What could push up energy costs and stall the growth of manufacturing in the United States? Dangers abound, but what's most ominous is a deliberate effort to increase the cost of electricity to support uncompetitive power plants.
Subsidizing money-losing nuclear reactors is the latest misstep in the long history of overzealous government intervention in the energy marketplace. State legislatures in New York and Illinois have approved as much as $10 billion in subsidies through zero-emission credit programs to keep aging nuclear plants open for the next decade. Lawmakers in Ohio, Pennsylvania, Connecticut and New Jersey are considering the same.
But in an era in which "no new taxes" is a sacred cow, New York and Illinois have invented another, creative way to raise the funds they need for subsidies, at the expense of the public.
This time, the consumer will not be victimized as a taxpayer, but as utility ratepayer, to keep money-losing nuclear plants operating. The two states have launched virtually identical programs that would reward nuclear plants with zero-emission credits tied to the plants' clean-air attributes. The credits would be purchased by electric utilities and passed along as higher rates for households, businesses, and industries – and priced based on the social cost of carbon.
Propping up nuclear plants, some of which have been losing money for years, is counterproductive and wrong. While guaranteeing a market for nuclear power might enable a distressed plant to continue operating for a few years, it won't bring about needed improvements in nuclear technology that would allow nuclear power to compete with low-carbon shale gas. And it will distort energy markets by favoring nuclear power over other options, saddling ratepayers with higher electricity costs.
The subsidies are being challenged in federal court by "merchant" power producers who are arguing that they intrude on the Federal Energy Regulatory Commission's jurisdiction over wholesale markets.
The cost of subsidies adds up. If every reactor across the Northeast and Mid-Atlantic States winds up with subsidies at the same level as those in New York and Illinois, ratepayers would need to pay an additional $3.9 billion annually, according to Bloomberg Intelligence. Hardest hit will be industries that use large amounts of electricity.
The company behind this grand plan is Exelon, a Chicago-based utility that owns the largest number of nuclear plants in the U.S. Exelon threatened to shutter three nuclear plants in Illinois after the company said it had lost $700 million in the last few years from operating the plants. Exelon also threatened to close money-losing nuclear plants it owns in New York. In both states, Exelon maintains that since carbon-free nuclear power doesn't contribute to global warming, nuclear plants should receive a premium to help level the playing field with natural gas and wind power.
But using a specious environmental argument to subsidize money-losing nuclear plants is indefensible. There seems to have been no particular logic to the bailouts of virtually-useless and technologically-backward nuclear plants in New York and Illinois – except the urge to save the jobs of nuclear plant workers. It would make more sense to retire the nuclear plants and instead use cheap natural gas to meet energy needs, while providing assistance to the workers and communities near the nuclear plants.
Electricity users are best served through market competition. If aging nuclear power plants cannot compete, handing out cash to utilities is not the answer. The plants will never get back on their feet. And the utilities aren't going to use bailouts to innovate or improve operations.
The cost of operating aging plants will only increase in the years ahead. While the cost of other low-emissions technologies continues to decline, as is the case with natural gas and renewables, nuclear-generated electricity is getting more expensive.
We are in a period of rapid innovation in the energy marketplace. The shale revolution has delivered low-cost and abundant natural gas that is driving down energy costs for consumers across the board. More energy efficient technologies, along with improvements in demand management, are driving down the demand for electricity. But we also need market-competitive energy solutions that reduce costs for electricity ratepayers while improving environmental performance.
There is still a place for nuclear power, with the development of more affordable modular and advanced reactors. But subsidizing what isn't working – and putting off needed innovations in the design and construction of nuclear plants – is not the answer.
We must ask ourselves if we want to let states pass the bill on to electricity users in the form of a multibillion-dollar bailout for distressed nuclear plants. Allowing this to happen when the energy market is working on behalf of electricity users by driving down electricity costs would be a colossal blunder.
Mark J. Perry (@Mark_J_Perry) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan's Flint campus.
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