The dubious Senate proposal to bail out nuclear powerplants

Costly economic distortions are an inexorable result of government bailouts for specific industries, the justifications for which are almost always deeply dubious.

Consider section 3203 of the proposed Senate Energy Infrastructure Act. It would establish a $6 billion credit program over four years starting in fiscal year 2022 for nuclear electricity plants “projected to cease operations due to economic factors.” The credits, disbursement of which would cease after 2031, would be defined as a certain dollar amount per megawatt-hour (mWh) of generation. And just as the production tax credit for wind electricity has been extended 13 times, it is difficult to believe that once implemented a similar subvention for nuclear power will fail to prove semi-permanent.

And sure enough: The draft legislation directs the comptroller general to submit by Jan. 1, 2024 “any recommendations to renew or expand the credits.” 

The bill makes it clear that the ostensible rationale for the credits is “the potential incremental air pollutants that would result if the [given] nuclear reactor were to cease operations. …and be replaced with other types of power generation.” 

But the draft legislation asks no one to investigate or even to speculate about whether the hypothetical increase in air pollutants resulting from a shutdown of a nuclear generating plant would yield a violation of the National Ambient Air Quality Standards (NAAQS) in the relevant geographic region for any of the (criteria) pollutants covered by the Clean Air Act. 

Because the Clean Air Act requires that the respective NAAQS “protect the public health” with “an adequate margin of safety,” it is difficult to believe that a shutdown of a limited number of reactors and replacement with, say, combined-cycle gas generation, would result in ambient air quality in excess of a given NAAQS. The “public health” would continue to be protected

Forget air pollution. This proposed subsidy is a bailout — that is, a sizable economic distortion to be added to all of the other distortions inflicted by various policies upon electricity markets. Would it not be better to reduce that aggregate of economic losses rather than to add to them? The actual unpublicized justifications for this proposal are exceedingly weak. 

Competitive price pressures from generation fueled with inexpensive natural gas. Competition is the very basis of a market economy, and a failure to foresee the sharp decline in natural gas prices when nuclear investments were made does not justify a federal bailout. Investors and managements contemplating large investments know that there are important risks, both known and unknown, and make their decisions accordingly. The proposed subsidy would shift those risks onto the taxpayers writ large, and there is no reason to believe that such a shift is efficient. 

Single-unit vs multi-unit nuclear operating costs. Two of the nuclear generating stations desperate for operating subsidies (Davis Besse and Perry, both in Ohio) are single-unit facilities, which have operating costs per mWh higher than those for multi-unit stations, because their fixed overhead costs are spread over less generation, and because they cannot achieve scale economies similar to those of multi-unit plants when negotiating service and fuel contracts. There is no reason that taxpayers should bear the attendant economic burdens.

Potential mismanagement. It is no secret that business management, like all human endeavors, varies in terms of the efficiency of the decisions made and the conduct of operations. Not only does the proposed legislation not consider the cost effects of possible mismanagement, it also reduces the economic penalty for such inefficiency.

Costly state regulation and the effects of “renewable portfolio” or “clean energy” standards. Regulation at the state level, imposed by legislatures, public utility commissions and other official bureaus, obviously creates costs and distortions, often sizable. Moreover, about 30 states require that some proportion of the electricity produced or consumed in the state be generated by certain technologies (e.g., wind and solar power), and those requirements often exclude nuclear electricity.

Is there a reason that federal taxpayers should be forced to bear the consequences of state laws and regulations? Reforms of state policies yielding adverse outcomes must be implemented at the state level; a federal bailout reduces the incentives for such reforms. The owners of nuclear powerplants should make their case to the state legislatures.

The distortions created by the federal wind production tax credit. The one argument in support of the proposed nuclear subsidy that is not wholly spurious is the effect of the wind production tax credit (PTC), now between $15 and $25 per mWh. The PTC thus allows the wind producers to reduce the prices that they bid for sales into bulk power markets – sometimes to negative levels – while still “earning” positive net prices. 

This obviously is unfair competition: The operators of nuclear plants receive no such subventions, and for technical engineering reasons, it is difficult or impossible for nuclear plants to ramp generation up and down in response to short-term price fluctuations.

So, one could argue that the proposed nuclear subsidy corrects the competitive problem created by the PTC, but that is a non sequitur. If the distortions created by given policies are to be addressed by incorporating new distortions, over time the entire economy in effect will become centrally planned, as one set of distortions after another is adopted to deal with the problems created by earlier ones. The proper course is to end the wind PTC and not to bail out nuclear plants with another subsidy program.

Note also that the prospective “profitability” of a given nuclear plant hinges on assumptions about prices, operations costs and other parameters that are subject to important uncertainties. One study by the former chief economist of the PJM Regional Transmission Organization projects net operating profits for 2021 of $30.4 million and $47.5 million for the two plants in Ohio referenced above, respectively. Another study from the PJM itself projects 2021 operating losses for those units of $28.8 million and $33.2 million, respectively.

In short, such calculations are far from straightforward, and no one will be surprised when those applying for the new nuclear credits find ways to increase the magnitude of the operating losses they will claim. 

The arguments in favor of this proposed subsidy are exceedingly weak, and the central principle weighing against it is powerful: Let us reduce rather than increase the distortions created by government economic policies. A failure to keep that principle in mind will yield ongoing economic losses for all of us.

Benjamin Zycher is a senior fellow at the American Enterprise Institute.