Can nuclear succeed in liberalized power markets?

04 February 2015

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There are 69 reactors under construction today - the largest number in 25 years - but only one is in a liberalized electricity market, writes Edward Kee.

In the USA, two nuclear power plants operating in liberalized electricity markets recently closed for financial reasons. Other operating nuclear power plants in liberalized electricity markets face similar issues and may also retire early. Moreover, all new nuclear power projects in U.S. liberalized electricity markets are on hold or have been cancelled.

The UK electricity market caused financial problems for British Energy prior to its sale to EDF. The difficulty in developing a new nuclear power project in the UK electricity market is demonstrated by the complex Electricity Market Reform program and controversial incentive package for Hinkley Point C.

Are liberalized electricity markets incompatible with nuclear power?

The electricity industry has two competing models. The traditional model has vertically integrated monopolies subject to economic regulation or government ownership. The new model has a de-integrated and restructured electricity industry with a liberalized electricity market.

Retail electricity rates in liberalized electricity market regions were both higher and more closely linked to natural gas prices.

These two models are based on very different economic principles. In the traditional model, regulated and government utilities plan and build a portfolio of generation units intended to minimize long-term total cost of the electricity system. In the new model, liberalized electricity markets use spot market prices to manage system dispatch to minimize short-term marginal cost of wholesale electricity

Traditional model



In the traditional model, regulated or government utilities build a generating plant portfolio to meet projected customer demand at the lowest long-term total system cost. The long-term revenue certainty implicit in the traditional model supports investment in capital-intensive generation projects, including nuclear power, that provide low-marginal-cost baseload electricity.

The generation planning process in the traditional model can consider all relevant generating technology attributes, including long-run cost levels, volatility of costs, environmental impact, power density, controllability, and reliability.

There is a century of successful experience with the traditional model.

All operating nuclear power plants were built under the traditional model. Almost all nuclear power plants under construction today are in systems using the traditional model, including countries with government-owned electric utilities such as China, India, South Korea, and the UAE.

New model



In the new model, generation assets are divested or privatized and then compete by bidding into the short-term electricity market. Generator bids are accepted to meet demand in each trading period, starting with the lowest bids first. The price of the last bid accepted sets the system marginal price, also referred to as the spot price. All wholesale electricity in each trading period is bought and sold at this spot price.

The new model relies on market price signals to provide incentives for generation investment instead of the long-term planning and regulated generation investment approach in the traditional model.

All generators with accepted bids receive the same spot price and the difference between this spot price and a generator's marginal cost results in net operating revenue. This net operating revenue is uncertain and may not cover all fixed costs, yet is expected to provide price signals for generation investments in the new model.

There is limited experience with the new model.

Liberalized electricity markets manage the dispatch of existing generation units well. However, the new model has not managed new generation investment so well. Market price signals for new generation investment have been blurred and weak, in part due to price caps in some markets. Spot prices may also be distorted by out-of-market subsidies given to renewable generation that can result in negative spot prices.

Private electricity generation investment in the new model is focused on minimizing commercial risk to investors, typically resulting in low-capital-cost natural-gas-fuelled power plants.

Nuclear power plants built under the traditional model now operate in liberalized electricity markets, but not all of these nuclear projects are profitable. No new nuclear power plants have been built in these liberalized electricity markets.

The traditional and new models can be compared in the USA, with regional examples of both models. A 2014 paper from the Energy Institute at Haas on the experience with US electricity industry restructuring showed that retail electricity rates in liberalized electricity market regions were both higher and more closely linked to natural gas prices than retail electricity rates in regions that retained the traditional model.

Can the new model accommodate nuclear power?



In Canada, several Bruce nuclear plant units were placed into long-term shutdown for more than a decade and then returned to service. Putting a nuclear power plant into an extended shutdown with low operating costs (i.e. mothball status) during times of low electricity market prices has not been an option in the USA. The mothball option, if nuclear safety regulations allow it, offers an alternative to permanent closure for nuclear power plants facing low electricity market prices.

State governments in the USA, including Illinois, New York, and Ohio are discussing ways to avoid the early retirement of threatened merchant nuclear projects operating in liberalized electricity markets. These discussions may provide some useful lessons about how to improve nuclear revenue certainty in these States.

Global industry developments also focus on nuclear revenue certainty.

Some liberalized electricity markets have added capacity markets and other features that improve revenue certainty for generators. The Finnish Mankala rules offer a business model for nuclear power projects in a liberalized electricity market that might be used in other countries. The UK EMR programme and Hinkley Point C deal provide an example of how long-term generation planning can be imposed on a liberalized electricity market. Turkey's Build-Own-Operate nuclear project approach includes power purchase agreements that provide revenue certainty. Japan is considering approaches to keep nuclear power plants financially viable after implementing electricity market reforms, in order to ensure long-term electricity supply and stable customer electricity rates.

In these approaches to provide revenue certainty, nuclear power in liberalized electricity markets is treated more like a regulated asset, similar to high-voltage transmission, than a deregulated commercial generation asset. Power contracts similar to those proposed for the Hinkley Point C project can provide nuclear revenue certainty without re-regulating the industry, without changing electricity market designs or rules, and with a wide range of flexibility.

Enhanced revenue certainty can compensate nuclear power plants for attributes not recognized or valued by liberalized electricity markets.

Nuclear power is the only non-combustion generation technology that can provide large amounts of reliable baseload capacity. Finding a way for nuclear power to work in liberalized electricity markets is one of the biggest problems facing the electricity industry – and the nuclear power industry - today.

Edward Kee

Comments? Please send them to editor@world-nuclear-news.org

Edward Kee is the owner and principal consultant at Nuclear Economics Consulting Group (NECG) and an affiliated expert at NERA Economic Consulting. He is based in Washington, DC.

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