Electricity Markets Undervalue Nuclear Power Plants
March 2014
Key Points
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Electricity markets must accord value to nuclear energy’s attributes—including large-scale electricity
production, clean air, price stability and the highest reliability of any electric generating source—or
these benefits may gradually disappear. By undervaluing nuclear power plants, current market policies
and practices threaten the diversity of our nation’s generating portfolio and our ability to meet environmental goals.

The U.S. electric sector is experiencing a period of sustained economic stress because of stagnant
electricity demand, low energy prices and the need for large capital investments to replace aging
infrastructure. The situation is particularly difficult for nuclear power plants in merchant markets that
are experiencing price suppression. Particularly at risk are the older, smaller plants—like Kewaunee in
Wisconsin, which closed in 2013, and Vermont Yankee in Vermont, which will shut down late this year.
However, large nuclear energy facilities also may be at risk in some markets.

Competitive electricity markets are not producing price signals to stimulate investment in new
generating capacity—with the exception of natural gas—or to support continued operation of existing
power plants. This is clear from assessments of these markets in New England, the Midwest, Texas
and elsewhere by independent firms commissioned to monitor market performance. Inefficient pricing
may stem from actions by regional transmission operators, weaknesses in market design, or government policies that enable low or negative pricing for some types of electric generation.

America’s 100 nuclear power plants generate 20 percent of the country’s electricity—and nearly twothirds of its carbon-free electricity. Shutting down a nuclear plant means a loss of hundreds of jobs, a
sharp drop in tax revenue for nearby communities, and a surge in greenhouse gas emissions as other
power sources (usually natural gas) fill the gap in electricity generation. Most mainstream analyses of
climate change policy show that nuclear energy is essential to reduce carbon emissions.

The continued economic viability of nuclear power plants depends on several factors, including
electricity and capacity prices, natural gas prices, regional growth in electricity demand, economic
growth in the region, and political sentiment. The outlook also depends on what actions, if any, policymakers take to address market defects.
Electricity Market Deregulation
About half of the states restructured their electricity markets in the late 1990s, creating competitive
markets in which electricity generation, transmission and distribution are separate enterprises. The
companies that sell electricity in these “merchant” markets may own and operate their own power
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generating facilities or buy electricity from generating companies and resell it to their customers. These
markets are not fully competitive because maximum prices are capped and some electricity sources are
subsidized. Merchant markets rely on price signals to provide incentive for investment in new electricity
generation.
Restructured, competitive electricity markets can work well. However, they are not producing pricing
signals to support investment in a diverse mix of electric generating facilities or to support continued
operation of existing capacity.
For example, Potomac Economics identified market issues in ERCOT, the independent system operator that
serves most of Texas. The company compared a net revenue analysis for four types of hypothetical
generating facilities in 2011 and 2012—natural gas combined cycle, natural gas combustion turbine, coal
and nuclear. The results indicated that ERCOT markets “would not have provided sufficient revenues to
support profitable investment” in any of them. “Investment will only occur when the total net revenues
expected by the investor are greater than its entry costs. … These sources of revenue must be available
to all resources, both new and existing, in order to facilitate efficient investment, maintenance, and
retirement decisions by all suppliers.”
Similarly, Potomac Economics found that electricity price signals in the Midwest would not support private
investment in new resources. “This resource adequacy concern is likely to rise as environmental
regulations, increasing wind output, and low natural gas prices accelerate the retirements of coal-fired
resources in the medium term.”
Potential Loss of Nuclear Generation Has Implications
For Price Volatility and Reliability of Supply
Absent the creation of new market mechanisms, it is not clear whether merchant markets will stimulate
investment in anything but the lowest-cost, short-term options. This typically is natural gas-fired
generation because of the relatively low initial capital cost of these facilities. However, this has implications
for energy costs. UBS Securities predicted in 2013 that “the ongoing replacement of large fixed-cost
structure plants, with lower capital cost, but higher dispatch cost units, will increasingly drive greater
energy market volatility.”
The average total electricity cost at a small nuclear plant like Kewaunee and Vermont Yankee is about $50
per megawatt-hour. A new combined-cycle natural gas plant is competitive if gas prices remain at or below
$4 per million BTU. However, natural gas prices historically are volatile, and the cost of generation from a
natural gas-fired plant is sensitive to fuel price. At $5 per MMBtu for natural gas, the per-megawatt cost
rises to $57; at $6 per MMBtu, the estimated cost is $64 per megawatt-hour.
The volatility of natural gas prices was evident during the polar vortex in early January. While the dayahead spot price at the Henry Hub Jan. 6-7 was just $4.50 per MMBtu, the price reached $13.97 per
MMBtu at the Chicago Citygate, $34.14 at the Algonquin Citygate near Boston, $56.59 at Transco Zone 6
in New York, and $72.43 per MMBtu at Transco Zone 5 in the mid-Atlantic.
Conclusion
Nuclear energy is essential to meeting our nation’s economic, energy and environmental goals. It is vital
that policymakers address the market issues that threaten the economic viability of even the most costefficient nuclear power plants. Unless prompt action is taken, more valuable energy assets could be at risk
of shutting down.
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