Tag: electricity

EPA and the ‘Necessary Bankrupting’ of Coal

In its proposed rulemaking on emissions from coal-fired power plants, the Environmental Protection Agency has fulfilled President Obama’s campaign statement that his administration would “essentially bankrupt” anyone who had the audacity to hope to build a new generation facility. By essentially prohibiting the production of new plants, the administration is again picking winners and losers in our energy economy, something which is best done by the market.

Supporters of this policy will claim that it is cheaper to generate electricity from natural gas, and that is true for now.  But major producers using hydraulic fracturing and new horizontal drilling techniques in shale formations have recently stopped drilling new wells because the price is so low.

If it ultimately costs more to produce electricity from gas than it does from coal, the administration will have slapped yet another energy price hike on us—in addition to what we already pay to subsidize solar power, windmills, and Chevrolet Volts while taxpayers absorb the debt from the multiple bankruptcies of other politically correct energy concerns like Solyndra, Range Fuels, and a host of others.

Consumers and the ‘Smart Grid’

The drive to let consumer-level electricity prices float as prices do in innumerable other markets has been stunted by complaints about so-called “smart meters” that would give consumers the ability to respond to fluctuations in the realtime price of electricity.

When the California Energy Commission attempted to put these kinds of meters into new buildings, the knee-jerk reaction consisted largely of complaints about the government “taking over” consumers’ electricity consumption in the case of a looming blackout. For more on why these concerns lacked some essential context, listen to the podcast with Peter Van Doren on the case of the CEC.

As I discussed with economist Lynne Kiesling at Cato University, consumer-side responses to varying electricity prices could take many forms, from smarter appliances plugged into the same pricing information to battery technology to take advantage of times of low electricity demand. What’s more, dynamic pricing could someday let consumers turn the product of electricity into the service of electricity by allowing consumers to pay a premium for costlier but “greener” methods of electricity generation.

Here’s more from Kiesling on smart meters.

Preparing for Life as a Light Bulb Black Marketeer

 I’ve decided the time has come to become an entrepreneur – as a black market operator.

Come next January, 100-watt incandescent light bulbs will be illegal, courtesy of Congress and President George W. Bush.  Lower wattages will be banned the following year.  As usual, politicians in Washington believe they know best and are determined to inconvenience the public in the name of saving energy.

No matter that incandescent lights offer a softer light and are a better value than fluorescent bulbs if turned on only briefly.  And no matter that breaking a fluorescent light will spill mercury, creating what in any other circumstance would be considered to be a biohazard.

There are other consequences of the coming prohibition.  Notes Tim Carney of the Washington Examiner:

  • Citing this law, GE has closed its incandescent light plant in Virginia. For the coming years, while they’re still legal, Americans will be buying their GE incandescents from Mexico. This probably means less efficient manufacturing and more shipping.
  • GE makes its CFLs in China. The factories are likely dirtier and less efficient, and certainly there will be more shipping costs.
  • Because of the warm-up time for CFLs and the knowledge that they use less energy, people are more likely to leave them on for longer, I imagine.
  • In northern latitudes, incandescents’ inefficiency is not wasted. Think about it: in Alaska, summer nights are very short and winter nights are very long. That means a vast majority of light-bulb time happens in the winter. The incandescents waste energy in the form of heat, but if it’s cold, that added heat slightly reduces your need to use a furnace.
Of course, it’s hard to decide how many bulbs to buy.  What would be a lifetime supply of 100 watt lights?

And why stop there?  I could become an incandescent bulb pusher once the prohibition takes effect.  I don’t think drug prohibition makes any sense, but I have no desire to get into that market.  Customers and competitors are an ugly lot and I really don’t want to go to prison.  But selling light bulbs – now there’s something I could do!

I’d be even happier, however, if the new Congress dropped the coming prohibition.  Fluorescent bulbs often are a wise choice, but not always.  A supposedly free society should leave at least a few choices to people – like deciding which light bulbs to use.

Radioactive Corporate Welfare

A good default proposition regarding the government’s role in the economy would state that the government should not loan money to an enterprise if the enterprise in question cannot find one single market actor anywhere in the universe to loan said enterprise a single red cent.  It might suggest – I don’t know – that the investment is rather … dubious.

Alas, like all good propositions regarding the government’s role in the economy, this one is being left by the roadside by the Obama administration.  Unfortunately, the only complaint being made by a not insubstantial segment of the political Right – frequently, the political crowd that is busy decrying “Bailout Nation” – is that the loan guarantees are not fat enough.

I write, of course, about the $8.3 billion federal loan guarantee announced by President Obama this week for Southern Company to build two new nuclear power plants.  The money will be used to guarantee the loans being made by the federal government (via the Federal Financing Bank) to partially cover the cost of Southern’s projected $14 billion nuclear construction project at their Vogtle plant near Waynesboro, Georgia.  The loan guarantees were authorized by Congress in the 2005 Energy Policy Act and, we are told, are the first installment on a total package of $54 billion that the President would like to hand out to facilitate the construction of 7-10 new nuclear power plants (Congress, however, has only authorized $18.5 billion to this point).

The claim being made by some – that the loan guarantees are necessary to jump-start investor interest in new nuclear power plant construction – is not quite correct.  Even these lavish loan guarantees aren’t enough to do that.  In a letter to the U.S. Department of Energy dated July 2, 2007, six of Wall Street’s s then-largest investment banks – Citigroup, Credit Suisse, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – informed the administration that, contrary to the government’s expectations, anything short of a 100 percent unconditional guarantee would be insufficient to induce private lending.

Why is it risky to build nuclear power plants?  Because new nuclear projects tie up more capital for longer periods of time than its main competitor, natural-gas fired generation.  Nuclear power makes economic sense only if natural gas prices are very high.  Then, over time, the high initial costs of nuclear power would be offset by nuclear power’s lower fuel costs.  Moreover, as noted by Moody’s in an analysis published in July of last year, there is uncertainty associated with construction costs, regulatory oversight, technological developments that might reduce the cost of rival facilities, and the ability of utilities to recover costs and make a profit over the lifetime of the plant – a risk tied up in the economic prospects of the region being served by the plant.  And those risks have been increasing, not decreasing, as time has gone on.

In short, even during the go-go days prior to the September 2008 crash – a time when Wall Street was allegedly throwing around money left and right to all sorts of dubious borrowers – the banks that stand accused of recklessly endangering their shareholders on other fronts were telling utility companies that they would not loan them anything for new nuclear power plant construction unless the feds unconditionally guaranteed every last penny of those loans.  That’s how risky market actors think it is to build nuclear power plants.

And it’s not as if the federal government disagrees completely.  The Congressional Budget Office pegs the chance of default (program-wide) at 50 percent or better and the Government Accountability Office likewise thinks that default risks are quite high.  Energy Secretary Stephen Chu says that he thinks the chance of default is much lower.  We can only speculate about who’s right given that no one has tried to build a nuclear power plant in the United States for over 30 years.

Regardless of what the risk actually is, the loan guarantees do not reduce that risk.  They simply transfer the risk from the bank to taxpayer.  In this particular case, however, the loan guarantee transfers risk from one arm of the state to the other, so it doesn’t really count.  But if such loan guarantees  ever were to induce actual private lending for plant construction, that’s how it would work.

Plenty of arguments have been offered to justify these loan guarantees.  Most of them are flimsy on their face.

For instance, we’re often told that we “need” new power plants.  But with electricity demand declining over the past couple of years, it is unclear when that need might arise.

Regardless, when the market “needs” more electricity, that need will be manifested in price signals that will carry with them profit opportunities.  Profit-hungry investors will be willing and able to meet that need without the help of government.  Of course, if market conditions don’t radically change, those needs will be met with gas-fired power plants, but hey, if that bothers you, take it up with someone else.

Others argue that we need the jobs that will be produced by new nuclear power plants.  Well, building big new reactors will certainly employ a lot of (largely unionized) construction workers.  But that’s one reason why building a nuclear power plant is not very economic compared to building gas-fired generators.  If creating jobs is the idea whether the project makes any economic sense or not, then let’s just ban food imports and farm equipment and put everyone to work with hand plows and scythes.

Two somewhat more serious arguments have been offered to justify these loan guarantees.  Neither of them stands up to much scrutiny either.

The first argument – the argument most often heard from the nuclear power industry and some segments of the political Left – is that we need nuclear power to reduce greenhouse gas emissions.  Of course, the best (that is, most efficient) way to reduce greenhouse gas emissions is to internalize the cost of greenhouse gas emissions in the retail price of electricity and then allow market actors to adjust their production and consumption decisions accordingly.  That price internalization exercise, however (whether directly through a carbon tax or indirectly through a cap-and-trade program), does not appear to be in the cards in the foreseeable future.  Hence, the loan guarantees are advanced as a “second-best” solution, one that will get us the technology and economic efficiency that would be delivered by a properly crafted carbon tax or cap-and-trade program without the retail price increases associated with either.

One of several problems with this argument is that it would take one hell of a carbon tax – or one hell of an onerous cap-and-trade program – to get anyone interested in building nuclear power plants.  If natural gas prices remained roughly where they are at present (that is, if they were to remain at historical norms) then it would take a $90 per ton carbon tax or a cap-and-trade program that delivered carbon emission credits at $90 per ton on the open market to induce investment in nuclear power plants.  Few economists who study climate policy believe that a carbon tax of that size is defensible given what we know about climate change.

And that’s if construction costs are as low as advertised.  Were they to double (as they did from 2003 to 2009) – either because of endogenous increases in the cost of capital, labor, or construction-related resources or because of cost overruns – then it would take at least a $150 per ton carbon tax (or a cap-and-trade program that delivered $150 carbon credits to the market) to induce investment.

You might ask yourself what the historical relationship is between final (inflation-adjusted) nuclear power plant construction costs in the United States and construction costs as projected at the onset of the project.  Happily, the CBO has done your homework for you.  They found that final construction costs averaged 207 percent of projected costs.  Hence, a doubling of construction costs is probably more likely than not once a project is underway … if past is prologue.

The upshot is that there are many more efficient ways to respond to greenhouse gas emission constraints than to go on a nuclear power bender.  This observation is heresy on the Right, but almost every credible analysis of the matter backs up that observation.

The second argument one hears to justify federal loan guarantees is that they are necessary to counter-balance the excessive regulatory costs associated with new plant construction.  Now, put aside the fact that the Nuclear Energy Institute – the trade association of the nuclear power industry – has often expressed near-total satisfaction with the current federal regulatory regime.  If the regulatory regime is truly “bad” and, accordingly, is imposing steep and unnecessary costs on the industry, then the correct remedy is to improve said regulatory regime, not to subsidize the industry.

The counter-complaint that positive regulatory reforms are impossible is difficult to swallow.  After all, if there is sufficient political will to bestow tens of billions of dollars worth of tax money on this industry, then surely there is enough political will to reform the bad and unnecessarily costly regulations allegedly bedeviling the object of those very same legislative affections.

I will confess to being skeptical about the argument that high construction costs are largely the fault of regulators.  Building a light water breeder reactor is a technologically challenging and costly undertaking whether regulators are on the scene or not.  Moreover, it is not obvious to me that the regulations that are in place are a priori objectionable from a libertarian perspective.

One rarely, if ever, hears of particulars in this bill of complaint offered about nuclear regulation.  But if a persuasive bill of complaints is ever presented, then the appropriate response is regulatory reform and then to leave the decision to build or not to build to markets.

In the course of announcing these loan guarantees, President Obama said this week that “The fact is, changing the ways we produce and use energy requires us to think anew. It requires us to act anew.”  Well, there’s nothing new about throwing subsidies at nuclear power.  Economist Douglas Koplow calculates that federal nuclear subsidies have totaled $178 billion from 1947-1999.  The promise of a nuclear economy with rates too cheap to meter has been made for over half a century.  What would be new would be a policy of “just saying no” to industries with their hands out in Washington.

[Cross-posted at MasterResource]