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Secrets revealed about sausages and nuclear power

Realpolitik over health care: The American Health Care Act—U.S. House Speaker Paul Ryan’s “repeal & replace” law—proves the truth of the maxim: “Laws are like sausages — it is best not to see them being made” (misattributed to Otto von Bismarck). More than a 10th of the AHCA draft is devoted to ensuring that lottery winners are ineligible for Medicaid. This appears to be the hobby horse of U.S. Rep. Fred Upton of Michigan. I don’t know anything about Mr. Upton, but as Ryan fired up his steamroller, he concluded Upton’s vote was worth buying. Just wait till the bill gets to the Senate. With a bare two vote margin, Senate Majority Leader Mitch McConnell will have a lot of deals to make. Until something actually passes, I’ll leave further commentary to others.

Clean energy’s dirty secret: A cover story by that name in The Economist explores the challenge posed by expanding supplies of renewable power. 

It helps to know how power prices are set. When you want to charge up your phone, fire up a space heater or top up your Chevy Volt, you don’t need anyone’s permission. And no one gets notified in advance. You plug in your device and begin to pull electrons from the stream flowing by. We’re conscious of power scarcity when on battery—but when we plug in, we don’t worry about getting a message from the utility saying, “Sorry. All available electricity is already in use. Please try again later.” 

The job of ensuring that enough power is available falls to the independent system operators. Leaving regulatory complexity aside, the ISO coordinates the power generators (e.g. the owners of nuclear power plants or wind turbines) and the “load-serving entities” (the utilities). The generators bid for the right to sell power into a specific geographic market on a particular day and time. The 

ISO begins with an estimate of the amount of energy required. Its auction aims to set the price high enough to entice enough generators into the market. Everyone selling into the market receives the same price for that day and hour.

This is a crazy simplification—power comes in different flavors. Generators bid to offer different kinds of energy and services. The ability to generate power almost immediately, which owners of “pumped storage” facilities can offer, for example, is worth something to the ISO. Plants burning fossil fuel need time to fire up. Other kinds of generation are costly to shut down—nukes, for example. 

Nuclear power plants want to be running all of the time, unless maintenance is required.

The ISOs also pay for capacity—the ability to generate power when needed, even if the plant only runs a few hours a week on average. That’s because we want our air conditioners to work when a heat wave hits in the middle of July—and everyone else does, too. At peak demand, every source of generation is called into service—including many smelly and inefficient oil-fired or coal plants that would be retired if they didn’t get paid to be on standby.

The price a generator bids depends on what it costs to run. If your cost of generating an extra kilowatt hour of energy is, say, 5 cents, then you’ll produce at any higher price.

Enter renewable energy. The cost of renewables is generally in the building, not the running. Although all machines need maintenance, the cost of running a wind farm is very close to zero once the turbines start turning. The same applies to solar. After you install solar panels on your roof, you can pretty much ignore them. You don’t get a bill from the sun for fuel.

In a bidding market, then, the renewable sources will bid low. If your “marginal cost” is a penny, you’re in the money at any higher price. If the market price is, say, 30 cents per kWh, then you make 29 cents, which is a very nice margin.

But there’s a problem: If you own the windfarm or the solar array, you still have to pay back the money you borrowed to build it in the first place. Just like a mortgage payment on an empty house, your lender doesn’t care if you are selling power or not. Currently, the “levelized” cost of renewables—operating cost plus debt divided by expected production—is still above the average cost of a modern natural gas plant. The cost of building solar and wind is dropping, but (with a few exceptions) the average cost is still higher than it is for new fossil fuel generation. And that’s why we subsidize the construction of renewables through tax credits and other incentives. The subsidy cuts the sum that must be borrowed, making the projects bankable. When renewables can serve the entire market demand at a particular day and hour, the market price will drop off a cliff. Owners of renewables will make a bit of money on each kWh, but won’t earn anything extra to pay back their loans. 

The same problem applies to traditional generators. If you run a big fossil plant that employs 300 people, you can’t just pay them when your plant gets called up by the ISO. This imbalance between average cost and marginal cost creates a critical problem for power markets.

The other problem is related to the nature of renewables. Solar cells and wind turbines can’t be dialed up or down. They run or they don’t—total output is driven by the weather, not the ISO’s dispatchers. Until we develop cost-effective mass storage, we will still need sources of electricity that can respond to demand.

This problem has been playing out in New York, although it is natural gas that has precipitated the crisis. Economically, nuclear power looks a lot like wind or solar. Although operating costs are certainly higher than zero, a disproportionate share of the cost of nuclear power is fixed, not variable. Remembering that nukes can’t be turned on and off like a light bulb, the operators are willing to accept a low price per kWh—but they must get additional revenue if the plants are to remain profitable. That’s why Gov. Andrew Cuomo pushed through a subsidy—1.7 cents/kWh—that will enable the Ginna, Fitzpatrick and Nine Mile Point nuclear power plants to stay open. Retaining nuclear power is key to his goal of reducing greenhouse gas emissions 40 percent by 2030. Splitting the environmental baby, Cuomo has also negotiated closure of the twin Indian Point plants in Westchester County. It’s not easy being green.

Kent Gardner is chief economist and chief research officer for the Center for Governmental Research Inc.

3/17/2017 (c) 2017 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.


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