States with nuclear power plants are grappling with a highly unusual conundrum. The plants are running significant operating losses, but allowing them to be shut down would, paradoxically, significantly increase electric bills, because new energy sources to replace them would be considerably more expensive.
A thicket of mandates and regulations have created this economically irrational situation by forcing politically-favored, heavily-subsidized technologies onto an electric grid where demand is flat. Impending nuclear closures around the country should serve as a wake-up call to federal and state policymakers to fix the broken energy policies that force us to replace lower cost with higher cost energy sources – but instead the state of New York is doing precisely the opposite, layering another complex and costly tax-and-regulate scheme on top of the existing thicket to directly subsidize nuclear plants.
New York Governor Andrew Cuomo via the Public Services Commission comprised of his appointees, has ordered a surcharge on home and business electric bills totaling $962 million in the first two years. This tax will only grow from there, well into the billions. The New York scheme is of enormous national significance because it’s widely being touted as a new national model.
The Cuomo plan is designed to force even more of the market-distorting, heavily-subsidized renewables that are undermining the economics of existing nuclear plants onto the grid, while simultaneously propping up nuclear with massive direct cash infusions. In all, the plan ratchets up the mandate for wind, solar, hydro, and nuclear to a combined 50 percent of the state’s electricity use by 2030.
States should not arbitrarily dictate that ever-larger amounts of renewables be used regardless of the economic consequences, especially when heavy federal policies mean that those renewables, though intermittent and unreliable, will often sell at spot prices well below not only their true cost but also baseload coal and nuclear plants.
The most comprehensive analysis of the costs of power from existing plants versus building new replacements was recently conducted by Tom Stacy and George Taylor for the Institute for Energy Research. They adjusted the data from the federal Energy Information Administration with actual capacity utilization results from Federal Energy Regulatory Commission filings to determine the levelized cost of electricity for existing and new sources. What they found was a substantial cost difference, with electricity from existing nuclear plants costing $29 per megawatt-hour versus over $55 for the lowest cost new-plant replacement, which would be combined cycle natural gas. Wind is over $100 and solar is over $140.
The state of New York has mandated high levels of unreliable, intermittent – but heavily subsidized – renewables, which has caused this problem. Nuclear energy should be sustainable without a government bailout in the current economic climate; however, the required usage of other energy sources has caused a price distortion that forces nuclear plants to run large losses when the wind is blowing. Rather than get rid of those policies to allow nuclear to compete on its merits, the Cuomo plan whacks the state’s ratepayers again with a new surcharge to directly subsidize the nuclear plants.
The anti-nuclear activists are up in the arms, but the big, well-heeled environmental groups are on board because they know that what’s really being bailed out is the state’s irrational mandate for non-fossil fuel electricity. Without nuclear energy, the state will be unable to meet its own renewable energy use mandates.
In effect, big government has created a serious problem for which we are told that even bigger government is the only solution – at the cost of a massive new tax collected on electric bills and imposed not by elected officials but by public service commissioners. And when this scheme fails, there will probably be an even bigger, more expensive one to follow.
A much better approach would center on a market design to create a pricing mechanism that values stable, reliable baseload generating capacity that can then allow the market to determine the resource mix based on economic factors. Nuclear might or might not do well in the long term, but we certainly wouldn’t be looking at the bizarre spectacle of a bailout for an energy source that’s actually cheaper than what would replace it.
Phil Kerpen is head of American Commitment and a leading free-market policy analyst and advocate in Washington. Kerpen was the principal policy and legislative strategist at Americans for Prosperity for over five years. He previously worked at the Free Enterprise Fund, the Club for Growth, and the Cato Institute. Kerpen is also a nationally syndicated columnist, chairman of the Internet Freedom Coalition, and author of the 2011 book "Democracy Denied."