US policymakers starting to address market issues, says NEI

13 February 2015

There has been a "significant evolution in thinking in a relatively short period of time" among US federal regulators, state officials and regional transmission organizations (RTOS) to address the market issues negatively impacting nuclear power plants in the USA, Marvin Fertel, CEO of the Nuclear Energy Institute (NEI) said yesterday.

Speaking to Wall Street analysts in New York, Fertel said NEI looked forward to continuing progress because there is no time to lose. "We have nuclear plants operating at a loss as we speak," he said.

Specifically, regulatory and legislative changes are needed to improve electricity capacity markets and reward plants with supplies of fuel at their sites.

The Federal Energy Regulatory Commission (FERC) convened a technical conference in April 2014 to explore the vulnerabilities of the US electricity system "laid bare" by the Polar Vortex and to discuss lessons learned and whether reforms were necessary to preclude any repetition. The Polar Vortex is the collective name for the succession of five cold periods in January, February and March 2014.

"All of us recognized that capacity market design is important, but we also recognized that most of the revenue – 75% or more – is in the energy market for nuclear power plants," Fertel said.

Out-of-market revenues

Prices in the energy markets are being suppressed in various ways, either because of out-of-market actions by the RTOs which compromise price formation or as a consequence of state and federal mandates and out-of-market revenues.

"Allowing market participants to reflect out-of-market revenues in their bids in the energy markets distorts and suppresses competitive price signals. In addition, in the energy markets, the RTOs frequently use out-of-market dispatch. As a result, the marginal resources offer is not reflected in the energy market's clearing price. Instead it is uplifted so the price paid for all resources in the energy market doesn't appropriately reflect the scarcity value of the marginal unit," Fertel said.

FERC also conducted a series of workshops to explore possible improvements in market design and operational practices in order to ensure appropriate price formation in energy and ancilliary services markets. And last November, FERC recognized the importance of fuel assurance to reliability and ordered the RTOs to report within 90 days on the status of their efforts to address market and system performance associated with fuel assurance issues.

"These initiatives at FERC are a remarkably swift response to the market conditions that are placing certain nuclear units and other baseload capacity at risk and it is obviously all to the good for the operating nuclear plants since fuel assurance is one of those attributes that in our opinion deserves compensation and currently doesn't get it," Fertel said.

At FERC's conference on the Polar Vortex in April, a PJM executive suggested that the RTO might be coming back to FERC with changes to its tariff to reflect the value of fuel assurance. PJM is an RTO that coordinates the movement of wholesale electricity in all or parts of 13 states and the District of Columbia. By December, PJM had requested FERC's approval of a new capacity performance product to drive greater reliability.

"In exchange for meeting higher performance standards qualifying generators, like nuclear power plants, would receive increased capacity payments. The point here is not that the problem is solved, or that work underway has yet relieved the economic stress facing some of our operating nuclear units. The point is that federal regulators, state officials and the RTOs now clearly recognize the problems that exist and are moving to develop solutions," Fertel said.

2014 was all about recognizing the value of nuclear power assets and the recent series of reports to the Illinois state legislature from various state agencies provide "dramatic proof" of that value, Fertel said.

According to analysis conducted by PJM for the Illinois Commerce Commission, if Byron, Quad Cities and Clinton retired prematurely, load payments would increase between $307 million and $437 million in the ComEd zone and between $752 million and $1.3 billion in PJM overall. "And that is a one-year impact," Fertel said.

PJM also confirmed in its analysis that the system would be unreliable in 2019 under all retirement scenarios studied, with significant thermal and voltage violations that would require substantial time to correct.

These conclusions "generally comport" with NEI's analyses of nuclear power stations at risk. In Illinois, losing all five reactors at risk would eliminate 2500 direct jobs - those people working at the plants - and total job losses, direct and indirect of in the first year would be 9000. The direct impact economic value lost in the first year would be $2.4 billion. Add to this another $1.2 billion indirect economic value in Illinois – that is the value created in the counties and states from having the plants there, Fertel said.

At the time of NEI's annual briefing to the financial community last year, the USA had lost one nuclear plant, Kewaunee, in Wisconsin, due to adverse market conditions. And the nuclear industry knew then that the Vermont Yankee plant would close at the end of 2014 for the same reasons. It also knew that other nuclear generating assets in Illinois and other competitive markets were at risk, Fertel said.

Vermont Yankee did close down permanently last month and, like Kewaunee, it was a "well-managed solid performer that fell victim to a market that did not compensate the facility for the attributes it provided," he said.

The country still has nuclear assets at risk, he warned. "It sounds like the same story but it's not; this year it's different. This year begins with something that we did not have this time last year. It's recognition of the value of these assets."

"2014 was a year when many people in the policy community, in the federal and state governments, in the regional transmission organizations and elsewhere in the electric power industry reawakened to the value of America's nuclear generating assets. The first step towards addressing a problem is gaining recognition that a problem exists, and I believe we took the first step in 2014. Our challenge going forward is to turn intellectual recognition of value into real monetary recognition and we haven't gotten there yet."

Simple propositions

When Fertel spoke to the financial community last year about the economic stress facing some of the country's nuclear plants operating in competitive markets, he suggested several "rather simple and basic propositions to help frame the issues."

First, he suggested that there was nothing wrong with the plants at risk. Kewaunee, Vermont Yankee and others at risk were "solid performers" - all of them highly reliable plants with high capacity factors and relatively low generating costs. When Vermont Yankee closed last month it had just completed a 630-day continuous run.

According to a report issued by HIS Energy in July 2014 titled The Value of US Power Supply Diversity, the Kewaunee power plant needed much less than the cost of a new gas-fired combined cycle plant to cover the costs of continued operation.

Second, Fertel suggested that it made no economic sense to allow these facilities to close because replacement generating capacity when needed would likely produce more costly electricity, fewer jobs that would pay less and more pollution.

Third, he suggested that goods and services would only be produced in a competitive market when they are priced and valued in the market.

"We are accustomed to thinking of electricity as an undifferentiated bulk commodity. That's a mistake. Every kilowatt hour of electricity on the grid has a unique pedigree or set of attributes and all resources are not equal. Demand resources that can be called only on limited occasions for short periods of time do not have the same value as a generating plant. And all generating capacity is not the same. Each source of electricity has its own set of attributes that provide varying degrees of value to the grid and those attributes must be reflected in the total compensation provided to each generator," he said.

Nuclear generating capacity has its own set of attributes, starting with productions of large quantities of electricity around the clock safely and reliably. Nuclear power plants have fuel on site and will run when needed. They also provide price stability and portfolio value and clean air compliance value.

"All of these attributes are valuable. Most are not paid for," he said.

Fourth and finally, Fertel suggested that sustainable markets demand consideration of all the factors that constitute a robust and resilient market. Among other things those factors include, he said, short-term price, long-term price stability, the value of fuel and technology diversity, environmental factors and others.

Short-run cost is an "important and necessary metric", he said, but solving this complex equation for that one variable only – lowest possible short-run electricity price – will not produce a reliable, resilient and affordable system for the long term.

NEI last year launched a campaign Nuclear Matters to raise awareness of the significant challenges facing the USA's largest source of carbon-free electricity. Two other events had as much, if not more, of an impact on the policymakers, Fertel said. One was the Polar Vortex and the other was the proposal by President Barack Obama’s administration to reduce carbon emissions from operating coal-fired plants under Section 111(d), of the Clean Air Act.

"Both focused attention squarely on the value of our nuclear power plants. One served as a reminder that assured fuel on site, or in our case 12-24 months of fuel in a reactor core, is a very valuable attribute," Fertel said.

The US Environmental Protection Agency's proposed Section 111(d), rule "shone a bright light on the fact that nuclear energy is our largest carbon-free source of electricity and that any credible program to reduce carbon emissions would be seriously compromised if we lose operating plants," he said.

The Polar Vortex "uncovered some significant vulnerabilities" in the electric supply system. "Through it all, nuclear units performed admirably, on average running at capacity factors in the mid-90% range," he said.

Researched and written
by World Nuclear News