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October 29, 2012
Paul Gipe

Is the Unthinkable Possible: Feed-in Tariffs for Coal and Nuclear?


 

Environmentalists have long advocated feed-in tariffs as a public policy mechanism to spur massive development of renewable energy. However, as a policy mechanism, feed-in tariffs are technology neutral. They can be used to pay for fossil-fired generation as well as nuclear power.

Some opponents of nuclear power have gone so far as to call for feed-in tariffs for nuclear. They reason that if the nuclear industry had to publicly reveal their fully-burdened costs, politicians would choose cheaper and less risky renewable energy rather than face the wrath of their constituents.

This will soon be put to the test.

Within days the coalition government of Britain will introduce its so-called Electricity Market Reform (EMR) bill. The proposal will usher in a new era of feed-in tariffs for power generation, including tariffs for new nuclear plants.

Meanwhile the conservative state of Indiana has introduced--without much fanfare--a one-off feed-in tariff for synthetic gas.

 

Transparency Questioned

One of the attributes of a well-designed feed-in tariff for renewables is transparency. Typically, the tariffs are set in a public process either through legislation or a regulatory proceeding. The tariffs are then posted publicly for all to see. Then it's a simple matter to compare the costs among various technologies.

With renewables this is often straightforward. Most jurisdictions use feed laws as the principal mechanism for meeting renewable policy objectives. They don't need to lard on subsidies from taxpayers to make a well-designed program work.

Under ideal conditions, politicians, consumers, and the public can see exactly what is being paid to all players with a feed-in tariff. The challenge, of course, is that all the costs are accounted for in the tariff and are not hidden through tax credits, grants, or other forms of direct and indirect subsidy.

While feed-in tariffs for renewables may be transparent, the same may not be the case for nuclear or coal gasification. There's a justified wariness that the tariffs for nuclear and coal gasification may not reflect reality. Or, at least the tariffs for nuclear and coal gasification may not be directly comparable to those for renewables.

First of all, accurate tariffs are those that result in plants being built and then operated. It makes no sense to compare a posted tariff that doesn't result in any new capacity or that is insufficient to operate the plant once it is built to tariffs that work. For example, a tariff that results in solar photovoltaics (solar PV) being installed on residential rooftops can't be compared to a solar tariff, as in Palo Alto, California, that doesn't result in any new capacity. The Palo Alto tariff for solar PV was too low to get the job done.

This simple requirement is easily met by short lead time technologies such as wind, solar PV, and biogas. But what about technologies, such as nuclear and coal gasification, where it may take a decade to bring a plant online?

Nuclear plants in particular have seldom been brought on line at the cost estimated or within the time allotted. The tariff negotiated today may not reflect reality five years after construction has begun.

Half a nuclear plant is still not a nuclear plant, nor even three-quarters of plant is a nuclear plant. With nuclear, and probably with coal gasification as well, it is all or nothing. Historically, there are cases where partially-built nuclear plants have been converted to fossil fuels.

Obviously a nuclear tariff that resulted in the start of construction in this case is not an accurate reflection of the "cost of generation plus a reasonable profit" if the plant is never operated as a nuclear plant.

The same problem of course holds for other high capital cost plants such as Integrated Gasification Combined Cycle plants using coal.

 

Indiana FIT for Coal Gasification

The Midwestern state of Indiana is in the heart of the Illinois coal basin and generates more than 90% of its electricity with coal.

As the province of Ontario closes its coal-fired power plants, Indiana is embarking on a program to use more coal through a feed-in tariff. Coal may no longer be king in Indiana, but it is still a very powerful prince.

During an earlier gas boom, Indiana was also one of the country's largest producers of natural gas. Much of the state heats with natural gas.

Now, the mud is flying in the state as the natural gas industry slugs it out with the powerful coal lobby.

While renewables advocates enjoy watching the fossil-fuel industry go at each others throats in this case, there's an important precedent that's been set--and it's been set in on of the more conservative states in the country.

The precedent is that a regulatory authority, in this case the Indiana Utility Regulatory Commission (IURC), determined a need for and a price for synthetic gas. The IURC determined a need for a demonstration coal gasification project, approved a negotiated price for the gas produced, required gas utilities in the state to take the gas, and will spread the cost of the gas across all gas consumers in the state.

The program has all the elements of an effective feed law. There is a long-term contract. There is a fixed price. And costs are spread over all consumers of the commodity. In this case the commodity is gas, whereas in most jurisdictions up to now it has been electricity.

Whether this was done in an open, transparent, and public process without political interference will be determined by the courts.

The IURC's decision was made on the watch of Republican Governor Mitch Daniels, a one-time presidential aspirant. Under his direction the Indiana Finance Authority signed a 30-year contract with Indiana Gasification to purchase the synthetic gas at a fixed price of $6.60 per million British thermal units (mmBtu).

Unlike feed-in tariffs for renewable energy which are typically open to all comers, Indiana's coal gasification tariff is one off. The deal was not offered to all takers. The contract is with only one supplier, Indiana Gasification. Critics were quick to note that Mark Lubbers is the project leader for the parent company of Indiana Gasification. Lubbers was a former political director for Governor Daniels.

The project is huge. The plant in southern Indiana will cost $3.5 billion and gas from the plant could account for 17% of Indiana's supply. Thus, the stakes are high for both the coal as well as the natural gas industries.

Not surprisingly for a state in coal country, Indiana has no effective renewable energy policy or renewable energy targets. There are only two token "voluntary" feed-in tariff programs in the entire state and one of those programs is being dismantled. Proposals for renewable energy feed-in tariffs in the state legislature have never made it out of committee.

Criticism of the Indiana Gasification deal mirror criticism of feed-in tariffs elsewhere: interference in the so-called "market" and the "price is too high".

When the deal was struck, gas was trading as high as $13 per mmBtu and expectations were that it could go even higher.

Since then the world has changed. Industrial consumption of gas has fallen dramatically in North America as manufacturers closed their doors or cut back production. Meanwhile the shale gas bubble began inflating as the huge number of wells begun during the run up in prices started coming on line. The net result has been the collapse of gas prices to as low as $3 per mmBtu since 2008.

 

Fixed Prices vs "the Market"

Renewables--and nuclear for that matter--are long-lived high capital cost projects. They produce electricity at stable prices for decades. Their initial prices may be higher than competing sources or existing "heritage" plants, such as long-amortized hydro plants. However, those fixed price contracts begin to look like a good deal to consumers as the price of generation from volatile sources, such as from fossil fuels, continue their inexorable increase. At some point, the cost of generation from fossil fuels on the spot market will exceed that from the fixed-price contracts. When that will occur is open to heated and politically charged debate.

Most journalists--business and energy writers alike--don't understand how markets work or specifically how markets for gas and electricity work. In the electricity market, most of the generation is produced under fixed-price contracts (Power-Purchase Agreements or PPAs) or the plants are in the rate base of regulated utilities. Only a portion of generation is sold on the "spot market".

Criticism of the Indiana Gasification deal by the natural gas industry point to the current spot market price and argue that the Indiana Gasification contract was a bad deal. It's cheaper, they say, to buy the gas on the spot market than through a long-term, fixed-price contract.

To buttress their case, critics of the Indiana Gasification deal can site numerous reports, articles, and even the presidential candidates saying that the US has a "100-year supply of natural gas".

While geologists may beg to differ, this is the prevalent discourse in North America and very few journalists know enough about the oil and gas industry to question such assertions.

Of course the same argument applies to renewables--and nuclear. North America is awash in natural gas. There's no need to worry. Our future is secure. We can all sit back and enjoy our game boys and I-pads while we let the fossil fuel industry manage our future.

For those who don't follow the industry, US natural gas production is no longer increasing as the industry has switched their drilling rigs to more profitable oil. Developers of unconventional natural gas, such as ExxonMobil, are complaining that they are "losing their shirts" in the shale gas boom. Translation: North Americans can expect tighter supply and higher prices for gas soon.

 

Full Cost Accounting?

Environmental opponents have a more extensive critique of Indiana's gasification deal.

As with other forms of fossil fuel, some portion of the "cost" of the gasification plant will be shifted "externally" to the environment in the form of air, water, and land pollution.

Indiana is infamous for its lax regulations and its "business friendly" atmosphere (an American euphemism for limiting environmental concerns). For example, it was the mining abuses in the coal fields of southern Indiana that contributed to the national movement to regulate surface coal mining in the late 1970s.

Consequently, the "tariff" or price for gas purchased from the gasification plant will not be fully transparent because the costs of pollution are not fully internalized and will be shifted to the public instead.

That's not all the costs that will be hidden in the gas tariff. The developer of the Indiana gasification project has applied for a $2.5 billion US Department of Energy (DOE) loan guarantee, according to the Sierra Club, a national environmental group. This is the same DOE loan program of Solyndra solar fame.

In the run up to the US presidential election, fossil fuel and nuclear lobbyists have been attacking renewables in the US because of the subsidized DOE loan program. However, these very same industries are busy trying to grab as many of the loans for themselves as possible. Some of the heat around the Solyndra scandal may not be so much about the "interference in the market" caused by the federal subsidies as incumbent industries fearing competition from renewables for the limited subsidies available.

American's have almost become immune to such irony, particularly during a presidential election that will cost $2 billion by the time it is over.

Indiana Gasification's reach for federal subsidies is not a lone outlier of the coal industry. Hydrogen Energy California is seeking nearly half a billion in a direct grant from DOE for a 300 MW Integrated Gasification Combined Cycle plant. If awarded, the grant will account for nearly 10% of the $5 billion project in the southern San Joaquin Valley, a region with some of the worst air pollution in the nation.

To summarize, the Indiana Gasification tariff may not be an accurate reflection of the true costs of the project.

 

What Price Nuclear?

Britain's so-called "reform" of the energy market is the Conservative Party's thinly veiled attempt to fit nuclear power into a "liberalized" market.

The proposed EMR will use "contracts for difference" (CfD) to pay for nuclear and other "low-carbon" technologies such as Carbon Capture and Storage (CCS) as well as renewable projects greater than 5 MW.

Renewable projects less than 5 MW qualify for an existing feed-in tariff program.

CCS projects in Britain will be similar to the Indiana Gasification project and the Hydrogen Energy project in California.

Under CfD generators will be paid a "strike price" or tariff. If the strike price is higher than the wholesale price, the government is obligated to make up the difference to the purchasing utilities. The government can do this through a tax levy or by passing the cost along to consumers in their utility bills.

But it is in determining an accurate strike price that is bedeviling the government. British newspapers have been reporting various rumors and estimates for months. Some of the leaks are no doubt to test the water of public reaction before the legislation is introduced in early November.

If the government doesn't reach a strike price that is high enough to warrant the exceptional risks associated with a nuclear project, no one will finance the new plants. If they do get the price right, then the government runs the risk of revealing what new nuclear actually costs, inflaming the already heated energy debate and possibly derailing their plans for new nuclear.

On the other hand, if the government set's the rates too low it will have to make up the difference somehow, for example, by obscuring some costs through government action. If it does so, then the government may run afoul of European Union restrictions on state aid, that is, subsidies.

That's not all. The coalition agreement between the Conservative Party and the Liberal Democrats includes a provision that there will be no "subsidies" for nuclear. Any overt aid could cause a crisis of confidence in the government leading to political instability.

Certainly the prices bandied about in the press are not anywhere near the "cheap" electricity advertised by the nuclear industry. They range from £0.105 GBP/kWh ($0.16 USD/kWh) to £0.166 GBP/kWh (0.25 USD/kWh).

 

It's unlikely that the government's proposal will reflect these prices. If they do, the government will have to admit that renewables, even offshore wind, are cheaper than nuclear, making it difficult to get approval to build the new plants.

Consequently, the press is now reporting suggestions that the government may "underwrite" the risks of nuclear, probably in the form of low-interest loans. This may not be enough.

Regulated feed-in tariffs differ markedly from previous "rate of return regulation" used to build nearly all nuclear power plants in the world. Under rate of return regulation, once construction is approved, utilities are assured of receiving a "fair rate of return" on their invested capital, assuming they make no major blunders. Even where there were huge cost overruns, the utilities were nearly always permitted to earn their regulated rate of return regardless of how much they spent.

However, with a feed-in tariff all construction and operation risk are borne by the project developer. There is no "guaranteed rate of return". If the project costs more than expected, the developer bears all the cost and their profit is reduced accordingly.

It is this distinction between guaranteeing a rate of return on invested capital, and the risk of financial failure from a fixed tariff that has caused the British government and the nuclear industry such consternation.

How the British handle this conundrum will lead to much gnashing of teeth on both sides of the nuclear issue.

Of course, there will remain some well entrenched subsidies for nuclear no matter what happens. Most famous is publicly-funded insurance for nuclear accidents.

And the sums are not insignificant. The cost for insurance against accidents, if the insurance was acquired from the private sector, would cost as much as the electricity itself.

Deutche Welle reports that Green Budget Germany estimates this risk insurance raises the cost of nuclear energy to between €0.11 and €0.34 euros per kWh ($0.10-$0.30 USD/kWh). This raises total cost to an astounding €0.30 to €0.50/kWh ($0.40-$0.80 USD/kWh).

 

In the next few weeks British politicians may well determine the fate of nuclear not only in Europe but in North America as well.

Whatever happens in Britain or Indiana in the next few months, the taboo against feed-in tariffs by conservative politicians on both sides of the Atlantic will have been broken.


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