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Energy Markets Are Blind to Critical Factors in the Electric Grid

Using the short-term energy markets to make long-term decisions about the electric grid will irreversibly damage the system’s diversity and resiliency, the nuclear industry told the Federal Energy Regulatory Commission on Monday, as the Commission prepared to take up a request by the Secretary of Energy to reform the rules for regional electricity pricing.

The markets are well set up to minimize short-term electricity costs, but they are blind to “critical non-price factors, such as resiliency, fuel diversity and environmental performance,” the Nuclear Energy Institute (NEI), the industry’s trade association, said in comments filed Monday with the Commission, known as FERC.

Using the short-term energy markets to make long-term decisions about the electric grid will irreversibly damage the system’s diversity and resiliency, the nuclear industry told the Federal Energy Regulatory Commission on Monday.

FERC sets the ground rules for the competitive energy markets that are now in place over more than half the country. But those rules have turned crucial decisions over to a very narrow set of considerations, as if the system operated in a “price-only vacuum,” NEI said in its comments.

The markets set prices that reflect the value of the electricity generated, and most of them also pay for being available to generate when needed, called “capacity.” They do not take account of diversity or how the system hedges its bets by relying on more than one or two technologies, and they do not consider the nuclear plants’ contribution to the resilience of the grid, the NEI comments stressed.

Driven largely by an abundance of natural gas, wholesale electricity prices have declined precipitously in the last several years, but energy sales are the source of most of the revenue for 43 reactors in market areas. It is lower revenues, not higher costs, that threaten the continued operation of the nuclear reactors.

The price of fossil fuels varies over time, and the supply is vulnerable to physical disruptions, market conditions and man-made problems. Natural gas is subject to sudden price increases and scarcity, NEI said in its comments.

In contrast to that just-in-time fuel delivery system, nuclear plants typically refuel once every 18 to 24 months and need only a few truckloads of fuel to run for that period. The price of fuel is a relatively small segment of their production cost, about 20 percent, so consumers are insulated from fuel price variations. Reactors take years to build, and keeping them ready to run costs money; hence when an owner decides to retire a plant, the company takes irrevocable steps quickly. The Nuclear Regulatory Commission doesn’t even have a rule for how to re-activate an operating license.

More than 11,000 megawatts of nuclear generating capacity has been retired in recent years or is scheduled to be shut prematurely. Since those plants run more hours of the year than any other – 92 percent last year – this represents an enormous amount of energy. The same capacity in wind or solar generation would produce one-third to one-sixth as much actual electricity.

On September 28, Energy Secretary Rick Perry proposed that electricity generators with 90 days of fuel stored on site should be compensated for their costs. He asked FERC to rule within 60 days, which reflects the urgency of the problem but is unusually prompt for the commission. Secretary Perry’s proposal opens the door for consideration of a variety of reforms. NEI favors the cost-based system proposed by Mr. Perry, until some broader solution can be worked out.

Allowing short-term energy price considerations to dictate long-term policy runs counter to the federal government efforts that have made resiliency a key component of its national security strategy for more than 20 years.

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