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A Messy Necessity

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A Messy Necessity

President Biden’s $6 billion nuclear bailout aims to patch up an industry damaged by bad energy policies. May 6, 2022
Infrastructure and energy
Politics and law

Last month, the Biden administration began implementing its plan to spend $6 billion bailing out financially troubled U.S. nuclear power plants. “We’re using every tool available to get this country powered by clean energy by 2035, and that includes prioritizing our existing nuclear fleet,” Secretary of Energy Jennifer Granholm said in a statement. The measure, a relatively tiny part of Biden’s $1 trillion infrastructure package, didn’t get much attention when that bill passed Congress last year. But now that the Department of Energy has launched the program, opponents are speaking up. The environmental group Beyond Nuclear calls the move a “misguided but predictable decision.” Taxpayers for Common Sense decries providing “more bailout money for an already failing industry.”

The critics have a point. As a rule, direct federal subsidies to specific industries are inefficient, prone to abuse, and unfair to competing businesses (not to mention a burden to taxpayers). Those concerns apply to the Department of Energy’s new Civilian Nuclear Credit (CNC) program as well. Still, considering the grim alternatives, the CNC program might turn out to be one of the rare bright spots in the Biden administration’s energy policy. How could enacting a clumsy, taxpayer-funded bailout be considered a sensible move? Only because the rest of U.S. energy policy is such a mess.

Today, nuclear reactors generate 19 percent of electricity produced in the U.S. Despite decades of subsidies, wind and solar power account for only 12 percent. While the output from wind and solar facilities varies unpredictably, nuclear plants produce reliable base-load power. Most of the plants in operation today could continue to run safely and efficiently for decades to come. “Nuclear plants operate with very high reliability,” Adam Stein, an energy analyst at the eco-pragmatist Breakthrough Institute think tank, told me in an email exchange. And, contrary to the widely held belief that nuclear energy is “too expensive,” these plants produce electricity at rates well below the U.S. average. “This is not a dying industry,” Stein concludes.

So why do nuclear plants need a federal subsidy? The answer lies partly in America’s history of counterproductive energy policies. After the 1979 Three Mile Island accident, regulations ramped up far beyond what was necessary to ensure safety. Today, it is almost impossible to build new nuclear plants, and even existing facilities face annual regulatory burdens of roughly $60 million per plant. At the same time, the federal government provides large tax credits and other advantages to competing energy sources, particularly wind and solar power. The nuclear industry, often decried for its supposed dependence on government subsidies, receives a relative pittance. According to a 2020 analysis by Robert Bryce, a stunning contrast emerges when one measures the tax breaks against the quantity of energy produced. Counted in terms of subsidy dollars per megawatt-hour, Bryce concludes, “the American solar industry got roughly 250 times as much in federal tax incentives as the nuclear sector.” Wind power received subsidies about 160 times greater than those granted to nuclear producers.

No wonder nuclear plants face headwinds. States add additional burdens, in particular “renewable portfolio standards” that force utilities to buy large shares of their electricity from renewable sources. In most cases, these RPS rules exclude nuclear power (which, though it is zero-carbon, is not technically “renewable”). Low natural gas prices over the past decade have been another challenge for nuclear operators. (In that case, at least, the culprit is market innovation, not government policies.) But perhaps the most insidious threat to nuclear power comes down to the variable nature of the electricity generated by wind and solar. Solar panels produce full power only on sunny days, and on average, wind turbines spin at optimal rates about a third of the time. One would think this “intermittency” would make renewable sources anemic competitors to the robust power provided by nuclear plants. But, while wind and solar can’t feasibly replace today’s dependable electricity sources, their on-again, off-again power can fatally undermine the economics of some nuclear plants.

Perhaps the best way to explain this paradox is through an analogy: Imagine you run a large, 24-hour restaurant; let’s call it the “Atomic Diner.” Since you have a sizable mortgage—and need to keep workers on site at all hours—your fixed costs are high. But thanks partly to big breakfast and lunch crowds, your restaurant is profitable. Now imagine a fast-food stand opens up next door; call it “Solar Burger.” It’s usually closed; in fact, no one knows in advance which days it will be open. But when it is serving, the restaurant cranks out hundreds of burgers an hour. What’s more, thanks to special tax credits and low fixed costs, Solar Burger can sell its sandwiches for pennies. Sometimes it even pays customers to take them away.

Imagine the state of your business now. Several days a week, Solar Burger happens to open during your lunch rush. Suddenly, your tables are empty while your customers scarf down the nearly free food next door. Even if Solar Burger opens only sporadically, that’s enough to wipe out your profit margin. The Atomic Diner soon flirts with bankruptcy.

This is the scenario facing many nuclear plants. During periods of peak wind and solar generation, electricity prices collapse. Some states even let producers pay customers who are willing to absorb power no one else wants. (How do energy companies make money selling at these “negative prices”? Tax credits.) Nuclear plants can’t easily shut down or send workers home during surges in renewable-power generation, so they are forced to operate at a loss—one of the factors that has forced the premature closure of 12 nuclear plants since 2013. According to the Department of Energy, seven more plants are marked for shutdown over the next four years, and as much as a quarter of the U.S. nuclear fleet faces economic challenges. Most of these plants are not the victims of bad management or outdated technology. They are threatened by “renewables-first” energy policies that put nuclear power at a huge disadvantage.

Note the irony here: while wind and solar produce enough electricity to make some nuclear plants unprofitable, they don’t make nearly enough to replace the carbon-free power lost when the plants shut down. Take the example of New York’s Indian Point nuclear plant. Former governor Andrew Cuomo, working with Hudson Riverkeeper and other green activists, forced the early shutdown of the plant in 2021. That single plant produced about two and a half times as much power as all the state’s existing wind and solar facilities combined. When its reactors went silent, utilities turned to gas-fired power plants to fill the gap. Only environmentalists were surprised when New York State’s grid-related carbon emissions shot up 15 percent. Electricity prices are now skyrocketing as well. Since more gas is now being used to make electricity, other gas customers face shortages.

This pattern—higher emissions coupled with higher consumer prices—has been repeated in every region where nuclear plants have closed prematurely. The push to replace reliable nuclear power mostly with wind and solar compounds the problem. While renewable energy can make meaningful contributions to clean-power generation, the grid today can’t operate primarily on these intermittent sources. (A mostly renewable power grid would require technology capable of storing huge amounts of energy at a reasonable cost. That goal remains far outside our reach for now.) California, home to the country’s most aggressive green-energy policies, faced rolling blackouts in 2020 when grid operators couldn’t cope with the wild swings in renewable-power output. In other words, the renewables-first approach isn’t just inefficient, it’s backfiring.

While some environmental groups have lately become more supportive of nuclear power, others, including the Sierra Club and Friends of the Earth, still agitate for more plant closures. Anti-nuclear activists and politicians typically argue that burgeoning wind and solar facilities will quickly replace the clean power lost when nuclear plants shut down. As we’ve seen in New York and other states, that’s simply not true. But even if it were the case, how would spending billions to replace one zero-carbon energy source with another make either economic or environmental sense? “This is what I call ‘treadmill decarbonization,’” says Breakthrough Institute analyst Stein: “We’re running in place instead of making progress.”

The nation’s leading power companies aren’t helping much. Entergy, the former owner of New York’s Indian Point, has announced plans to gradually close or sell off its five remaining nuclear plants. While the company blames economic conditions, political considerations presumably also play a role in shutdown decisions: keeping nuclear plants online requires periodic equipment upgrades and other investments. Business leaders don’t want to risk such expenditures if they think activists and politicians might later pull the rug out from under them. Political uncertainty is a major risk factor for businesses whose investments need to pay off over decades.

The Biden plan is meant to give these challenged plants a chance to keep operating—at least until a better regulatory model emerges. The first tranche of CNC payments will “prioritize reactors that have already announced their intention to cease operations,” according to the Department of Energy. Later cycles will include a broader group of plants facing monetary hardship. Clearly, offering direct subsidies to businesses that claim to be financially stressed can create perverse incentives. By funneling cash to those plants and not others, the program risks effectively penalizing the power companies that run their operations most efficiently.

But our over-regulated energy sector is already a maze of perverse incentives. Existing policies encourage unreliable energy production and penalize reliable nuclear plants, threatening to undermine the integrity of the U.S. grid even as they burden ratepayers and taxpayers. The Biden administration isn’t alone in concluding that saving at-risk plants requires drastic action. Several states, including Illinois and New Jersey, already subsidize nuclear power. Even as New York pushed to close Indian Point, it also launched a program to subsidize three upstate plants. From the perspective of pro-nuclear activists, these programs simply offer nuclear power the same kind of financial incentives that states routinely grant to renewable-energy suppliers.

Free marketeers, of course, see such subsidies as a form of crony capitalism, and they’re not all wrong. “Subsidizing nuclear power is poor public policy,” writes American Enterprise Institute economist Mark J. Perry. “The nuclear industry knows that its days are numbered.” If the nuclear industry were falling behind in a genuinely free market, this assessment would be correct. But our current energy regime places unique regulatory burdens on nuclear producers. At the same time, wind and solar benefit from a kind of green crony capitalism, one that involves not just government policies but also the investment community’s focus on ESG (Environmental, Social, and Governance) criteria in making financing decisions.

Some advocates say that nuclear power should get higher subsidies across the board. A better approach would be to reduce the disproportionate aid flowing to wind and solar and let all clean energy sources compete on a level playing field. Such a complete rethink of renewable-energy policies probably won’t fly in states such as California and New York, or in the Biden White House. But Biden’s bailout plan at least attempts to stave off the imminent closure of the country’s most at-risk plants. In the short term, the move could help save our power grid from losing 7 gigawatts of clean energy. Still, bailouts are not a long-term solution. We need more comprehensive reform.

It’s too soon to know if the bailout plan’s provisions will be flexible enough to help power companies keep their endangered plants running. But the program is already nudging some states to reassess the importance of their nuclear plants. In Michigan, Governor Gretchen Whitmer wants to tap into the fund in a last-ditch effort to save that state’s Palisades nuclear plant, which its owner, Entergy, plans to shut down later this month. In California, anti-nuclear environmentalists and politicians have long backed a plan to shutter Diablo Canyon, the state’s only remaining nuclear facility. But in a stunning about-face, Governor Gavin Newsom recently announced that he wants to keep it open. It’s unclear whether Diablo Canyon would qualify for the bailout funds (it’s being forced to close mostly for political rather than financial reasons). But Newsom’s sudden conversion represents a political sea change for the state, and, as Bryce writes, “a massive win for rational climate policy and the pro-nuclear movement in the United States.”

The Biden administration isn’t known for challenging its progressive base, so it deserves some credit for wholeheartedly endorsing nuclear power as a vital part of our energy mix. Still, Biden’s energy policies recommit to some of the same mistakes that helped create the nuclear-power dilemma in the first place. In addition to its relatively paltry $6 billion for nuclear plants, the 2021 Infrastructure Investment and Jobs Act includes $65 billion for power-grid upgrades, partly to help utilities handle the anticipated increases in renewable power. The grid needs these upgrades, but they should be paid for by the private sector. A better approach would be to roll back the regulations that make infrastructure projects so slow and expensive to build.

The administration is also pushing a grandiose scheme to line the East Coast with the world’s biggest network of offshore wind farms. The project would be “catalyzed” through lavish tax credits and other subsidies. But the power produced by the gargantuan turbines could wind up costing two or three times more per megawatt-hour than electricity from today’s nuclear plants or other sources. That multibillion-dollar burden would fall on ratepayers. In a devastating new report, Manhattan Institute adjunct fellow Jonathan A. Lesser exposes both the “dismal economics” and the engineering absurdities of the plan.

American energy policy has evolved into a tangled web of regulations, tax credits, incentives, and disincentives—all of which drive up prices even as they do surprisingly little to bring down carbon emissions. Indeed, as we’ve seen, the renewables-first approach favored by progressives can even drive up emissions if it forces nuclear plants to close.

Biden’s bailout is a clumsy way to address that dilemma. Providing direct subsidies to nuclear power producers is a messy, wasteful way to protect our power grid. Let’s hope it’s temporary. But given today’s political realities, it might be the least bad option on the table, helping some vulnerable plants stay alive until another, more market-oriented administration can start untangling our energy mess.

 Photo credit should read ANDREW CABALLERO-REYNOLDS/AFP via Getty Images

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