06/19/2014 - 12:42

The EPA carbon plan: Coal loses, but nuclear doesn't win

Mark Cooper

Mark Cooper

Cooper is a senior research fellow for economic analysis at the ...

More

The claims and counterclaims about EPA’s proposed carbon pollution standards have filled the air: It will boost nuclear. It will expand renewables. It promotes energy efficiency. It will kill coal. It changes everything. It accomplishes almost nothing.

Evaluating the impact of the so-called Clean Power Plan requires a clear view of how the new rule will work. The plan centers on performance standards, which have yielded effective outcomes in other energy areas—such as appliance efficiency standards and fuel economy standards for light-duty vehicles. It sets a moderate, mid-term target for carbon reductions, but allows for flexibility because it does not dictate the use of specific technologies or products. States are allowed to design programs in response to local conditions.

The EPA plan picks a loser: coal. It does not, however, pick winners among the low-carbon options available. It does not offer much in the way of sweeteners for any specific technology. Assuming that states generally adhere to the prime directive of public utility resource acquisition—choosing the lowest-cost approach—the proposed rule will not alter the dismal prospects of nuclear power, which will therefore play no role in the reduction of carbon emissions from power plants.

EPA’s analysis of the proposed carbon pollution guidelines reflects this reality. EPA forecasts for nuclear power are flat-lined, which means that other resources—including energy efficiency, natural gas, wind, and solar—will carry the full weight of carbon reductions.

It is unlikely that the states will act irrationally enough to make the EPA analysis miss the mark by a wide margin. The marketplace and 48 of the 50 states have declined to embrace nuclear energy during the past decade, despite the incentives included in the Energy Policy Act of 2005.

New nuclear capacity would be expensive. The day before the EPA carbon plan was proposed, efficiency was the least costly way to meet the need for electricity. Gas and onshore wind were next. The cost of solar was dropping like a rock, and load factors for wind and solar—the so-called intermittent resources—were rising dramatically, due to technological improvements, the rapidly falling cost of energy storage, and information and control technologies that make it possible to manage fluctuating energy sources on a minute-by-minute basis. The EPA plan does nothing to change the fundamental economics of low-carbon resources in the mid- and long term.

As a result of this economic reality, a boatload of independent analysts—including Lazard, Citi, Credit Suisse, McKinsey & Company, Sanford C. Bernstein, The Motley Fool, Morningstar, and Barclays—not only had concluded that efficiency, renewables, and natural gas would account for the vast majority of resources deployed to meet the need for electricity over the next decade, but also that the model of the electric utility that dominated the 20th century has become obsolete.

The adoption of the climate change rule is likely to reinforce the pressure to modernize the electricity system and, to the extent that it requires more low-carbon resources, it will accelerate this process. In the short term, this might have the effect of raising the cost of electricity slightly, because resources with slightly higher costs will be pulled into the market. On the other hand, because many of the alternative energy sources have not been dominant in the past, accelerating their adoption might actually lower electricity costs, because these energy sources are still at the stage of development where innovation, learning by doing, and increases in economies of scale are dramatically cutting the price.

As I have shown in a number of reports over the past five years, most recently a May 2014 report on small modular reactors, nuclear power in not one of the technologies that will benefit from the emergence of an integrated, two-way electricity system that accommodates decentralized energy production. It remains among the most costly of the low-carbon options and will become relatively more costly as the other technologies develop. The target reduction in carbon emissions under the EPA plan is well within the capacity of the lower-cost alternatives.

Old nuclear reactors would still retire. Before the EPA published its proposed rule, a handful of old reactors, threatened with early retirement, were already making headlines. The EPA’s notice of proposed rule making gave these reactors added prominence by singling them out for potential special treatment, but the attention is undeserved in the context of a mid-term carbon abatement program. The six threatened reactors represented about 1 percent of all US electricity generation in 2013, and less than 8 percent of the total carbon reductions in the EPA target. Since 2005, which is the base year for carbon reductions used by EPA, non-hydropower renewable technologies added to the US grid have generated 3.5 times as much electricity as the total output of these six reactors. From the point of view of carbon reduction, there is not an awful lot at stake.

Second, there is a queue of aging power sources that are in line for retirement, including these six reactors. The carbon rule would move some coal plants ahead of the reactors in the line. But since non-nuclear alternatives are already picking up the slack from retiring coal plants, and the EPA rule might accelerate the economics of cost reduction for renewables, the retirement line may speed up.

If the EPA is true to its word and does not pick favorites among low-carbon technologies, and the states choose winners based mainly on cost, new nuclear reactors—or even uprates of existing ones—will not be part of the solution. Old reactors will retire at the end of their licenses or sooner. A technology that is not growing, while the sector around it is in the midst of a major transformation, is dying.

Adhering to principles. These outcomes could change if federal and state authorities do not adhere to their highest principles. The language of the proposed rule raises some concerns about a potential bias in favor of nuclear power, but if efficient, least-cost carbon reduction is the goal, the EPA should reject this bias.

First, in the area of new reactors, the EPA points to subsidies for renewables that might be giving them an advantage in the current market. It fails to note the massive subsidies that nuclear has enjoyed in the past (10 times as large as for renewables on a life-cycle basis) or current nuclear subsidies resulting from the socialization of liability risk and waste management, federal loan guarantees, and state advanced cost recovery. There is no justification for giving nuclear a leg up because of subsidies. Indeed, if anything, nuclear energy should be penalized for past excesses.

Second, with regard to old reactors, the EPA calls out the potential retirement of six reactors that are unable to compete in the market. It contemplates giving states special credit for keeping those reactors on line. It does not note that there is a strong movement afoot to jerry-rig market outcomes in a way that favors nuclear energy (such as giving nuclear power plant operators extra credit for reliability or paying them for providing capacity to the network), disadvantages renewables (for example, by reducing or eliminating state mandates or by requiring renewable energy providers to pay unattractive interconnection or net metering rates) and/or prevents demand-side resources from entering the market (for example, by cutting funding for utility efficiency programs). These efforts pose a much greater threat to carbon reductions than do the poor economics of old nuclear reactors.

To move toward a sharp increase in efficiency and renewables as the primary resources used to reduce carbon emissions, the states would not only have to adhere to the least-cost principle but would also have to attend to the deployment of the physical and institutional infrastructure that supports alternative energy sources. The current infrastructure was designed for central-station electricity generation, much of which will be rendered unusable by the proposed rule. While non-nuclear low-carbon resources are economically the most attractive, in many ways the existing infrastructure is an obstacle to their full deployment.

Because of the inertia and distortion that results from the existing physical and institutional infrastructure, putting a price on carbon—with either a cap-and-trade program or a tax (at the federal or state level)—is not the silver-bullet solution it is frequently made out to be. The climate-change literature has a strong thread pointing out that market barriers and imperfections must be removed as early as possible, preferably before or at the same time a price is put on carbon. If they are not addressed, the effects of carbon pricing will be dampened and the cost of the transition to a low-carbon economy will be raised. On the other hand, if the moderate reductions in carbon required by the proposed rule hasten the institutional transition to a 21st-century electricity system, their effect will be larger than the numbers indicate and the bleak prospects for nuclear will become even bleaker.