Busting the Big Nuclear "Bail-Out" Myth

By Alan Medsker and Michael Shellenberger

Illinois is at grave risk of losing its status as one of America’s clean energy leaders. If it shuts down two of its high-performing nuclear plants, they will be replaced by out-of-state methane gas from fracking.

There are various reasons for this, but one of the biggest is a last-minute intervention by the state’s Attorney General, Lisa Madigan, who claims Illinois ratepayers already bailed out the state’s nuclear plants, and that Exelon is simply seeking corporate welfare.

The truth is starkly different. Illinois nuclear plants were never subsidized by ratepayers using any standard definition of the word "subsidy." By contrast, solar and wind have been heavily subsidized for over a decade — and Attorney General Madigan strongly supports those subsidies.

What we need is fair and equal treatment of all forms of clean energy. Madigan should embrace this principal of fairness and equality.

Let's start at the beginning.

First, Madigan denies that nuclear plants are overwhelmingly replaced by fossil fuels.

In every recent closure of a nuclear plant, from Vermont Yankee to California’s San Onofre, lost nucear power has been replaced almost exclusively by fossil-fueled power. That’s not just a federal issue; the loss of Clinton and Quad Cities means a loss of Illinois jobs, a loss of Illinois grid stability, a loss of clean air and a gain in dirty, polluting emissions in Illinois.

Second, Madigan falsely claims that Illinois nuclear plants have already “benefitted from two rounds of subsidies.”

The claim that Illinois ratepayers “subsidized” nuclear plants requires defining all payments for electricity from nuclear as a subsidy.

As for the alleged “second round” of subsidies from deregulation, Madigan simply misrepresents the situation. Electricity deregulation meant that ratepayers did not pay for all the construction costs of Exelon’s Illinois nuclear plants. In fact, Exelon had to pay some of those costs out of its own pocket because of deregulation.

Here’s why: Exelon’s nuclear plants were built under the old regulated electricity system. Under that system, the capital and construction costs — the plants' mortgages, as it were — were intended to be paid off over several decades by customers paying regulated rates.

But the repayment period was cut short when Illinois deregulated its electricity market in 1998. The remaining capital costs and construction debt the company was supposed to collect could not be recovered in a deregulated market where prices were set by power plants that had already paid off their mortgages. These unrecoverable debts are called “stranded costs.”

In recognition of this problem, the deregulation law allowed Exelon and other utilities to recover stranded costs of nuclear plants (and other generators) by levying a “transition charge” on customers who switched to other electricity providers.

But then watch what happened: provisions in the law limited Exelon to collecting less than half of its stranded costs before transition charges were phased out in 2006.

So contrary to Madigan’s claim, Exelon never recovered all the construction costs for its nuclear plants from ratepayers — either before or after deregulation.

Only industrial and commercial customers paid transition charges, because virtually no residential ratepayers switched suppliers until after 2010. Residential customers did get a 20 percent rate cut under the deregulation act, which saved customers of ComEd, Exelon’s grid-utility arm, $4.27 billion dollars from 1998 to 2006, while ComEd recouped just $1.2 billion in transition charges. ComEd’s transition charges to consumers were more than balanced by residential rate cuts under the deregulation act.

Even if we consider transition charges from 1998 to 2006 to be subsidies for Illinois nuclear plants rather than partial compensation for stranded costs imposed by deregulation—a doubtful interpretation—they cost just 0.7 cents per kilowatt-hour, a fraction of the total subsidies wind and solar receive.

Third, Illinois nuclear plants never got anything like the federal production tax credit, or the federal investment tax credit, or state-mandated REC purchases, or renewable portfolio standards that force utilities to buy renewable power at a premium.

They did get indirect research and development subsidies, mainly as a spin-off of the military’s development of naval reactors. But wind and solar also get government subsidies for R&D.

We agree with Madigan that utilities should have to repay ratepayers if subsidized plants become profitable, but that standard should apply equally to nuclear or renewables.

And for now, the first order of business must be to keep nuclear plants open lest Illinois ratepayers lose these valuable sources of baseload clean energy.

Fourth, Exelon’s management of the Illinois nuclear fleet under deregulation has yielded benefits for air quality and decarbonization that dwarf those of the subsidized Illinois renewables sector.

Environmental Progress supports regulated electricity markets that protect ratepayers while allowing clean-energy producers to grow with stable revenue.

Even so, Exelon’s profits under deregulation in fact produced a huge payoff in clean energy. That’s because, after the 1998 deregulation, the company invested hundreds of millions of dollars in operations and capacity uprates at Clinton and Quad Cities and greatly improved both plants’ performance and reliability.

Quad Cities increased its yearly output of zero-emissions electricity by 63 percent, while Clinton doubled its output. Just the increase in output from Clinton and QC alone, 9,629 gigawatt-hours per year, nearly equals the entire output from the Illinois wind sector last year, 10,733 gigawatt-hours, and eliminates 8.7 million tons of carbon dioxide every year that would have been emitted if the state’s coal plants had continued generating that power.

If nuclear plants are shuttered because of temporarily cheap gas, that lower-cost competition won’t be there when gas prices go back up, as they someday will. Starving Clinton and Quad Cities of a subsidy they need just to spite Exelon is senseless and undermines the state’s environmental goals.

Fifth, Madigan supports federal wind and solar subsidies and rejects far smaller subsidies for nuclear — a blatant contradiction, and one she does not even attempt to justify.

Nuclear is Illinois' main source of zero-carbon power and yet gets no state subsidy. By contrast, there is:

a. federal production tax credit of 2.3 cents per kilowatt-hour for wind;

b. an additional subsidy for wind and solar under Illinois’ renewable portfolio standard. In the 2014-2015 procurement year, ComEd and Ameren paid a subsidy of about 1.15 cents per kwh for Renewable Energy Certificates under the RPS law;

State and federal subsidies for solar and wind together can equal the market price for wholesale power in Illinois. They allow wind farms to charge prices below their production costs and sometimes to bid negative prices for their power.

Negative prices are when power plants have to pay to put their power onto the grid when wind farms are suddenly and often randomly producing power. Like in the middle of the night. When nobody needs it.

This subsidized wind oversupply is a major factor in depressing electricity prices down-state.

The bottom line is this: Clinton and Quad Cities need far smaller subsidies to level the playing field — about half what wind gets.

Sixth, Madigan doesn’t object to profitable solar and wind companies receiving subsidies — why does she object to a profitable nuclear company receiving them?

Wind and solar farms get subsidies even when they’re profitable — why does Madigan want to apply a different standard to Exelon? The reason is obvious: because she doesn’t like nuclear. Indeed, it is notable that Madigan has no complaints about the federal and state subsidies Exelon receives for its downstate wind farm.

The additional capacity revenues nuclear plants receive, and which Madigan criticizes, show just how important nuclear plants are to grid stability. They stem from the wake-up call of the recent polar vortex, when grids came close to collapse after wind, solar, gas and even coal plants were knocked out. That’s why grid managers revamped capacity markets to obtain guarantees of reliability during emergencies and require steep penalties if generators fail to deliver.

Nuclear plants did well in auctions because they face lower risks of unscheduled outages than do other sources. If Illinois loses Clinton and Quad Cities, there will be less supply to meet those capacity markets for reliable power; either capacity payments will go up or the state’s electricity supply will be less stable and secure.

Seventh, Madigan claims wind and solar and competitive and yet still advocates that they receive subsidies.

Writes Madigan: “In addition, wind and solar are cost competitive with gas and coal and are only getting cheaper.”

If that were true, why does Madigan advocate that they receive subsidies?

Eighth, letting Illinois nuclear plants close means that Illinois will run in place or go backwards — and increase emissions.

Writes Madigan: “Encouraging renewables and energy efficiency will allow Illinois to meet our Clean Power Plan obligations cost effectively and without putting ratepayers on the hook to further pad the bottom line of a profitable company.”

Her grandstanding is hypocritical. Madigan has no problem with Exelon fattening on subsidies for wind power, yet insists that not a penny go to their nuclear plants, which are the state’s best clean-energy assets. This is neither smart consumer policy nor wise climate policy; it’s the dogma of a small group of anti-nuclear ideologues and the wind, solar and gas companies that fund them.

In sum: nuclear plants are indispensable social assets that produce a public good in the form of abundant clean energy. Regardless of Exelon’s bottom line, everyone in Illinois has a stake in keeping them open. Longer-term, what we need is fair and equal treatment of all forms of clean energy. Madigan should embrace this principal of fairness and equality.

Michael ShellenbergerJune 20, 2016Comment