A recent European Wind Energy Association (EWEA) blog post about nuclear energy “subsidies” includes a statement revealing a common misunderstanding about energy system economics.
There is also a puzzling contradiction in Foratom’s blog. First it claims, “today nuclear energy is competitive in the internal energy market without requiring public financial support.” Later in the same article it says, “because the initial capital cost of nuclear power is relatively high, long-term guaranteed price for electricity are probably the best way to make investment in nuclear attractive enough”. Surely if it is competitive in the market it doesn’t need a guaranteed price?
The competitive problem is that “the market” generally favors sprinters when the real economy would do better if the energy market was set up to favor ultra marathoners who could keep steadily moving forward long after the sprinters have given up and faded out of the race. Because of the focus on short term profits and daily market swings, investors often make decisions based on rapid capital movements.
In the energy business, that set up favors fuels that can be used in cheap machines, especially when the fuels are sold by very large entities with at least one related and highly profitable product that can afford to establish low market prices that last long enough to drive out the competition. I provided the following comment on the EWEA blog post.
There is a solid reason why nuclear energy developers are interested in the establishment of a stable market price for their product.
The leaders of the nuclear industry can look at history to recognize that the competitive natural gas industry has the ability to sell its product at a loss for several years in a row in order to drive down market prices and disable its competition. That is possible because there really is no isolated “natural gas” or “methane” industry — the suppliers are also oil companies because both products come out of the same holes in the ground.
If the petroleum producers cannot find a market for their gas, they still have to get rid of it somehow. The cheapest disposal method is to simply burn it off; the most expensive approach is to inject it back into the reservoir.
When the gas industry is able to kill off its competition, it sets itself up for a boom in profits because customers, once hooked, have a hard time shifting to another power source once the price starts rising. Eventually, the high prices result in another round of investment in alternatives like nuclear, but the cycle can continue, resulting in large losses at the newly developed alternatives while the gas companies have their oil revenues to support the temporarily low prices.
Here in the US, we have had the “luxury” of about four years of extremely low natural gas prices. The nuclear renaissance that was gaining steam before 2008 has just about died out with only four reactors actually moving forward out of the 30 or so that were once in serious planning.
Surprise, surprise, natural gas prices have started to rise again, with a 75% increase from the low point. (The low was just under $2 per MMBTU, the current price is $3.52 per MMBTU at one of our largest trading hubs.)
Publisher, Atomic Insights
Whenever I get involved in a discussion about energy market prices, I like to point back to the graph of natural gas prices in the United States. As you can see, the most important feature is that the price is unpredictable and can vary by a couple of hundred percent over a relatively short time. Anyone who believes that natural gas prices can be predicted needs to try to buy futures that are more than two years out.
If nuclear plant developers ask for predictable market prices, there is a tradeoff deal that the public needs to better understand. When nuclear plants are provided price stability for their output in order to make the finances work out for the investors, customers need advocates that can ensure their interests are protected. If they agree to pay a price that might be higher than the market price at certain times, they should also ensure that the prices they agree to pay do not rise just because the market price rises.
In other words, the nuclear plant investors should not be the ones who profit by above market prices when the market price is low AND the ones who profit when the market prices increase. In the Southeast US, there are some excellent examples of rate regulation deals that have been favorable to the interests of both the sellers and the buyers. Each side of the deal also had to make some sacrifices in order to achieve the goal of predictable prices for a valuable commodity – reliable, emission-free electricity.
That commodity is the one that enables nearly every other facet of modern living, from the clean water piped into our homes, to the massive data streams available for our education and entertainment, to the reliable lighting, and to our ability to control our own indoor climate. Reliable, clean power is a product that is worth a considerable effort; it is also far too important to leave to the “market” decisions made by people who are mostly motivated by short term money-making.
Update (Posted October 25, 2012)
A post on the UK Nuclear Industry Association blog providing some details about the strike price negotiations underway with regard to EDF’s Hinkley Point C nuclear power plant construction project makes similar arguments to my post above.
It is worth reading if you want to understand a little more about the complex, but important decisions associated with building large, reliable, emission-free nuclear power stations that may very well be providing low marginal cost electricity into the 22nd century. (I mention that fact because the post compares the capital outlay associated with Hinkley Point C to the cost of the London Olympics, which was an event whose economic return on investment is over and done in just a few short months.)