NEI: Nuclear plant closures show that market defects must be fixed

September 24, 2013
Matthew Bandyk

The trend of nuclear reactors being forced to close due to unfavorable economics shows there are serious "structural defects" in deregulated, competitive electricity markets in the U.S., but figuring out how to correct these defects is no easy task, a Nuclear Energy Institute official said Sept. 24.

"We're coming to agreement on what the problem is but we still have a way to go on figuring out how to solve it," NEI Vice President for Policy Development, Planning and Supplier Programs Richard Myers said at a briefing for reporters. NEI is a trade group that lobbies and advocates on behalf of the nuclear power industry.

NEI held the briefing in response to Entergy Corp.'s recent announcement that it would retire the Vermont Yankee nuclear plant because wholesale prices and payments it receives in ISO New England Inc.'s market are too low for the plant to make money. The announcement of Vermont Yankee's closure came less than a year after Dominion Resources Inc. said it was retiring its Kewaunee plant in Wisconsin for similar economic reasons. Duke Energy Corp.'s Crystal River plant in Florida and Edison International and Sempra Energy's San Onofre plant in California are being permanently retired after the operators determined that repairing damaged components of those reactors would be too expensive.

Myers said it is important to separate Kewaunee and Vermont Yankee from Crystal River and San Onofre. The latter cases were "unique, one-off situations unlikely to be repeated," Myers said.

But as for Kewaunee and Vermont Yankee, the problems are systemic, he contended. "There was and there is absolutely nothing wrong with these plants," Myers said. "There is something seriously wrong with the markets in which they are operating."

Echoing comments made by an Entergy executive about the New England market, Myers said restructured markets in general fail to compensate nuclear plants for value they provide that is not captured in immediate electricity prices, like diversifying a utilities' portfolio or providing lower emissions generation. "The states that have restructured have not yet, even after 15 years, developed mechanisms to value these public goods and internalize them into their decision-making," he said.

Within the past two decades, the Northeast, Mid-Atlantic and Midwest regions of the country made movements away from vertically integrated utilities owning most power plants toward decentralized, competitive markets into which power producers bid. But the old model in which state regulators compensate state utilities for their investments — still the prevailing model in the Southeast and Northwest — is better able to capture the value of nuclear plants, as shown by the fact that utilities in Georgia and South Carolina are not only keeping existing reactors but are building new ones.

In contrast, restructured markets "are never going to build anything but gas-fired capacity because they're driven solely by short-run marginal economic considerations which will always drive you to the lowest capital-cost technology," Myers said. "There are real dangers associated with overdependence on natural gas and big parts of the country are really placing themselves at significant risk of price volatility."

But NEI does not believe re-regulating markets is the answer. "Our companies would agree that competitive markets can be made to work," he said.

Exactly how to change the markets so they provide more compensation for nuclear plants is unclear, however. The Kewaunee and Vermont Yankee retirements may be speeding up the search for an answer. "There's a lot of thinking going on at the moment of what to do," Myers said. "The solution may vary market to market."

Competitive markets have their defenders. The lack of payments for nuclear plants could be a sign that market players simply do not need their power. "Every auction we've held to date, the auction has closed at the floor price with excess capacity," ISO-NE spokeswoman Marcia Blomberg said after the Vermont Yankee announcement, implying that robust competition is going on in the market.

The grid operator also is working on ways to deal with dependence on natural gas. "The ISO is working with market participants and the New England states to develop potential market enhancements, including a pay-for-performance market mechanism that will create strong financial incentives for generators to ensure that they have adequate fuel arrangements to be able to produce electricity when called on by the ISO," ISO-NE said in an email.

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