The impact of the US electricity market

20 April 2016

Unless the deregulated US electricity markets recognize the carbon-free attributes of nuclear plants, there will be a substantial number of nuclear plant closures in the country, writes Bradley Fewell.

Despite performing at exceptional efficiency, many US nuclear facilities do not receive fair consideration for producing both clean and reliable electricity. As a result, the nuclear fleet is at risk of early retirement, jeopardizing the country's ability to reduce carbon emissions, as well as increasing the likelihood of greater price volatility and power outages.

Although nuclear power accounts for about 20% of the USA's overall electricity generation, it provides more than 60% of the country's carbon-free electricity - more than wind, solar and hydro combined. In 2014, over 595 million tonnes of carbon dioxide emissions were avoided due to nuclear electricity, the equivalent of taking 135 million cars off the road.

US carbon-reduction goals depend greatly on the continued use of nuclear power. The carbon-free electricity loss due to the closure of the San Onofre nuclear power plant in California was greater than the combined total of all the electricity from California's wind and solar generation.

Over the last three years, other US nuclear units have also shut down. Although some of those shutdowns were due to technical reasons, the decisions to close them were still the result of not being able to justify the capital cost needed, given the current economic conditions. Further closures are planned, some of which will be announced in the very near future.

This situation has been understood by Wall Street for a while. For example, in July last year, Fitch Ratings commented: "Absent reforms to address constraints in the current market structure, Fitch Ratings considers at least eight additional merchant nuclear units with an aggregate capacity of approximately 8000 MWe to be at risk of early retirement."

Market flaws

One of the main reasons why nuclear power is struggling to compete in the market is the negative impact of subsidies for wind and solar. These subsidies encourage wind generators to maximize production even when electricity demand is low, such as at night, as they get paid regardless of whether or not there is the need for their electricity. As they sell power irrespective of the demand, this drives down wholesale prices resulting in negative pricing, where other generators such as nuclear must pay grid operators to take the power they produce. That's not a good financial model for anyone.

Negative pricing has become more pronounced as more wind has joined the grid. Some parts of Illinois see negative prices for as much as 10-11% of the off-peak hours. One way that Exelon addresses this is through 'advanced economic dispatch', where a number of plants in the fleet are being ramped up and down by about 20% according to the demand for electricity as well as when the prices start to go negative.

There are several other market forces that also affect nuclear plants in deregulated markets or competitive markets. These include: low or no growth in electricity demand in some areas; low natural gas prices continuing to depress wholesale prices; transmission constraints resulting in charges to move power onto the grid; and there are also significant market design issues. Aside from its carbon-free attributes, the markets fail to fully recognize the value of reliable baseload power provided by nuclear plants.

Such flaws in energy and capacity market rules must be corrected in order to ensure that baseload clean energy is properly valued and remains in service.

Market reforms

One obvious solution is to put a price on carbon in order to encourage market reforms that will appropriately value nuclear power. Although this is not likely to happen soon, other market reforms are emerging. New York has developed the Clean Energy Standard rules, which call for 50% of all electricity used in that state to come from renewable and nuclear sources by 2030. Lots of states have had similar goals for renewables but this is one of the first times where a US state has recognized the role that nuclear power can play in such an ambitious goal.

Legislation has also been introduced in Illinois to create a low-carbon portfolio standard. This would require all Illinois electric utilities to purchase a certain percentage of low-carbon energy credits from low- or zero-emitting carbon emitters such as nuclear.

There have also been some positive developments in capacity in energy markets. The regional transmission operator PJM has restructured its capacity market to ensure that electricity generating units perform when they're needed. This structure reflects the PJM's recognition that it is not enough to line up sufficient generating capacity to meet reserve targets. Rather, that capacity must carry with it meaningful performance obligations - with corresponding incentives and penalties - to ensure that those resources actually deliver when required to do so. Previously, the penalty for generating units not being available despite prior commitments was very low. This is no longer the case under PJM's so-called Reliability Pricing Model and it is hoped that similar capacity market reforms will be implemented at other regional transmission operators.

Lastly, the Clean Power Plan (CPP) was promulgated by the Environmental Protection Agency (EPA) to reduce carbon emissions from power plants - by 32% in 2030 compared with 2005 levels. The CPP might recognize the value of nuclear plants as shutting down a nuclear plant would have to be replaced with generation that does not exceed a state's emissions cap. However, the Supreme Court in February this year halted the implementation of the CPP pending the resolution of legal challenges in a federal appeals court.

Will these reforms happen soon enough? At present, the nuclear plants that are in liberalised markets are losing significant amounts of money and without quick action it is not clear whether they are going to be able to wait for the long-term action needed to keep them online.

J. Bradley Fewell

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This article is based on a presentation given at the World Nuclear Fuel Cycle conference, held in Abu Dhabi on 4-6 April 2016 and organized jointly by the World Nuclear Association and the Nuclear Energy Institute.

J. Bradley Fewell is Senior Vice President, Regulatory Affairs & General Counsel at Exelon Generation.