Costly economic distortions are the inexorable result of government bailouts for specific industries, the justifications for which are almost always deeply dubious.
Consider Section 3203 of the Senate Energy Infrastructure Bill. It would establish a credit program of $ 6 billion over four years from fiscal year 2022 for nuclear power plants “which should cease operations due to economic factors”. Credits, which would cease payment after 2031, would be defined as a certain dollar amount per megawatt hour (mWh) of production. And just as the wind power generation tax credit has been extended 13 times, it’s hard to believe that once in place, a similar subsidy for nuclear power will fail. semi-permanent.
And of course: the bill orders the Comptroller General to submit by January 1, 2024 “any recommendation to renew or extend the appropriations”.
The bill makes it clear that the apparent rationale for the credits is “the potential additional air pollutants that would result from the [given] nuclear reactor were to cease operations. … And be replaced by other types of electricity production.
But the bill does not ask anyone to investigate or even speculate whether the hypothetical increase in air pollutants resulting from the closure of a nuclear power plant would result in a violation of national air quality standards. (NAAQS) in the relevant geographic region for one of the pollutants (criteria) covered by the Clean Air Act.
Given that the Clean Air Act requires the respective NAAQS to “protect public health” with “an adequate margin of safety”, it is hard to believe that shutting down a limited number of reactors and replacing them with, say, combined cycle gas production would result in ambient air quality greater than a given NAAQS. “Public health” would continue to be protected
Forget about air pollution. This proposed subsidy is a bailout, that is, a significant economic distortion to be added to all the other distortions inflicted by various policies on the electricity markets. Wouldn’t it be better to reduce this set of economic losses rather than aggravate them? The actual unpublished justifications for this proposal are extremely weak.
Competitive pressures on the prices of inexpensive natural gas-fired generation. Competition is the very basis of a market economy, and failure to anticipate the sharp drop in natural gas prices during nuclear investments does not justify a federal bailout. Investors and executives who are considering large investments know that there are significant risks, known and unknown, and make their decisions accordingly. The proposed subsidy would transfer these risks to taxpayers as a whole, and there is no reason to believe that such a transfer is effective.
Nuclear operating costs of one unit or several units. Two of the nuclear plants in desperate need of operating subsidies (Davis Besse and Perry, both in Ohio) are single-unit plants, with higher operating costs per mWh than multi-unit plants, because their fixed overheads are spread over less and because they cannot achieve economies of scale similar to those of multi-unit plants when negotiating service and fuel contracts. There is no reason for taxpayers to bear the resulting economic burdens.
Potential mismanagement. It is no secret that business management, like all human activities, varies in terms of the effectiveness of decisions taken and the conduct of operations. Not only does the proposed legislation fail to take into account the cost effects of possible mismanagement, it also reduces the economic penalty for such inefficiency.
Costly state regulation and the effects of “renewable portfolio” or “clean energy” standards. State-level regulation, imposed by legislatures, utility commissions and other official offices, obviously creates costs and distortions, often considerable. In addition, about 30 states require that some of the electricity produced or consumed in the state be generated by certain technologies (for example, wind and solar power), and these requirements often exclude nuclear electricity.
Is there a reason why federal taxpayers should be forced to bear the consequences of state laws and regulations? State policy reforms that produce negative results must be implemented at the state level; a federal bailout reduces the incentives for such reforms. Owners of nuclear power plants should make their case before state legislatures.
The distortions created by the federal wind power tax credit. The only argument in support of the proposed nuclear subsidy that is not entirely false is the effect of the Wind Power Generation Tax Credit (CTP), currently between $ 15 and $ 25 per mWh. The PTC thus allows wind generators to reduce the prices they offer for sales in bulk electricity markets – sometimes to negative levels – while “earning” positive net prices.
This is obviously unfair competition: nuclear power plant operators do not receive such subsidies, and for technical engineering reasons, it is difficult if not impossible for nuclear power plants to increase and reduce production by response to short-term price fluctuations.
Thus, one could argue that the proposed nuclear subsidy corrects the competition problem created by TPC, but this is non-sequencing. If the distortions created by given policies are to be corrected by incorporating new distortions, over time the entire effective economy will become centrally planned, as one set of distortions after another is adopted to address the issues. problems created by the previous ones. The right course is to end wind PTC and not bail out nuclear power plants with another subsidy program.
Note also that the prospective “profitability” of a given nuclear power plant depends on assumptions about prices, operating costs and other parameters which are subject to significant uncertainties. A study by the former chief economist of the PJM Regional Transmission Organization projects net operating profits for 2021 of $ 30.4 million and $ 47.5 million for the two Ohio factories referenced below. above, respectively. Another study by the PJM itself projects operating losses in 2021 for these units of $ 28.8 million and $ 33.2 million, respectively.
In short, such calculations are far from simple, and no one will be surprised when applicants for new nuclear credits find the means to increase the size of the operating losses they will claim.
The case for this subsidy proposal is extremely weak, and the central principle against it is powerful: let us reduce rather than increase the distortions created by government economic policies. Failure to keep this principle in mind will result in continued economic loss for all of us.
Benjamin Zycher is a senior fellow at the American Enterprise Institute.