Atomic Dreams
Last week I was on John Stossel’s (most excellent) new show on Fox Business News to discuss energy policy -- in particular, popular myths that Republicans have about energy markets. One of the topics I touched upon was nuclear power. My argument was the same that I have offered in print: Nuclear power is a swell technology but, given the high construction costs associated with building nuclear reactors, it’s a technology that cannot compete in free markets without a massive amount of government support. If one believes in free markets, then one should look askance at such policies.
As expected, the atomic cult has taken offense.
Now, it is reasonable to argue that excessive regulatory oversight has driven up the cost of nuclear power and that a “better” regulatory regime would reduce costs. Perhaps. But I have yet to see any concrete accounting of exactly which regulations are “bad” along with associated price tags for the same. If anyone out there in Internet-land has access to a good, credible accounting like that, please, send it my way. But until I see something tangible, what we have here is assertion masquerading as fact.
Most of those who consider themselves “pro-nuke” are unaware of the fact that the current federal regulatory regime was thoroughly reformed in the late 1990s to comport with the industry’s model of what a “good” federal regulatory regime would look like. As Oliver Kingsley Jr., the President of Exelon Nuclear, put it in Senate testimony back in 2001:
The current regulatory environment has become more stable, timely, and predictable, and is an important contributor to improved performance of nuclear plants in the United States. This means that operators can focus more on achieving operational efficiencies and regulators can focus more on issues of safety significance. It is important to note that safety is being maintained and, in fact enhanced, as these benefits of regulatory reform are being realized. The Nuclear Regulatory Commission -- and this Subcommittee -- can claim a number of successes in their efforts to improve the nuclear regulatory environment. These include successful implementation of the NRC Reactor Oversight Process, the timely extension of operating licenses at Calvert Cliffs and Oconee, the establishment of a one-step licensing process for advanced reactors, the streamlining of the license transfer process, and the increased efficiency in processing licensing actions.
It’s certainly possible that the industry left some desirable reforms undone, but it seems relevant to me that the Nuclear Energy Institute -- the trade association for the nuclear energy industry and a fervent supporter of all these government assistance programs -- does not complain that they’re being unfairly hammered by costly red-tape.
For the most part, however, the push-back against the arguments I offered last week has little to do with this. It has to do with bias. According to a post by Rod Adams over at “Atomic Insights Blog,” I am guilty of ignoring subsidies doled-out to nuclear’s biggest competitor -- natural gas -- and because Cato gets money from Koch Industries, it’s clear that my convenient neglect of that matter is part of a corporate-funded attack on nuclear power. Indeed, Mr. Adams claims that he has unearthed a “smoking gun” with this observation.
Normally, I would ignore attacks like this. This particular post, however, offers the proverbial “teachable moment” that should not be allowed to go to waste.
First, let’s look at the substance of the argument. Did I “give natural gas a pass” as Mr. Adams contends? Well, yes and no; the show was about the cost of nuclear power, not the cost of natural gas. I did note that natural gas-fired electricity was more attractive in this economic environment than nuclear power, something that happens to be true. Had John Stossel asked me about whether gas’ economic advantage was due to subsidy, I would have told him that I am against natural gas subsidies as well -- a position I have staked-out time and time again in other venues (while there are plenty of examples, this piece I co-authored with Daniel Becker -- then of the Sierra Club -- for The Los Angeles Times represents my thinking on energy subsidies across the board. A blog post a while back about the Democratic assault on oil and gas subsidies found me arguing that the D’s should actually go further! Dozens of other similar arguments against fossil fuel subsidies can be found on my publications page). So let’s dispose of Mr. Adams’ implicit suggestion that I am some sort of tool for the oil and gas industry, arguing against subsidies here but not against subsidies there.
Second, let’s consider the implicit assertion that Mr. Adams makes -- that natural gas-fired electricity is more attractive than nuclear power primarily because of subsidy. The most recent and thorough assessment of this matter comes from Prof. Gilbert Metcalf, an economist at Tufts University. Prof. Metcalf agrees with a 2004 report from the Energy Information Administration which contended that preferences for natural gas production in the tax code do little to increase natural gas production and thus do little to make natural gas less expensive than it might otherwise be. They are wealth transfers for sure, but they do not do much to change natural gas supply or demand curves and thus do not affect consumer prices. Prof. Metcalf argues that if we had truly level regulatory playing field without any tax distortions, natural gas-fired electricity would actually go down, not up! Government intervention in energy markets does indeed distort gas-fired electricity prices. It makes those prices higher than they otherwise would be!
The Energy Information Administration (EIA) identified five natural gas subsidies in 2007 that were relevant to the electricity sector (table 5). Only two are of particular consequence. They are:
- Expensing of Exploration and Development Costs – Gas producers are allowed to expense exploration and development expenditures rather than capitalize and depreciate those costs over time. Oil and gas producers (combined) took advantage of this tax break to the tune of $860 million per year. How much goes to gas production rather than to oil production is unclear.
- Excess of Percentage over Cost Depletion Deferral – Under cost depletion, producers are allowed to make an annual deduction equal to the non-recovered cost of acquisition and development of the resource times the proportion of the resource removed that year. Under percentage depletion, producers deduct a percentage of gross income from resource production. Oil and gas producers (combined) take advantage of this tax break to the tune of $790 million per year. How much goes to gas production rather than to oil production is unclear.
Even if we put aside the fact that these subsidies don’t impact final consumer prices in any significant manner, it’s useful to keep in mind the fact that the subsidy per unit of gas-fired electricity production -- as calculated by EIA -- works out to 25 cents per megawatt hour (table 35). Subsidy per unit of nuclear-fired electricity production works out to $1.59 per megawatt hour. Hence, the argument that nuclear subsidies are relatively small in comparison with natural gas subsidies is simply incorrect.
Some would argue that the Foreign Tax Credit -- a generally applicable credit available to corporations doing business overseas that allows firms to treat royalty payments to foreign governments as a tax that can be deducted from domestic corporate income taxes -- should likewise be on the subsidy list. The Environmental Law Institute calculates that this credit saves the fossil fuel industry an additional $15.3 billion. There is room for debate about the wisdom of that credit, but regardless, it doesn’t appear as if the Foreign Tax Credit affects domestic U.S. prices for gas-fired electricity.
The bigger point is that without government help, few doubt that the natural gas industry would still be humming and electricity would still be produced in large quantities from gas-fired generators. But without government production subsidies, without loan guarantees, and without liability protection via the Price-Anderson Act, even the nuclear power industry concedes that they would disappear.
Now, to be fair, Prof. Metcalf reports that nuclear power is cheaper than gas-fired power under both current law and under a no-subsidy, no-tax regime. His calculations, however, were made at a time when natural gas prices were at near historic highs that were thought to be the new norm in energy markets and were governed by fairly optimistic assumptions about nuclear power plant construction costs. Those assumptions have not held-up well with time. For a more recent assessment, see my review of this issue in Reasonalong with this study from MIT, which warns that if more government help isn’t forthcoming, “nuclear power will diminish as a practical and timely option for deployment at a scale that would constitute a material contribution to climate change risk mitigation.”
Third, Mr. Adams argues that federal nuclear loan guarantee program is a self-evidently good deal and implies that only an anti-industry agitprop specialist (like me) could possibly refuse to see that. “That program, with its carefully designed and implemented due diligence requirements for project viability, should actually produce revenue for the government.” Funny, but when private investors perform those due diligence exercises, they come to a very different conclusion … which is why we have a federal loan guarantee program in the first place.
Who do you trust to watch over your money -- investment bankers or Uncle Sam? The former don’t have the best track record in the world these days, but note that the popular indictment of that crowd is that investment banks weren’t tight fisted enough when it came to lending. If even these guys were saying no to nuclear power -- and at a time when money was flowing free and easy -- what makes Mr. Adams think that a bunch of politicians are right about the glorious promise of nuclear power, particularly given the “too cheap to meter” rhetoric we’ve heard from the political world now for the better part of five decades?
Anyway, for what it’s worth, the Congressional Budget Office has taken a close look at this alleged bonanza for the taxpayer and judged the risk of default on these loan guarantees to be around 50 percent. They may be wrong of course, but the risks are there, something Moody’s acknowledged last year in a published analysis warning that they were likely to downgrade the credit-worthiness of nuclear power plant construction loans.
Fourth and finally, Mr. Adams cites Cato’s skepticism about “end-is-near” climate alarmism as yet more evidence that we are on the take from the fossil fuels industry. I don’t know if Mr. Adams has been following current events lately, but I would think that we’re looking pretty good right now on that front. Der Spiegel -- no hot-bed of “Big Oil” agitprop -- sums up the state of the debate rather nicely in the wake of the ongoing collapse of IPCC credibility. Matt Ridley -- another former devotee of climate alarmism -- likewise sifts through the rubble that is now the infamous Michael Mann “hockey stick” analysis (which allegedly demonstrated an unprecedented degree of warming in the 20th Century) and finds thorough and total rot at the heart of the alarmist argument. Mr. Adams is perhaps unaware that our own Pat Michaels has been making these arguments for years and Cato has no apologies to make on that score.
Regardless, ad hominem is the sign of a man running out of arguments. There aren’t many here to rebut, but the form of the complaints offered by Mr. Adams speaks volumes about how little the pro-nuclear camp has to offer right now in defense of nuclear power subsidies.
I have no animus towards nuclear power per se. If nuclear power could compete without government help, I would be as happy as Mr. Adams or the next MIT nuclear engineer. But I am no more “pro” nuclear power than I am “pro” any power. It is not for me to pick winners in the market place. That’s the invisible hand’s job. If there is bad regulation out there harming the industry, then by all means, let’s see a list of said bad regulations and amend them accordingly. But once those regulations are amended (if there are indeed any that need amending), nuclear power should still be subject to an unbiased market test. Unlike Mr. Adams, I don’t want to see that test rigged.
