My post the other day on nuclear power prompted a number of comments – most of them hostile. Because the comments offered were fairly standard-issue arguments that one often hears in the debate about nuclear energy, it’s worth surveying them seriously.
One argument often heard is that market actions are not indicative of economic merit. Rod Adams, for instance, writes:
Markets dominated by people whose only motive is making more money are not the best decision makers – the people making the decisions in that situation will often decide to influence the law of supply and demand by keeping their hands on the levers that they can use to keep supply restrained. If their hands are “invisible” it is because they work at keeping them hidden or because observers and academic study producers do not work very hard to find them.
Well, the desire to make money is what makes markets work in the first place. Rather than walk through an Econ 101 text to flesh out that point, let me ask a question: If profit-hungry investors aren’t the best people to make decisions about whether to invest in this or that, then who are – vote-maximizing politicians? Who has the better incentive to make efficient investment decisions?
Rod seems to be suggesting that nuclear power prices are high because plant operators make more money that way. Given that those operators have to compete with coal and gas-fired electricity, how exactly do cost overruns and high construction costs help nuclear power plant operators?
Regardless, if you really believe that market actors maximize revenues by restraining supply to the detriment of consumers, then you should be in favor of a total government take-over of the energy industry. Nothing else will solve that problem were it to exist. But what makes us think that a government-run energy sector will perform any better than a government-run health care sector, a government-run agricultural sector, or what have you? When politicians elbow aside market actors and call the shots, we get decisions that are designed to help politicians, not the economy. See, for instance, the utterly insane ethanol preferences that make absolutely zero sense from an economic or environmental perspective but wonderful sense from a political perspective.
Jon Boone seconds Rod Adams’ contention that markets are worthless in this context:
As Adam Smith himself wrote, his unseen hand works effectively when the field is level and the players share a common sense of the rules, values, and objectives of the game. Such is not the case today in the energy marketplace.
That’s not quite what Adam Smith wrote, but never mind. Jon’s indictment of the market could be made in every sector of the economy because there is no instance that I am aware of when all of these alleged preexisting conditions for effective market operation exist.
But we are not debating about the merits of a theoretically “flawed” market versus a perfect state command-and-control regime. We are debating the merits of a real work economy versus a real-world U.S. Congress making energy decisions in place of investors. That should be an easy debate to adjudicate for readers of this blog. Alas, when the topic turns to nuclear power, it is not an easy debate to resolve because, for many, if the market is rejecting nuclear power, it means there’s something wrong with the market … not that there might be something wrong with nuclear power.
Ed Peschko states the case most bluntly:
You can do some quick, back-of-the-envelope calculations based on power densities and physical trends to get an idea of when the market is giving a false signal or a true one.
Alas, this is the reigning conceit of central planners everywhere: Smart guys with computers and specialized training can outperform markets and market actors and know more than the accumulated wisdom of millions of market actors who’s insights are aggregated in price information. If this were true, then socialism would work grandly. Alas, it does not and there is no BTU exception to the observations found in The Wealth of Nations.
Nuclear power advocates frequently point to experience abroad as proof that nuclear energy is economic under something closer to optimal political conditions. Ted Rockwell, for instance, notes that plants in Europe make a profit, so why can’t they make a profit here as well?
Yes, some nuclear power plants in Europe – and rather many in the United States for that matter – make a hell of a profit. That’s the case in the U.S. because third-party investors bought those plants at fire-sale prices from utilities which had been bled dry by those same plants. The new owners turned out to be much better operators than the old owners, and so profits were gained.
So yes – if someone else eats the bulk of the construction costs, you can make money in nuclear. That’s not very relevant going forward, however, for those interested in building new facilities. The construction costs will be their’s to eat.
European nuclear power plant construction costs going forward are not much different than U.S. construction costs as witnessed by the Areva debacle in Finland – the first new power plant to be built in a liberal energy market anywhere in the world over the past several decades. This facility, for those not keeping up with the news, was advertised to be a state-of-the-art, modular facility with a $4.2 billion price tag – about the same as that for a similarly-sized plant that might be built in the U.S. – but it is already several years behind schedule and 50% over budget for reasons that have nothing to do with regulatory delay. The final price tag is expected to double.
Nuclear often gets built in non-liberal energy markets in Europe, however, because it is the state – not the market – that decides what gets built in those economies and politicians in France and elsewhere simply love nuclear power for all sorts of (non-economic) reasons. Because these are public-private construction projects, it’s hard to concretely identify total costs. But to the extent we can, they do not appear to be different than those experienced in the United States.
In France, overnight construction costs for an Areva plant being built in Flamanville are estimated at 4 billion Euros, or 2,434 Euros/kW, which is just as high – if not higher! – than many costs estimates floating around for new plants in the United States. That plant, by the way, is also running behind schedule and over budget – and this from one of the most experienced nuclear power companies currently operating anywhere in the world today.
Ed Peschko, on the other hand, finds inspiration in Asia:
In places where nuclear is accepted and where energy projects seem to be planned on technical merits – namely korea, china, taiwan and japan – construction costs are much lower. Large reactors are regularly being built there in a 3 to 5 year timeframe at 1500-2000 $/KW.
That is simply incorrect. For data on construction costs there, see Jim Harding, Economics of Nuclear Power and Proliferation Risks in a Carbon-Constrained World,” The Electricity Journal 20:10, December 2007. Costs there are as high (or higher!) than costs here once relatively low-cost Korean labor is factored into the equation.
Blaming the Regulators
Jim Hopf, like many, believes that nuclear power was cheap before the regulatory onslaught that followed the Three Mile Island incident. This, he says, is strong evidence that regulators are to blame for high construction costs.
But nuclear power plant construction costs were climbing steeply well before Three Mile Island, almost doubling from the period 1972-1973 to the period 1974-1975 and increasing by 50% from the 1974-1975 period to the 1976-1978 period (see Table 12.3 in William Peirce’s excellent Economics of Energy Industries: 2nd Edition, Praeger, 1996). They doubled again after Three Mile Island and regulatory reaction was indeed one reason. But there were other reasons as well; the general inflation of construction costs throughout the economy, high interest rates, and poor utility management.
The latter should not be underestimated. Some utilities were able to hold construction costs down rather impressively even in the wake of Three Mile Island. Of the 24 plants that were ready to begin operations in the period between 1984-1987, costs ranged from $830 per MW of installed capacity (for Duke Power’s Maguire 2 facility) to $4,700 per MW for the infamous Shoreham plant (nominal dollars for both).
Here we find perhaps the best argument for the possibility of economically competitive nuclear power; to wit, that low cost plants have indeed been built in the past. This is true, but it seems to be an exception to the rule. Good utility management can theoretically get low-cost plants into the market. And if any good utility managers have a plan to do so, they have every chance of convincing profit-hungry investors that free money will come to those who provide the loans.
The larger point, however, is that if the industry could not survive the regulatory jihad after Three Mile Island, how do we explain the Maguire 2 plant? Too often, we attribute high costs to regulators rather than poor utility management.
Katana0182 (whoever that may be – I prefer to deal with actual names) may be correct that the Nuclear Energy Institute is not ideally placed to challenge bad regulation. I have heard similar arguments from friends in the nuclear energy industry (yes, believe it or not, I do indeed have friends in the industry!) who are frustrated with that association’s attitude towards Washington. On the other hand, industry executives who testify in front of Congress sing nothing but praise for the existing federal regulatory architecture. Do chief executives of other heavily-regulated industries do the same when they are encumbered by – or threatened to be encumbered by – counter-productive federal policy? Uh … no. Peruse through the testimony of the oil industry over the past decade if you want a dose of industry anger towards government.
That said, Katana’s contention that construction costs would be much lower if the feds didn’t prescribe how plants were to get built is founded upon a misunderstanding of the regulatory status quo. Utilities submit designs and the NRC approves them or not. Perhaps you think that the NRC does too much tinkering with these plans, but if so, we hear little complaint from those who would have every reason to complain – the parties filing the permit requests.
Even if regulations are “good” now, isn’t there fear that they will become “bad” in the future? If so, might that – as Ted Rockwell argues – color investor interest in nuclear power? Of course! Regulatory uncertainty is no small thing. But it is not, as Mr. Rockwell argues, a good argument for federal loan guarantees. Those guarantees do not “ameliorate” this risk because the risk of policy change does not go away. The risk is simply transferred from investors to taxpayers. That’s a good deal for the industry, perhaps, but a bad deal for the taxpayers.
Regardless, regulatory uncertainty exists for all sectors of the economy. Ask the coal industry about it with regards to future rules concerning carbon emissions. Should we give them loan guarantees as well?
Several commenters go into great detail about how micro plants and other technological innovations could make nuclear economic. Rod Adams, for instance, asks:
What if some technologists reject that assumption [high construction costs – although the reality of high construction costs is not an “assumption”] and choose a path that aggressively and successfully works to reduce construction costs?
Well then, I would throw a party. Haven’t seen it yet though.
If technological innovations occur, those innovations will attract investor interest and, hence, find their way into the market. That’s what a single-minded pursuit of profit will deliver to us in a free market economy.
Rod Adams also complains about my statement that the argument for nuclear power is little different from the argument for solar power. He’s right to point out that nuclear power has many advantages relative to solar power. But that’s not the point. The reason that solar power and nuclear power is the flip side of the same coin (economically and politically) is that neither would exist without massive amounts of government intervention. The Nuclear Energy Institute admits this frankly when their production tax credits, loan guarantees, and liability protections are up for legislative renewal. They are similar politically because the arguments made for both are in large part identical; they both offer theoretically limitless power, they both have low operating costs, they are both environmentally friendly (relatively speaking), they both capture the popular imagination, and advocates for both turn themselves into pretzels in the course of arguing that the object of their affection is economically competitive were it not for some vague conspiracy of competitors acting to keep those technologies down.
Jim Hopf goes into great detail about how prices are inaccurate because pollution from gas and coal is not reflected in electricity prices. His argument as it pertains to carbon was already dealt with in my initial post, so I will not elaborate on that. All I would add is that if we could quantify the negative externalities at issue and they were found to be significant, then the correct remedy isn’t subsidy to nuclear power (or solar power for that matter) but a Pigovian tax.
Nonetheless, academics who have attempted to quantify these externalities have produced estimates that are all over the map (see Thomas Sundqvist and Patrik Soderholm, “Valuing the Environmental Impacts of Electricity Generation: A Critical Survey,” The Journal of Energy Literature 7:2, December 2002). Hence, it’s unclear to what extent these externalities are worth our time.
The national security externality Jim would like to see addressed was demolished two years ago in an article I wrote on this topic for The Georgetown Journal of Law and Public Policy. See also this study by my colleague Richard Gordon.
I agree completely with Richard Fulmer. The only way to know for certain whether an industry or a technology is economically worthwhile is to subject that industry or technology to a market test. We have done this with nuclear and it has so far failed said test. Excuses are rampant, of course, but if the main excuse has merit – that regulators are unduly burdening the industry – then the proper remedy is to reform said regulations, not to cut a taxpayer-backed check.
If one day the industry could pass that market test – without government assistance – then I would be as happy as any one of the commenters to my original post. But rigging the market to get the passing grade is – and always will be – bad policy no matter what technology we’re talking about.