Recognizing the whole value

We’ve written before of anti-nuclear energy activists taking a deliberately skewed view of Northwest power markets to negate the value nuclear energy delivers to the region.

The latest iteration is Phil Lusk’s Sept. 14 post at Energy Central, “Columbia Generating Station Market Test.” It is based on an apples-to-apple-pie comparison of spot market prices to the actual costs of producing wholesale power. As chief researcher for the Guacamole Fund, a group focused on “a non-nuclear future,”
Mr. Lusk’s examination of nuclear power economics only considers part of the value proposition provided by the region’s sole source of clean nuclear energy.

In contrast, the Northwest’s Public Power Council recognizes Columbia Generating Station as a linchpin for clean energy diversity, grid resiliency and low-cost predictability. Experts at the PPC understand that daily prices for energy at the Mid-Columbia trading hub do not represent the full cost or value of producing wholesale power. In fact, using spot market prices as the sole basis for comparison with firm power generation undervalues all firm power resources, not just nuclear.

The example Mr. Lusk uses of side-by-side gas stations charging vastly different prices for a gallon of gas shows the disconnect. For that analogy to be relevant, there would need to be another 1,207 megawatt nuclear power plant next to Columbia selling its electricity for half the price. There isn’t.

Let’s talk markets
The Mid-Columbia spot market is a daily bilateral market for wholesale energy. The amount of electricity actually traded in this incremental market is small when compared to the overall average megawatts required to power the Northwest. Prices in this spot market are driven by short-run variable costs – such as fuel and variable operations and maintenance expenses – of incremental generation in the Pacific Northwest. Examination of actual Mid-Columbia market prices and regional generation patterns demonstrates that daily spot prices do not allow generation owners to recover their fixed costs, such as depreciation, interest expense, labor and other fixed O&M expenses.

To illustrate, at certain times, such as when regional loads are low to moderate and hydro and wind generation are high, wind and hydro are the incremental sources of generation in the Northwest and their low variable costs drive the Mid-Columbia spot market price. At other times, such as during high system demand and low hydro and wind generation, natural gas-fired generation is the incremental source of generation and its somewhat higher variable costs set the spot market price.

Recent changes in the regional generation fleet have made it more difficult to recover fixed costs in the spot market. Large amounts of wind power have been added in the region (more than 8,000 megawatts to date), and surplus solar generation from California is imported into the Northwest. These resources, with low variable operating costs, are the incremental sources of generation driving down spot market prices more often than not.

This reduces the effectiveness of the spot market as a mechanism to recover power plant fixed costs, further negating the validity of the Mid-Columbia price index as a benchmark for valuing generation. Furthermore, the spot market does not value the capacity, resilience and other attributes that power plants provide.

Since the daily spot market for wholesale power is not an effective mechanism for recovering fixed costs of generation, how are such costs currently recovered in the Pacific Northwest? The answer lies in the fact that most wholesale power is either generated by, or sold via bilateral contracts to, utilities who then sell it to their retail customers at cost-based rates. As a result, most fixed costs of generation are recovered directly from consumers in retail utility rates, rather than via the spot market.

The big picture
Mr. Lusk’s argument lacks this important understanding of the full range of cost factors and how fixed costs are recovered. A market price index for daily spot market energy transactions is not a valid or accurate representation of the actual value of power produced by Columbia Generating Station or any other firm, long-term power supply resource.

The full “all in” economic value of Columbia is further strengthened by the plant’s environmental contribution.

columbia-nuclear-plant 600xx2400-1600-0-100

Columbia Generating Station.

The Northwest Power and Conservation Council concluded in its Seventh Northwest Power Plan that “it’s not possible to entirely eliminate carbon dioxide emissions from the power system without the use of nuclear power or emerging technology breakthroughs.” And studies by the International Energy Agency, the U.N.’s Intergovernmental Panel on Climate Change and the U.S. Energy Information Administration suggest that we absolutely cannot prevent the rapid pace of climate change without preservation of current nuclear resources and aggressive investment in new nuclear.

The current 99 nuclear plants in the United States provide nearly 20 percent of the country’s power, and an impressive 60 percent of our country’s clean energy. And what is, or will be, the price on carbon? Columbia alone prevents 3.6 million metric tons of carbon dioxide emissions annually compared to the best-case natural gas replacement option. For a region facing imminent carbon constraints from nine coal and 29 gas plants, the zero-carbon nature of our existing nuclear facility will result in an even greater premium on its value.

(Posted by Energy Northwest)

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