New York’s nuclear subsidies contradict economic principles Credits to keep nuclear generation online will not lower emissions, argues the R Street Institute’s Devin Hartman, Utility Dive, 28 Feb 17 In New York State’s massive zero-emission credits (ZECs) program kicks off in April, it will begin a 12-year process of unloading $7 billion in subsidies on unprofitable nuclear plants. Astoundingly, this staggering price tag will yield minimal, if any, immediate climate benefit. Indeed, after factoring in the damage ZECs will do to competitive electricity markets, the plan may actually undermine the long-term goal of reducing greenhouse gas emissions.
The main reason ZECs are unlikely to yield incremental emissions reductions is New York’s participation in the Regional Greenhouse Gas Initiative (RGGI), a regional carbon dioxide emissions trading program. Imposing new policies under a binding emissions-trading program will affect the market price of allowances without changing emissions levels. Should RGGI remain binding, subsidizing nuclear will merely avoid emissions reductions elsewhere…….
The underlying market failure is that pollution is underpriced, not that clean energy is overpriced. Unsurprisingly, economists overwhelmingly prefer emissions pricing (e.g., tax) as the means to address pollution.
As a mirror image of taxes, subsidies can, in theory, provide incentives to reduce emissions, but in practice, they often encourage economically inefficient and environmentally unsound decisions. The ability of nuclear generators to displace emissions from fossil plants varies dramatically by time and location. ……
For example, nuclear generation in wind-heavy areas with transmission constraints generally reduce emissions less than in locales with high coal generation. Emissions pricing accounts for this by building pollution costs into dynamic, sub-regional supply curves. Subsidies do not, resulting in inaccurate compensation for nuclear or other low-emissions resources.
Subsidies are grossly inferior in application, as well as in design. Markets pick different, lower-cost winners than governments……….
Unlike emissions pricing, subsidies create a public financial burden and encourage poor economic behavior from recipients. Production subsidies like ZECs lower the effective costs of operating a power plant. This encourages owners to offer into electricity markets below their true cost, which can artificially suppress market-clearing prices and distort market signals for resource investment……..
Subsidies also encourage poor political behavior. They establish entrenched interests that contribute to an ongoing cycle of subsidization. An examination of bailout policy history reveals that “early bailouts set a stage that makes subsequent requests for assistance more difficult to resist.” This underscores the challenge of using nuclear subsidies as a transitional policy to efficient emissions pricing. Ignoring the political economy of subsidies obscures the complete economic picture.
The economist Frédéric Bastiat once remarked that “the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”
Beyond the visible price tag, the foreseen effects of ZECs will severely undermine the health of competitive wholesale electricity markets administered by the New York Independent System Operator (NYISO). Investors in competitive markets make decisions based on forward price expectations. Healthy price formation requires quality market design and minimal political interference. New York’s nuclear subsidies unexpectedly retain massive blocks of electric capacity that has already disrupted forward prices. This renders once-profitable investments uneconomic overnight, upends investor confidence and deters or requires a risk premium for new investment……
If New Yorkers truly care about reducing emissions and providing a model for the world, they should remain committed to emissions pricing and embrace competitive electricity markets. http://www.utilitydive.com/news/new-yorks-nuclear-subsidies-contradict-economic-principles/436978/
