Tag Archives: GHG

Calculating the risk reduction benefits of closing Germany’s nuclear plants

Max Aufhammer at the Energy Institute at Haas posted a discussion of this recent paper reviewing the benefits and costs of the closure of much of the German nuclear fleet after the Fukushima accident in 2011.

Quickly reading the paper, I don’t see how the risk of a nuclear accident is computed, but it looks like the value per MWH was taken from a different paper. So I did a quick back of the envelope calculation for the benefit of the avoided consequences of an accident. This paper estimates a risk of an accident once every 3,704 reactor-operating years (which is very close to a calculation I made a few years ago). (There are other estimates showing significant risk as well.) For 10 German reactors, this translates to 0.27% per year.

However, this is not a one-off risk, but rather a cumulative risk over time, as noted in the referenced study. This is akin to the seismic risk on the Hayward Fault that threatens the Delta levees, and is estimated at 62% over the next 30 years. For the the German plants, this cumulative probability over 30 years is 8.4%. Using the Fukushima damages noted in the paper, this represents $25 to $63 billion. Assuming an average annual output of 7,884 GWH, the benefit from risk reduction ranges from $11 to $27 per MWH.

The paper appears to make a further error in using only the short-run nuclear fuel costs of $10 per MWH as representing the avoided costs created by closing the plants. Additional avoided costs include avoided capital additions that accrue with refueling and plant labor and O&M costs. For Diablo Canyon, I calculated in PG&E’s 2019 ERRA proceeding that these costs were close to an additional $20 per MWH. I don’t know the values for the German plants, but clearly they should be significant.

CCAs don’t undermine their mission by taking a share of Diablo Canyon

Northern California community choice aggregators (CCAs) are considering whether to accept an offer from PG&E to allocate a proportionate share of its “large carbon-free” generation as a credit against the power charge indifference adjustment (PCIA) exit fee.  The allocation would include a share of Diablo Canyon power. The allocation for 2019 and 2020; an extension of this allocation is being discussed on the PCIA rulemaking.

The proposal faces opposition from anti-nuclear and local community activists who point to the policy adopted by many CCAs not to accept any nuclear power in their portfolios. However, this opposition is misguided for several reasons, some of which are discussed in this East Bay Community Energy staff report.

  • The CCAs already receive and pay for nuclear generation as part of the mix of “unspecified” power that the CCAs buy through the California Independent System Operator (CAISO). The entire cost of Diablo Canyon is included in the Total Portfolio Cost used to calculate the PCIA. The CCAs receive a “market value” credit against this generation, but the excess cost of recovering the investment in Diablo Canyon (for which PG&E is receiving double payment based on calculations I made in 1996) is recovered through the PCIA. The CCAs can either continue to pay for Diablo through the PCIA without receiving any direct benefits, or they can at least gain some benefits and potentially lower their overall costs. (CCAs need to be looking at their TOTAL generation costs, not just their individual portfolio, when resource planning.)
  • Diablo Canyon is already scheduled to close Unit 1 in 2024 and Unit 2 in 2025 after a contentious proceeding. This allocation is unlikely to change this decision as PG&E has said that the relicensed plant would cost in excess of $100 per megawatt-hour, well in excess of its going market value. I have written extensively here about how costly nuclear power has been and has yet to show that it can reduce those costs. Unless the situation changes significantly, Diablo Canyon will close then.
  • Given that Diablo is already scheduled for closure, the California Public Utilities Commission (CPUC) is unlikely to revisit this decision. But even so, a decision to either reopen A.16-08-006 or to open a new rulemaking or application would probably take close to a year, so the proceeding probably would not open until almost 2021. The actual proceeding would take up to a year, so now we are to 2022 before an actual decision. PG&E would have to take up to a year to plan the closure at that point, which then takes us to 2023. So at best the plant closes a year earlier than currently scheduled. In addition, PG&E still receives the full payments for its investments and there is likely no capital additions avoided by the early closure, so the cost savings would be minimal.

“Making the perfect the enemy of the better” for a carbon tax

In an opinion article published on Utility Dive, Kenneth Costello argues that adopting a carbon tax would be a mistake. As he says, “(i)nstead of a carbon tax, why not give more consideration to adaptive strategies, which can evolve over time in response to new information?” His arguments make several key errors and underestimate the political will required to deliver his preferred option.

We need not rely on the social cost of carbon (SCC) to set a tax. Instead of using a benefit-cost approach implied by the SCC, we can use a cost-effectiveness approach by setting the tax to achieve an expected amount of greenhouse gases reduction. This is really no different than how we conduct most of our private transactions–we don’t directly weigh the monetary benefits of buying a new car against its costs–we decide what type of car that we want and then spend the money to buy that car. We may not achieve the mythical “positive net benefits” using such a strategy, but the the truth is that benefit-cost analysis is problematic in the context of climate change, as Martin Weitzmann among others pointed out.

We have a good idea of how increased prices that would result from a carbon tax impact demand, contrary to Costello’s assertion. We have seen that over and over with changes in gasoline and electricity prices in the last half century. (One paper found that the early CAFE standards did not affect automobile fleet fuel economy until gas prices fell in 1984.) We can adaptively manage a carbon tax (which also can be implemented as a global trade tariff framework) to steer toward our emissions reduction target.

Costello instead proposes that we focus solely on climate adaptation by hardening our infrastructure and other measures. This illustrates a lack of understanding of the breadth of the expected impacts and the inability of a large segment of the world’s population to undertake such mitigation without a large wealth transfer. Further, such adaptation focuses largely on the direct impacts to humans and ignores the farther ranging ones on our global environment. Those latter effects, such as ocean acidification and melting of the tundra, can lead to catastrophic outcomes that cannot be readily adapted to, no matter what is spent. And there other effects that that we may not even know about. Focusing so narrowly on what might be adaptive strategies will lead to a gross underestimation of the costs to adapt.

Finally, Costello overestimates the political barriers to implementing and managing a carbon tax and overestimates the political will to implement adaptation strategies. Contrary to his assertion, environmental groups such as EDF and NRDC have been at the forefront of using prices and taxes to regulate environmental pollutants. (I have worked for several of them on such proposals.) Yes, politicians want to avoid taxes, but that reflects the more general problem of wanting to avoid any hard choices. And we only need to look at the state of the U.S. infrastructure to see how difficult it is to persuade the political system to make the investments that Costello recommends. This will be a tough road either way, but the carbon tax option cannot be simply dismissed based on Costello’s analysis.

 

Our responsibility to our children

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Greta Thunberg’s speech at the UN has sparked a discussion about our deeper responsibilities to our future generations. When we made the huge effort to fight World War II, did we ask “how much will this cost?” We face the same existential threat and should make the same commitment. We can do this cost effectively, and avoid making most stupid decisions, but asking whether this effort is worth it is now beyond question. We will have to consider how to compensate those who have invested their money or their livelihoods in activities that we now recognize as damaging to the climate, and that will be an added cost to the rest of us. (And we may see this as unfair.) But we really have no choice.

J. Frank Bullit posted on “Fox and Hounds” a sentiment that reflects the core of opposition to such actions:

What if the alarmists are wrong, yet there is no counter to the demands of enacting economic and energy policies we might regret?”

So our energy costs might be a bit more than it would have otherwise, but we get a cleaner environment in exchange. And even now, renewable energy sources are competing well on a dollar to dollar basis.

On the other hand, if the “alarmists” are correct, the consequences have a significant probability of being catastrophic to our civilization, as well as our environment. We all have insurance on our houses for events that we see as highly unlikely. We pay that extra cost on our house to gain assurance that we will recover our investments if such unlikely events occur. These are costs that we are willing to accept because we know that the “alarmists” have a point about the risks of house fires. We should be taking the same attitude towards climate change assessments. It’s not possible to prove that there is no risk, or even that the risk is tiny. And the data trends are sufficiently consistent with the forecasts to date that the probabilities weigh more towards a likelihood than not.

Unless opponents can show that the consequences of the alarmists being wrong are worse than the climate change threat, we have to act to mitigate that risk in much the same way as we do when we buy house insurance. (And by the way, we don’t have another “house” to move to…)

U. of Chicago misses mark on evaluating RPS costs

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The U. of Chicago just released a working paper “Do Renewable Portfolio Standards Deliver?” that purports to assess the added costs of renewable portfolio standards adopted by states. The paper has two obvious problems that make the results largely useless for policy development purposes.

First, it’s entirely retrospective and then tries to make conclusions about future actions. The paper ignores that the high initial costs for renewables was driven down by a combination of RPS and other policies (e.g. net energy metering or NEM), and on a going forward basis, the renewables are now cost competitive with conventional resources. As a result, the going forward cost of GHG reductions is much smaller than the historic costs. In fact, the much more interesting question is “what would be the average cost of GHG reductions by moving from the current low penetration rate of renewables to substantially higher levels across the entire U.S., e.g., 50%, 60% etc. to 100%?” The high initial investment costs are then highly diluted by the now cost effective renewables.

Second, the abstract makes this bizarre statement “(t)hese cost estimates significantly exceed the marginal operational costs of renewables and likely reflect costs that renewables impose on the generation system…” Um, the marginal “operational” costs of renewables generally is pretty damn close to zero! Are the authors trying to make the bizarre claim (that I’ve addressed previously) that renewables should be priced at their “marginal operational costs”? This seems to reflect an remarkable naivete on the part of the authors. Based on this incorrect attribution, the authors cannot make any assumptions about what might be causing the rate difference.

Further, the authors appear to attribute the entire difference in rates to imposing an RPS standard. The fact is that these 29 states generally have also been much more active in other efforts to promote renewables, including for customers through NEM and DER rates, and to reduce demand. All of these efforts reduce load, which means that fixed costs are spread over a fewer amount of kilowatt-hours, which then causes rates to rise. The real comparison should be the differences in annual customer bills after accounting for changes in annual demand.

The authors also try to assign stranded cost recovery as a cost of GHG recovery. This is a questionable assignment since these are sunk costs which economists typically ignore. If we are to account for lost investment due to obsolescence of an older technology, economists are going to have go back and redo a whole lot of benefit-cost analyses! The authors would have to explain the special treatment of these costs.

Why do economists keep producing these papers in which they assume the world is static and that the future will be just like the past, even when the evidence of a rapidly changing scene is embedded in the data they are using?

Moving beyond the easy stuff: Mandates or pricing carbon?

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Meredith Fowlie at the Energy Institute at Haas posted a thought provoking (for economists) blog on whether economists should continue promoting pricing carbon emissions.

I see, however, that this question should be answered in the context of an evolving regulatory and technological process.

Originally, I argued for a broader role for cap & trade in the 2008 CARB AB32 Scoping Plan on behalf of EDF. Since then, I’ve come to believe that a carbon tax is probably preferable over cap & trade when we turn to economy wide strategies for administrative reasons. (California’s CATP is burdensome and loophole ridden.) That said, one of my prime objections at the time to the Scoping Plan was the high expense of mandated measures, and that it left the most expensive tasks to be solved by “the market” without giving the market the opportunity to gain the more efficient reductions.

Fast forward to today, and we face an interesting situation because the cost of renewables and supporting technologies have plummeted. It is possible that within the next five years solar, wind and storage will be less expensive than new fossil generation. (The rest of the nation is benefiting from California initial, if mismanaged, investment.) That makes the effective carbon price negative in the electricity sector. In this situation, I view RPS mandates as correcting a market failure where short term and long term prices do not and cannot converge due to a combination of capital investment requirements and regulatory interventions. The mandates will accelerate the retirement of fossil generation that is not being retired currently due to mispricing in the market. As it is, many areas of the country are on their way to nearly 100% renewable (or GHG-free) by 2040 or earlier.

But this and other mandates to date have not been consumer-facing. Renewables are filtered through the electric utility. Building and vehicle efficiency standards are imposed only on new products and the price changes get lost in all of the other features. Other measures are focused on industry-specific technologies and practices. The direct costs are all well hidden and consumers generally haven’t yet been asked to change their behavior or substantially change what they buy.

But that all would seem to change if we are to take the next step of gaining the much deeper GHG reductions that are required to achieve the more ambitious goals. Consumers will be asked to get out of their gas-fueled cars and choose either EVs or other transportation alternatives. And even more importantly, the heating, cooling, water heating and cooking in the existing building stock will have to be changed out and electrified. (Even the most optimistic forecasts for biogas supplies are only 40% of current fossil gas use.) Consumers will be presented more directly with the costs for those measures. Will they prefer to be told to take specific actions, to receive subsidies in return for higher taxes, or to be given more choice in return for higher direct energy use prices?

The two problems to be addressed head on by nuclear power advocates

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Nuclear power advocates bring up the technology as a supposedly necessary part of a zero-GHG portfolio to address climate change. They insist that the “next generation” technology will be a winner if it is allowed to be developed.

Nevertheless, nuclear has two significant problems beyond whatever is in the next generation technology:

  1. Construction cost overruns are the single biggest liability that has been killing the technology. While most large engineering projects have contingencies for 25-30% overruns, almost all nuclear plants have overruns that are multiples of the original cost estimates. This has been driving the most experienced engineering/construction firms into bankruptcies. Until that problem is resolved, all energy providers should be very leery of making commitments to a technology that takes at least 7 years to build.
  2. We still haven’t addressed waste disposal and storage over the course of decades, much less millennia. No other energy technology presents such a degree of catastrophic failure from a single source. Again, this liability needs to be addressed head on and not ignored or dismissed if the technology is to be pursued.