Nuclear subsidies distort competition and increase power prices

Prof. Bernard Weinstein, associate director of the Maguire Energy Institute, writes about the effect of government subsidies on energy prices.

By Bernard Weinstein

Bernard Weinstein
Bernard Weinstein

America is blessed with a diverse portfolio of energy resources. We rank first in the world in oil and natural gas production, No. 1 in nuclear power generation, No. 1 in renewable energy, and No. 2 in coal output.

Indeed, abundant and relatively cheap energy provides much of the basis for our global competitive advantages. What's more, competition between fuels helps to hold down energy prices for households and businesses.

In an ideal world, all energy resources would compete on a level playing field; but in the real world, energy markets are rife with subsidies. Perhaps the most egregious are those afforded wind and solar installations, currently receiving direct federal subsidies of about $12 billion per year in addition to a wide range of state and local tax breaks.

Yet after more than 20 years of such largesse, wind and solar currently provide a mere 6% of the nation's electric power generation.

Apologists for the renewable industry continue to claim that the oil and gas industry receives subsidies dwarfing those going to wind and solar. But they conflate "tax deductions" with "direct subsidies." Tax deductions for oil and gas aren't special favors but rather the standard relief afforded all manufacturers and mining companies to help recognize the costs of operations.

By contrast, subsidies are a direct cash transfer from the government — i.e., taxpayers — to businesses.

In any case, the roughly $3 billion per year in tax deductions taken by the oil and gas industry is a tiny price to pay for the huge benefits this sector produces for the economy and the $86 million in taxes the industry pays daily to the U.S. Treasury.

Now the nuclear power industry, facing strong competition from less expensive natural-gas-fired generation, is begging for subsidies. For example, last year New York offered a huge subsidy to Exelon (EXC) to keep open two nuclear plants located upstate. The state Public Service Commission estimates that the subsidies will cost ratepayers at least $6 billion over the next 12 years. Ironically, New York Gov. Andrew Cuomo is pushing ahead with his plan to shut down the Indian Point nuclear plant north of New York City by 2021.

(Meanwhile, Exelon announced this week that it would close its Pennsylvania-based Three-Mile Island nuclear plant in 2019 because the state is refusing to make alternative-energy subsidies available. Pennsylvania has shown little political interest in subsidizing the Three-Mile Island facility, which suffered a partial nuclear meltdown in 1979 that gained world media attention and set off a wide-ranging debate over nuclear safety).

Illinois has also jumped into the nuclear subsidy game. Last summer, Exelon announced that, absent a rescue bill, it would close two nuclear plants by 2018. In response, the state legislature passed, and the governor signed, a bill in December that provides Exelon and Commonwealth Edison with a $235 million annual credit in each of the next 13 years.

Not surprisingly, in February a group of Exelon's competitors filed a lawsuit against Illinois regulators claiming that the new state subsidy intrudes on federal authority over wholesale energy prices.

Other states are joining the bandwagon. Nuclear subsidy legislation is currently being considered in Connecticut, a bill will soon be introduced in Ohio, and a subsidy scheme is being considered in New Jersey.

Though advocates of nuclear subsidies claim that they'll only boost household electric bills by a few dollars per month, while ensuring that the state retains some of its "zero emissions" power generation, they neglect the long-term impact of higher utility costs on the state's businesses.

For example, one recent study using a sophisticated input-output model found that higher power costs associated with Illinois' nuclear subsidy program would cost the state 43,000 jobs by 2030 and reduce state revenue by $420 million.

Similarly, New York, already one of the most expensive states for operating a business, is likely to lose even more jobs in the years ahead as a result of its nuclear subsidies.

Over time, consumers and businesses are best served by competitive power markets. This is why nearly two-thirds of the states have deregulated electricity and/or natural gas in recent years.

Giving preference to one form of power generation over another through direct subsidies smacks of re-regulation and will invariably bring about higher costs for all electricity users.