The Inexorable Economic Death of Coal and Nuclear
The Inexorable Economic Death of Coal and Nuclear
Charles Botsford, P.E., Monrovia, Calif.
Coal and nuclear powered generation have provided the backbone of US and world electricity for decades. That dominance is slowly slipping away.
By 2050, neither coal, nor nuclear generation will contribute significantly to the US grid mix. This will be true generally for the rest of the world except for China and India, where coal and nuclear may still contribute 50 percent to the grid mix. However, even this projection depends greatly on the persistence of natural gas-powered generation and the uptake of renewables. The reason for the demise of coal and nuclear is economic.
Coal-fired power plants don’t have particularly high electricity conversion efficiency. Approximately 10,500 British thermal units (BTUs) are required to produce a kilowatt-hour (kWh) of electricity. In contrast, natural gas-fired power plants have gotten ever more efficient over the years and now require less than 8,000 Btu/kWh.
Coal-fired generation had one thing going for it: cheap and plentiful fuel. Coal remains relatively cheap at $3.00-3.50/million Btu, depending on the grade and transportation costs. Natural gas, once highly volatile and prone to large price spikes, is now relatively stable at about $2.50-3.00/million Btu, due primarily to advances in fracking technology.
The combination of fuel cost and plant heat rate (efficiency) leads to the cost of electricity. For example, coal-fired plants produce power at about $30-40/MWh. Natural gas-fired plants produce power at about $25/MWh and wind comes in at $20/MWh, depending on the region. The trick is to produce electricity at a cost less than the price of power for that particular market. The difference between the two is called the spread. For coal, the difference between the cost to produce electricity and the price of power is called the dark spread. For natural gas, this is called the spark spread. The Energy Information Administration (EIA) recently published an analysis that showed the spark spread (natural gas) was quite a bit more robust (profitable) than the dark spread (coal) from January 2016 to July 2017 for the PJM market, which is what should be expected for the lower fuel cost and lower plant heat rate of natural gas.
The Downward Spiral
Since 2005, energy from coal generation has decreased from 170MMWh to about 100MMWh, and the list of announced coal plant retirements is seemingly endless. Coal generation once accounted for over 50 percent of US power, but is now down in the low 30s. US utilities aren’t building new coal plants. All of this happened before the Clean Power Plan, or the repeal thereof. Almost all new grid generation additions for the past ten years have been natural gas, wind, and solar, all of which are driven by superior economics.
As if coal’s unfortunate economics weren’t enough, the problem of climate change, and environmental issues associated with mining and ash disposal, severely stigmatizes the industry. Coal in the US is having a rough economic time, and it will only get worse.
China, India, and the Rest of the World
Beginning in the early 2000s, China, India, and others nations built coal-fired power plants at an accelerated rate. China in particular has relied heavily on coal to power its economic growth and has nearly a terawatt (TW) of coal-fired generation in operation. Over the last few years, however, air pollution problems have caused China to slow significantly the build of coal plants. For example, China is undertaking an effort to provide 4 million homes in northern China with natural gas heating. Indications are that coal use has flattened and may be on the decline.
Other nations are still building coal plants, but are running into the economics of gas-fired plants and the rapidly decreasing cost of renewables.
Can Anything Save Coal? The Grid Resiliency Argument
On September 28, 2017, DOE issued a Notification of Proposed Rulemaking (NOPR) – Grid Resiliency Pricing Rule. The NOPR follows on the heels of the DOE Electricity Markets and Reliability draft report published August 2017. The rule proposed rule would direct the Federal Energy Regulatory Commission (FERC) to provide additional financial support to baseload plants, those that have a 90-day supply of fuel on hand.
The Squirrel Problem
One commenter noted that this is similar to a squirrel stocking nuts for the winter. Historically, most coal facilities have operated with an average of 75 days of coal on-hand. Over, the last year, this average has increased to about 90 days. To be eligible for the DOE-sponsored subsidy, coal plants would have to stock more nuts than they’ve historically needed.
“Baseload” is sometimes used to designate power plants that provide electricity at low generation costs, and is often associated with system reliability. Relative to coal and nuclear, this designation is no longer the case because of their much higher generation costs. Thus, the DOE proposed rule is seen by some as an attempt to provide a crutch to generation that is otherwise not economically viable.
“If your only tool is a hammer…”
If your only tool is a hammer, then every problem looks like a nail. The DOE NOPR views the fuel supply question as their nail, reasoning that ensuring a sufficient fuel supply at “baseload plants” will solve the grid resiliency problem. This ignores DOE’s own analysis that fuel supply emergencies caused less than 0.0001% of electricity supply disturbances from 2012 to 2016. DOE Secretary Perry points to the Polar Vortex, blaming natural gas generation problems as making the situation worse. However, FERC member, Robert Powelson, has reportedly rejected this assertion, referencing coal plant outages during the Vortex caused by frozen coal piles. Other extreme weather events, Hurricane Harvey for example, have caused coal plant outages due to flooded coal piles. Further investigation of outages during the Vortex attributed to natural gas supply shortage may have actually been political, not technical.
Grid resiliency is a much larger problem than fuel supply and requires a broad spectrum of tools to fix. The DOE NOPR also points to the North American Electric Reliability Corporation (NERC) 2017 report on “The State of Reliability” to bolter the claim of the fuel supply nail. However, the bulk of the key findings in this report do not support DOE’s claim. Instead, the NERC report says grid reliability and resiliency priorities are: system protection from misoperation, frequency response, cyber and physical security (e.g. physical attacks on transformers), transmission outages, and severe weather resiliency.
Many progressive electric utilities and grid operators are moving in the direction of distributed energy resources (DERs) to increase grid efficiency, reliability, and resiliency. Market improvements such as California ISO’s energy imbalance market (EIM), allow greater operational reliability and increased diversity of power generation. Transmission and distribution (T&D) improvements provide greater recovery after severe weather events and allow for increased integration of renewables. Technology improvements such as synchrophasor measurements via phasor measurement units (PMUs) provide wide grid visualization and even forensics in the case of a grid outage. DERs can provide highly robust voltage support and frequency response services on a much more rapid time frame than baseload plants, a key priority listed in the NERC report. Finally, microgrids are receiving attention as a way to provide local and regional grid reliability and resiliency.
Buying a new car is generally considered bad debt, while buying a house is generally considered good debt. The coal plants that the DOE-promoted subsidy would apply to are generally fully depreciated, inefficient, and have been paid for many times over. Subsidizing these and nuclear plants on the argument that on-hand fuel supply will increase grid resiliency could be considered bad debt. Investing in progressive grid infrastructure such as cyber security, transmission, voltage and frequency response services, and efficiency could be considered good debt.
Politics, however, often holds sway over technical and economic arguments in the world of rule making. The DOE NOPR directed at FERC, which will no doubt undergo spirited debate, could provide a temporary lifeline to coal and nuclear in the short term. In the long term, the market will provide the lowest cost, highest reliability electricity to the consumer.
Coal, the Final Word
The economics of coal power are poor compared with natural gas and renewables, and will not improve in the long term. Pollution control technology to mitigate carbon emissions from coal plants, is not only costly, but also decreases the operational efficiency, which further worsens the overall economic picture. It is difficult to imagine circumstances that would see the building of a new coal-fired power plant in the US.
You take your car into the shop for an odd clunking sound coming from the engine. An hour later, the mechanic says your engine block is cracked. You ask, how much to fix it? He says he can’t fix it at any price. Worse, they don’t make your block anymore.
That’s what happened to San Onofre. The plant went down due to a steam leak and never started up again—the boiler tubes couldn’t be fixed. Lawsuits ensued.
New construction of nuclear power in the US essentially stopped by the 1990’s. After a 25-year standstill, things got much worse in 2017 as the scandals of Vogtle, VC Summer, and the bankruptcy of Westinghouse unfolded. What a difference a year makes. A year ago, late 2016, the VC Summer plant construction was still a go. Now it’s not. The Westinghouse bankruptcy created havoc, which caused utilities to cancel many projects. It’s not clear whether Vogtle will go forward. Reportedly, Georgia Public Service Commission will decide on Vogtle’s fate February 2018. If Vogtle proceeds, it may well be the last nuclear power plant constructed in the US.
Investors are reluctant to back new nuclear power plants. The cost overruns at Vogtle, for instance, now see estimated total costs topping $25B. However, construction costs are not the only problem. Plant operational costs, which are significant, also factor in fuel and waste transportation costs, decommissioning, cyber-security, and the potential for catastrophic events. On the plus side are the potential for carbon credits.
In many ways, the economics of nuclear power are worse than coal. Poor operational economics, primarily caused by the competition from inexpensive natural gas, have forced the premature retirement of many nuclear plants, even as they’ve renewed their licenses for an additional 20 years. Additional security measures in the wake of 9/11 and the Fukushima event have greatly increased operational costs.
Power plants bid their incremental $/MWhr capacity cost in regional market auctions. For example, natural gas plants bid their power on the order of $25/MWh. Only the newest and largest nuclear plants can compete with that bid rate. Exelon’s Three Mile Island plant in Pennsylvania failed to clear a 2017 PJM Interconnection capacity auction, which followed a failed 2016 bid for 2018-19 and 2019-20. Failing to clear a bid severely limits plant revenue. A Massachusetts Institute of Technology study estimates that two-thirds of the US nuclear fleet have economics in jeopardy due to low electricity demand and low cost natural gas. Well over half of the 61 nuclear plants in the US are not profitable.
Fuel, Waste Handling, and Maintenance Costs
Fuel costs are approximately 15-20% of nuclear power operating costs, which include transportation. Waste disposal could be a large cost if waste were taken off-site and processed. However, most nuclear plant waste is stored on-site while awaiting the build of a nuclear waste storage facility such as the one planned, on and off, at Yucca Mountain. Still, on-site handling and storage of waste is a significant operational cost, most of which is deferred to the decommissioning stage.
Maintenance can be a significant cost, and in some cases, can cause the end of life for a nuclear plant as was the case for San Onofre and many others. As a plant ages, components such as pumps, heat recovery steam generators, and controls become increasingly outdated and at-risk. The cost to maintain can overwhelm the cost of continued operation. This trend is evident by the continual announced retirement of nuclear plants. Age is a source of concern, considering the bulk of US nuclear plants were built between 1970 and 1990.
Largely, the decommissioning costs for nuclear plants are sufficiently funded if the plant operates to its planned life. The Decommissioning Trust Fund (DTF) pays for these costs. Decommissioning typically proceeds according to SAFSTOR for on-site nuclear waste. If a plant closes prematurely, as was the case with San Onofre Nuclear Generating Station, it might take the unusual procedure of DECON, which is the immediate dismantling and decontamination of the plant. This process was chosen for San Onofre because the plant sits on Navy property. However, a premature closure can also mean the decommissioning process becomes extended, sometimes by as much as 60 years, to pay for the DTF shortfall. A third option, ENTOMB, yet to be chosen, requires on-site permanent entombment of radioactive waste. Table 1 is a list of the top ten DTFs for US nuclear plants.
Ratepayers fund the nuclear plant DTF. Over the life of the nuclear power plant the ratepayer pays on the order of a cent per kWh additional to their monthly bill to cover decommissioning.
Cyber security also falls under O&M costs. Actual costs for Information Technology labor is a small percentage of operational costs. However, a recent secretive cyber-attack, code-named “Nuclear 17” has caused concern relative to hacking threats and vulnerabilities.
Catastrophic Event Costs
Nuclear plants worldwide are typically covered for catastrophic failure events by insurance according to various conventions based on the region. US plants and those of 20 other countries fall under the international Convention on Supplementary Compensation for Nuclear Damage (CSC). This insurance has been insufficient for some of the more notable world nuclear catastrophic failure events.
Carbon Credit Subsidies
With no carbon dioxide emissions, many consider nuclear power a major player in the war on climate change. Two state subsidies have been enacted and are currently the subject of legal challenges. The New York Zero Emission Credit subsidy of $8B over a period of twelve years, approved by the Public Service Commission August 2016, provides funding for three New York nuclear power plants. Illinois, in December 2016, passed an energy subsidy. Other states are considering this type of subsidy. However, ratepayers and taxpayers are typically opposed to such subsidies. For example, a poll of Ohio voters overwhelmingly agreed with the notion that the marketplace should decide the fate of power plants.
NOPR, Part 2 – Nuclear Plants
The DOE NOPR, which focuses on “energy and capacity markets”, such as PJM, ISO-NE, and ISO-NY, also pertains to a subset of nuclear plants. Will the DOE NOPR help these plants, some of which are also subject to the pseudo-carbon credit state subsidies, to significantly extend their lives?
New Technology – Hope for the Future?
Many groups have focused on developing small modular reactors (SMRs). On the positive side, are theoretical low construction costs, short construction schedules, low operational costs, and inherent safety. These are termed theoretical because few SMR projects have become operational worldwide. Skeptics say SMRs lack a supply chain for components, have no customers, and are inverted relative to economic scale. The pullout of two major players, Westinghouse and Babcock & Wilcox have hurt the movement. Opposition groups are as vocal relative to SMRs as they are with conventional nuclear plants.
South Korea, the world’s prime example for building nuclear plants on schedule and on budget, announced its intent to cancel lifetime extensions for aged reactors. This announcement follows a previous announcement to move away from coal power due to pollution concerns. If no one will build new coal or nuclear plants, then generation from these two technologies will eventually die. Market economics and aging components will only accelerate their finish.
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