Share This

Merchant Electricity Markets Undervalue Nuclear Energy, Industry Says

Sept. 26, 2013—Merchant electricity markets are failing to provide adequate price signals to support investment in capital-intensive baseload generation—or, in some cases, to support the continued operation of existing power plants, the Nuclear Energy Institute’s vice president for policy development, Richard Myers, said this week.

The Kewaunee nuclear energy facility in Wisconsin and Vermont Yankee in Vermont both had efficiency ratings at or above 90 percent. However, neither plant could earn enough revenue to support continued operation. Consequently, Kewaunee closed permanently in May, and Vermont Yankee is set to shut down next year.

“There is absolutely nothing wrong with these plants, but there is something seriously wrong with the markets in which they are operating,” Myers said at a Sept. 24 meeting with reporters.

Even after 15 years of operation, deregulated markets have yet to develop mechanisms to value several important qualitative attributes of nuclear energy facilities, Myers said. “Those markets don’t accord adequate value to baseload capacity that can be dispatched when it is needed. They do not recognize the value of fuel and technology diversity or the significant clean-air compliance value of a nuclear plant.”

While current economics are tough for operating plants, it is all but impossible to build new capital-intensive facilities like coal-fired or nuclear plants in deregulated markets as they are currently designed, Myers said. “Absent some change, deregulated markets are never going to build anything but gas-fired capacity because they are driven solely by short-run, marginal economic considerations.”

Meanwhile, he said, five new reactors are under construction in states that retain traditional cost-of-service regulation. “In the regulated states, they assign value to qualitative factors like fuel and technology diversity, price stability and environmental attributes.”

Firms that monitor independent system operators also have raised concerns about the effectiveness of price signals in merchant markets to attract investment in new generation.

Potomac Economics identified market issues in ERCOT, the independent system operator that serves most of Texas. The report said that despite recent improvements in market design, “net revenues provided by the market were at historic lows as energy prices fell substantially. Net revenues were insufficient to support investment in new generation even though planning reserve margins have fallen to levels that are close to the minimum planning reserve targets.”

Potomac Economics also found that price signals in MISO (the Midcontinent Independent Transmission System Operator) would not support private investment in new resources. “This resource adequacy concern is likely to rise as environmental regulations, increasing wind output, and low natural gas prices accelerate the retirements of coal-fired resources in the medium term.”

UBS Securities believes merchant markets with “capacity markets”—which provide some revenue for maintaining a certain amount of generating capacity—generally have been successful in procuring adequate resources to ensure reliability.

However, UBS identified concerns with future electricity price volatility in a paper prepared for a Sept. 25 Federal Energy Regulatory Commission meeting on capacity markets.

“The greatest issue we perceive in capacity market design relates to price volatility, leading to irreversible decisions on future capacity,” UBS said. “Recent price volatility has resulted in substantial baseload capacity retirement. … We believe the ongoing replacement of large-fixed cost structure plants, with lower capital cost, but higher dispatch cost units, will increasingly drive greater energy market volatility as well.”

These lower-capital cost facilities typically are natural gas-fired.

UBS also noted: “A growing policy question remains whether is it appropriate to explicitly design these markets to maintain the grid’s underlying diversity. While retiring coal plants may have aligned well with administration goals of reducing criteria and hazardous pollutants domestically in recent years, we expect a more robust discussion in coming years around fuel diversity as nuclear plants continue to announce license expiration retirements.”

Despite current economic stress, Myers believes the long-term prospects for nuclear energy in the United States remain strong. “The value proposition is as healthy as ever,” he said. “Nuclear plants generate a large quantity of baseload electricity around the clock, safely and reliably, and aid in clean-air compliance.”

Myers added that the cost of electricity from nuclear plants remains fairly stable, not subject to the price volatility associated with gas-fired generation. Even though current prices for natural gas are not particularly high—in the range of $3.50 to $4 per million Btu—prices remain volatile, he said. “The average price of gas delivered to electric generators through the first six months of this year was about 44 percent higher than the first six months of 2012,” Myers said. “That volatility will not go away. It is a commodity and it will continue to act like a commodity.”

The current situation with deregulated electricity markets is not sustainable, Myers said. “If it is allowed to continue, we will continue to shut down useful, productive assets—nuclear, coal and otherwise.”

An audio transcript of Myers’ Sept. 24 interview is available on NEI’s website.