas-fired combined cycle plant that will be built when you need to replace the lost nuclear capacity.  Unless you believe that natural gas prices are going to stay below $4 per million Btu for the next 20 years, there is no rational economic reason to allow these two nuclear plants to shut down.  Make no mistake:  Shutting them down is a perfectly rational, necessary and appropriate business decision on the part of the companies.  Not so from society’s point of view.
As mentioned before, there was nothing wrong with the Kewaunee and Vermont Yankee nuclear plants.  There is something seriously wrong with the markets in which they are operating – which do not value baseload capacity that can be dispatched when needed; which do not provide value for fuel and technology diversity, and which do not recognize the clean air compliance value of a nuclear power plant.
How many additional nuclear plants shut down, if any, will depend on a number of factors, all difficult to forecast with any confidence, including energy and capacity prices in the market in which the plant operates, natural gas prices, regional growth in electricity demand, economic growth in the region, political sentiment about the plant, and – perhaps most important – whether and when policy-makers and political leaders address the defects in market structure, design and performance discussed above.
This year is not the first time the U.S. nuclear industry has shut down power plants.  In the mid- to late-1990s, the American industry closed 10 reactors, typically due to a combination of several factors – economic uncertainty in the face of restructuring and deregulation, regulatory distress, political opposition, or a combination of these.
Some forecasters took the shutdowns as a sign that the U.S. nuclear industry’s best days were behind it.  In its annual forecast for 1997, the Department of Energy predicted:  “The 1997 Annual Energy Outlook reference case assumes that … 50 units will retire between 1995 and 2015 … [The Outlook] assumes that individual reactor performance improves for the first 20 or 25 years of operation, after which it declines as units age.  As a result, the national average capacity factor stays near the current level of 77 percent.”
This forecast, and others like it, was not only wrong; it was spectacularly wrong.  Fifty reactors did not shut down, and industry performance did not stall at 77 percent, but leveled off at approximately 90 percent, with the top quartile of plants typically running at 95-percent average capacity factors.
Looking Forward
With its solid, 50-year record of safe operating experience and ever-improving performance, the nuclear industry recognizes the need to redouble its effort to increase awareness of the value of reliable, affordable, clean electricity to American homes and businesses, and to note the indispensable role of nuclear energy in providing it.
Our core message is the importance of fuel and technology diversity to the electric supply system, the fact that this diversity is seriously at risk, and the importance of nuclear power as part of the portfolio.
We must ensure that the shutdowns that have occurred – and any others that may be lying in wait out there – do not compromise confidence in nuclear energy, and our ability to pursue our priority issues.  We cannot afford to have people in the Executive Branch or Congress or state governments saying things like: “Well, the U.S. nuclear industry is on its last legs, so it doesn’t matter whether we address the used fuel issue or vigorously pursue development of Small Modular Reactors.”
NEI is launching a major project that will demonstrate analytically the value of fuel and technology diversity, which will be cofunded with several other organizations.  We look forward to reporting those results to this Committee when we have them.
Nuclear energy’s long-term fundamentals are still strong.
Even at less-than-one percent annual growth in electricity demand – below historical trends – EIA forecasts a need for 339 gigawatts of new electric capacity by 2040.
Second, the United States is on course to shut down between 10 and 20 percent of our coal-fired generating capacity in the next several years.  And if the Obama Administration succeeds in establishing emission limits for carbon, that number will increase.
Third, it is unlikely that natural gas prices will stay low and stable for the next 40 to 60 years, the lifetime of a new nuclear power plant.  Commodities just don’t behave that way.
And finally, sooner or later, the value of fuel and technology diversity will inevitably reassert itself.
Public Support for Nuclear Energy is Strong
Nuclear energy is one of the largest sources of U.S. electricity today, and 85 percent of Americans expect that role to continue in the years ahead, according to a new national public opinion survey. Fifty percent believe that the importance of nuclear energy in meeting America’s electricity needs will increase, and 35 percent believe it will stay the same; 13 percent believe it will decrease.
Bisconti Research Inc., with Quest Global Research, conducted the national survey of public opinion September 5-15, 2013. A nationally representative sample of 1,000 U.S. adults was interviewed by landline and cell phone. The survey’s margin of error is plus or minus three percentage points. Nuclear Energy Institute (NEI) sponsored the survey as part of a continuing public opinion tracking program begun in 1983.
The survey also found that 82 percent believe that nuclear energy will play an important role in meeting America’s future electricity needs; 39 percent say that role will be very important, and 43 percent somewhat important. 
Americans’ views of the energy mix tend to be inclusive, consistent with an all-of-the-above approach. Most (85 percent) agree that “we should take advantage of all low-carbon energy sources, including nuclear, hydro, and renewable energy, to produce the electricity we need while limiting greenhouse gas emissions.”
Eight in 10 Americans believe that both America’s energy policy makers and electric companies should be planning at least 10 years ahead to ensure a well-balanced energy supply in the future, and majorities believe they should be planning at least 20 years ahead, a national public opinion survey found this September. Fifty-nine percent believe that America’s energy policy makers should be planning at least 20 years ahead, and 53 percent believe that the electric companies should be planning at least 20 years ahead.
Among eight considerations for the way electricity is produced, 82 percent give top importance to “reliability” and 82 percent also to “clean air.” Large majorities also give top importance to “affordability” (78 percent), “efficiency” (76 percent), “energy independence” (73 percent), “job creation” (67 percent), and “economic growth” (65 percent). A slim majority (51 percent) gives top importance to “climate change solution” as a consideration in electricity production.
Majorities of the public associate nuclear energy a lot with “reliable electricity” (58 percent) “energy independence” (54 percent), “efficiency” (54 percent), “clean air” (52 percent), and “affordable electricity” (51 percent). Fewer recognize nuclear energy’s contribution to “economic growth” (43 percent)
The nuclear industry anticipates a continuing strong role for nuclear energy going forward, here in Ohio, throughout the United States and indeed throughout the world.
Thank you very much.