Another Nuclear Bailout?

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As pulp fiction aficionados, we love a good hostage situation.

By Leonard S. Hyman and William Tilles:

Last week, New Jersey joined the list of states seemingly eager to bail out politically well-connected nuclear power plant operators. Governor Phil Murphy signed a bill that would grant subsidies of up to $300 million per yearto the owners of the Salem and Hope Creek nuclear power stations, two plants in southern New Jersey approaching the end of their useful lives.

PSEG Nuclear, an affiliate of the state’s largest utility, owns 100% of Hope Creek and 57% of Salem. It made clear that it would not put any new investment into these large, aging power stations without a subsidy, threatening a full closure within a brief period.

As pulp fiction aficionados, we love a good hostage situation. In this case the “hostages” are several thousand utility employees and presumably voters.

The potential adverse economic impact of a power plant closures is regionally significant. State and local governments have become dependent on property and related taxes levied on these facilities. Not surprisingly for this genre the hostages, so to speak, have relatives.

The state legislature’s bill would add a surcharge on electric utility customer bills. This would amount to about $40 per year for a typical residential customer, adding a not inconsiderable 3% to the average electric bill in the state. A ransom is also typical in these dramas.

The nuclear plant’s owners commissioned a study that laid out the supposed costs of a plant closure. It concluded that average electric bills would increase by 3-4%. Retiring plants of this size and type entails two types of expenditures that would be passed along to ratepayers:

  • The cost of replacement power.
  • Accelerated expenditures for nuclear plant closure.

However, the legislature voted to keep the nuclear plants open and raise customer electric bills by almost the amount that closure would have cost.

The study also claimed that the two power stations provided direct and indirect employment of between 1,400 and 4,400 jobs – a significant number in the South Jersey region. No state official or politician wants to see unemployment rise. But presumably the bulk of a highly skilled workforce could find gainful employment elsewhere. And whatever power producing facility replaces the nuclear stations would have to employ workers as well although perhaps not in the same place.

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But what of the actual subsidy?

It saves power-plant jobs at a cost of $214,000 per employee per year – if we assume that the direct jobs are the real ones, and $52,000 per year for both direct and indirect jobs. Need we point out that many consumers paying higher electric bill do not earn anything like those figures?

However, there are other issues here, a backstory if you will. At this point our story shifts dramatically and becomes a love affair between the utility industry and ostensibly free markets.

The progeny of this love affair between utilities and markets was the deregulation movement. In New Jersey the regulated utility transferred these two nuclear facilities to the company’s unregulated generation arm. The intent was to remove the financial risk of bad decisions from consumers. Hopefully under the new free market regime, the plant owner would absorb financial risks in an effort to earn significant rewards, if any.

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We have to admit this jump into markets certainly took guts. Taking a uniquely inflexible, extremely high-cost nuclear power generating asset and expecting it to compete in an emerging wholesale power market was, to put it politely, unrealistic.

One risk of placing these plants within a deregulated framework was the possibility that the wholesale power market itself was badly designed for nuclear plants. Another was the possibility that a change in technology or public attitudes about nuclear energy would render these plants less useful or profitable. It seems safe to say, in retrospect, that neither possibility got much consideration.

What has ensued, rather than a shifting of risk to generators, was an asymmetric profit arrangement tilted heavily to the generators. In periods of relatively high power prices, the unregulated generator raked in the profits at the expense of consumers. But in lean years when power prices softened, the consumers still had to pay for the generator’s bad business judgment.

That was the old regulatory formula where the customer was on the hook, so to speak, for all prudently incurred costs but at least somebody kept a lid on profits.

Nuclear power plant owners today argue the markets (as constituted) do not take into account the costs of global climate mitigation. Therefore, old nuclear power plants should be given special consideration because electricity produced by nuclear fission does not emit greenhouse gases.

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That is true. But the answer should be to fix the markets. A carbon tax would do that, but nobody likes taxes so regulators permit surcharges on electric bills and pretend those surcharges are not taxes in disguise.

Closing down those nuclear facilities may raise carbon emissions if they are replaced in whole or in part by fossil-fuel power plants. But we are entitled to ask if paying a subsidy to the nuclear stations is or is not the most economical way to keep down carbon emissions. That $300 million per year could go a long way to reducing carbon emissions in other ways.

Furthermore,  the electricity market is stagnant in the US. Keeping old plants in service crowds out or hampers the introduction of new technologies. To keep carbon emissions level, old nuclear plants should be replaced by a combination of renewables and energy storage. Shuttering aging nukes could provide incremental local demand for renewables. Perhaps some of the developers might even set up facilities in New Jersey.

Imagine what would have happened if, in the early 1900s, the government had announced that it would subsidize the ownership of all horse drawn carriages in order to maintain employment at stables, carriage manufacturers, and buggy whip makers? Or to subsidize vaudeville theaters to prevent displacement of numerous performers following the introduction of talking pictures?

Disruptions of this sort occur regularly in a competitive, technology driven marketplace. The question is whether the state has better ways to deal with the consequences of disruption than by propping up failing, uncompetitive nuclear power generation businesses.

We imagine the legendary actor Edward G. Robinson in a strutting tough guy role might’ve summed up the situation as follows: “I told those Jersey pols I was gonna shut those nuke plants, see? They better cough up 300 large or else the plant was gonna get it. And you know what, they all folded like a cheap suit at Macy’s, nyah.” End scene. And Jersey electricity customers? Pay up. By Leonard S. Hyman and William Tilles

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