Emily Hammond Professor of Law The George Washington University May 8, 2015

Transcription

1 Emily Hammond Professor of Law The George Washington University May 8, 2015

2 Project Background Emily Hammond & David B. Spence (UT- Austin), The Regulatory Contract in the Marketplace (forthcoming Vand. L. Rev.) Builds on prior research on electricity fuels, markets, nuclear power, governance, and administrative law

3 Two Distinct Visions Ever-more-efficient markets for electricity Ever-greener grid

4 Reformation of Regulatory Contract? Shift to markets, less incentive to invest in infrastructure Premise: in quest to minimize cost, markets fail to fully value reliability or environmental attributes of power Results: loss of diversity in fuel sources, disincentives to invest in some greener technology Implications.

5 Implications?

6 Overview of Research Background How Electricity Markets and the Grid Work Attributes of Electricity Cost, Reliability, Externalities Market Failures Overview of Nuclear Regulatory Regime Nuclear Risk Premium Nuclear Power in the Markets Policy Approaches Changes in markets Changes in market inputs Implications for the Regulatory Contract

7 Focal Point: Nuclear Power Reliable source of baseload, lifecycle GHG emissions comparable to wind and hydro, not a major source of other air pollutants But is being priced out of the market And apparent stall in new reactor construction

8 Attributes of Electricity Minimize Cost Maximize Reliability/Flexibility Minimize Environmental Externalities

9 Cost Levelized Cost of Electricity (2012 dollars) Generation Source LCOE ($/MWh) Capital costs as % of LCOE Variable O&M ($/MWh) Coal % 30 Natural Gas - CCNG % Nuclear % 12 Onshore Wind % 0 Utility-Scale PV Solar % 0

10 Features of Wholesale Markets Spot or day-ahead transactions Bids: Based on short-run marginal cost Power is dispatched to meet demand in order of lowest to highest cost, constrained only by technical needs of grid

11 Short-Run Marginal Cost and Plant Profitability Sometimes competitive bids are not dispatched because of technical grid issues Various factors lower market-clearing prices Plants will not earn positive return on investment unless average market-clearing price exceeds long-run average costs

12 Reliability/Flexibility Balance Loads Keep Prices Low Frequency 60 Hz

13 Environmental Externalities Air Emissions - Fossil fuels smog, acid rain, particulate matter, mercury - Fossil fuels - Greenhouse gases Solid Waste - Coal and nuclear Water Use - Thermal Plants (coal, nuclear, some NG)

14 Summary of Fuel Attributes Reliability Cost Dispatchable? Flexibility Externalities Capital Cost Operating Cost Coal Yes Not very Worst High Med Better than Natural Gas Yes Very coal Low High Nuclear Yes Not very Better than natural gas and coal Highest Low Hydro Seasonally Usually not Best High Low Wind No Not very Best High Low Solar No Not very Best High Low

15 Markets: Theory and Practice

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17 Problems with spot markets Missing money price caps and lack of pricing signals keep prices from fluctuating freely In a perfect world, temporary high prices = decreased demand Long-term high prices = more investment in capacity

18 More problems Asset specificity In a competitive market, firms with high capital costs, constructed at particular location for particular purpose, are at a disadvantage because they can be held up on price The are not nimble This dynamic is accelerating a loss of fuel diversity

19 Valuing the Environment Externalities as a market failure Tax pollution Marketable permits Most American law uses regulation CAA, CWA Many studies agree these under-regulate, especially with respect to coal emissions

20 Do Electricity Markets Value Reliability and Environment? Not really. Reliability constrains grid dispatch somewhat, but not from a long-term capacity standpoint Pollution controls increase long-term average costs RPSs, production tax credits enable bidding at lower costs The Spot Markets Are Designed So That Only Short- Run Marginal Cost Matters.

21 Nuclear Power in the Marketplace

22 Nuclear Licensing Regime Comprehensive, preemptive federal law Licensing for adequate protection does not include cost considerations Trust funds required for ultimate decommissioning Spent fuel handling and disposal Replacement parts, upgrades Backfitting Insurance

23 Nuclear Power s Risk Premium High-dread risk= More regulation than economically efficient Highly susceptible to punctuating events Sustained opposition; regulatory & litigation expense

24 Nuclear Power and Cost Overruns Demand expected to skyrocket Natural gas shortages; banned from use for power Oil prices escalating Security a priority Strong regulatory contract Demand tapered Deregulation of natural gas = reduced prices Oil markets recovered Three Mile Island, Chernobyl Regulatory changes Cost recovery not necessarily allowed The Predictions The Reality

25 Barriers to New Construction Lack of trust in regulatory contract Missing money Asset specificity Risk Perceptions, Litigation, Fukushima, Spent Fuel Uncertainty Regulated States Wholesale Markets

26 Competing in the Markets Very low short-run marginal costs; why can t nuclear compete in wholesale markets? Must run = price takers Long-run average prices higher than others: insurance, decommissioning, fuel management, backfits, upgrades, highly trained workforce

27 Lessons Learned Regulatory contract amorphous Cost recovery not guaranteed for new Backfits, upgrades for existing not recoverable on spot markets Implications for other grid resources? High-capital investments Risk perceptions Many benefits not valued

28 Political Economy of Solutions

29 Federal Initiatives FERC and the markets Carbon adder? Reliability adder? EPA and CAA regulation NRC and nuclear regulation Pilot projects, especially for new tech Shared authority with states?

30 State Initiatives RPS Low-carbon fuel standards IRP and carbon adders Nuclear initiatives Most important: allow cost recovery for CWIP Permit renegotiated contracts Allow cost recovery for difference between wholesale and needed revenue-ppl cases?

31 Regional Initiatives Regional GHG Initiative Reliability standards/governance Capacity markets Remove caps Social cost dispatch

32 Moving Forward Increasing heterogeneity across/among governance levels Regulated v. restructured matters a lot Regulatory contract is really a regulatory network Suggests need for research on layering of policy options Flexibility, not static

33 Emily Hammond Professor of Law The George Washington University Law School