SONGS Meets the Market

San Onofre Nuclear Generating Station (SONGS) is an inoperative nuclear power plant on the Pacific coast of the United States, near San Diego, California. The plant was closed in June 2013 and is in the early stages of being decommissioned. According to Think Progress, the decommissioning process will go on for at least two decades, and the radioactive waste will be stored onsite for the foreseeable future.

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Of Markets, Regulated and Deregulated

I’ve been studying the history of nuclear power for some time now. With that in mind, I found Fortune’s November story on “Southern’s Big Nuke Bet,” in which Geoff Colvin interviewed Tom Fanning, CEO of Southern Company, to be quite interesting. In the article, Fanning responds to the following question from Colvin:

[Geoff Colvin:] A couple of other utilities have decided to get out of nuclear. Constellation got out of plant development earlier this year, and NRG pulled out of its nuclear project in Texas. Is this just a case of differing business judgments, or is there something else?

[Tom Fanning:] It goes back to scale, credit quality, and credibility. When you think about the challenges that a small company will face building a $14 billion deal, that gets rather daunting.

The U.S. really is divided into two electricity markets. Some years ago many states deregulated, and they have what’s called merchant markets, where the price for electricity is largely set a day ahead or week ahead or month ahead. Remember this is going to take 10 years to build, and it’s going to be the largest capital asset in your portfolio, and you’re going to need to run it 30 to 50 years to earn that money back. Putting that magnitude of capital in a deregulated merchant market is exceedingly risky. Thankfully, Georgia Power operates in a vertically integrated regulated market where legislation and regulation are stable and constructive and will support this over time.

In other words, the major reason Southern Power is able to undertake the construction of a new nuclear power plant is because it operates in what looks a lot like a planned market. This is a point that some in the U.S. seem to ignore. For instance, in an article for the Heritage Foundation, Jack Spencer claimed that federal loan guarantees were not essential to the continued development of nuclear power in the United States, but that instead, free markets could be counted on to intervene in the government’s place.

But rather than being driven by “market” forces, history reveals time and again that the construction of nuclear power plants depends almost exclusively on state intervention. For instance, in recent years, EDF, Rosatom and China have been three of the most active developers of nuclear power projects worldwide. All are essentially state entities. As of January 2010, the French government owned 84.48% of EDF. While Rosatom and the Chinese nuclear industry are entirely owned by their respective governments.

Meanwhile, in the US, the nuclear “renaissance” is now essentially limited to Southern Company’s planned Waynesboro, GA facility. Of the other approximately two dozen applications submitted over the past few years, none are being actively being pursued at this time. By comparison, not only has Southern Company received $8.2 billion in loan guarantees from the federal government, as the interview above makes plain, the economic viability of the project additionally hinges on the fact that Georgia remains a regulated energy market, meaning that the ultimate costs of the project (whether the currently projected $14 billion, or more) will ultimately be borne by Georgia electricity ratepayers. This effectively offers the company a state-level guarantee on top of its federal loan guarantee.

In short, the preponderance of the evidence from both the US and the rest of the world suggests that heavy governmental subsidies, loan guarantees and/or liability exemptions — either explicitly or de facto — are essential to the development of nuclear power. By comparison, all of the literature I have read on the topic suggests that the market has yet to build a single nuclear plant.

Earth Day Versus Earth Race

In “Off to the Races,” New York Times columnist Thomas Friedman contrasts “two basic strategies for dealing with climate change.”

The Earth Day strategy is epitomized by a series of eponymous events as well as other summits, such as Copenhagen. “The Earth Day strategy said that the biggest threat to mankind is climate change, and we as a global community have to hold hands and attack this problem with a collective global mechanism for codifying and verifying everyone’s carbon-dioxide emissions and reductions…”

However, Friedman questions the viability of the Earth Day strategy. “[A]nyone who watched the chaotic way [the Copenhagen] conference was ‘organized,’ and the bickering by delegates with which it finished, has to ask whether this 17-year U.N. process to build a global framework to roll back global warming is broken.” Thus, while agreeing that the Earth Day process has not been “a waste,” Friedman dubs himself “an Earth Race guy.”

The Earth Race strategy considers “averting catastrophic climate change [to be] a huge scale issue. The only engine big enough to impact Mother Nature is Father Greed: the Market. Only a market, shaped by regulations and incentives to stimulate massive innovation in clean, emission-free power sources can make a dent in global warming.”

This Earth Day versus Earth Race logic leads Friedman to conclude that priority one is “getting the U.S. Senate to pass an energy bill, with a long-term price on carbon that will really stimulate America to become the world leader in clean-tech.”

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If you believe that CO2 is an externality (and most people now do), then removing uncertainty through regulation seems to be important step. Until CO2 emissions (and its “equivalents”) have a price, there is little incentive for internalizing such costs. But I fail to see how such a policy is the exclusive domain of an Earth Race strategy. It seems that regulating carbon is also a logical conclusion of an Earth Day strategy.

Moreover, despite potentially agreeing with his conclusion, I am not sure about Friedman’s logic. For one, the either/or dichotomy implicit in Friedman’s article ignores the potential interdependencies between an Earth Day strategy and an Earth Race strategy. If anything, I suspect the Earth Race strategy is best understood as an emergent response to the growing prominence (political and otherwise) of the Earth Day strategy. Having said that, I would not go so far as to suggest that an Earth Race was either an inevitable response or even the only possible response to the Earth Day strategy. Further, it is difficult to imagine the Earth Race strategy having any traction were it not for the forty years of effort put into the Earth Day strategy. In fact, it is not entirely clear that the Earth Race strategy has sufficient traction to sustain itself.

Additionally, it is ironic that Friedman’s proposed solution — “the Market” — is only viable when “shaped by regulations and incentives.” I am not troubled by these conditions. If anything, I see them as acknowledgment(whether intended or not) that markets are social constructions. As a result, markets are not inherently capable of solving social problems. “Greed is good” (or bad) only if and when human institutions make it so. “Successful” markets require every bit as much explanation as market failures. However, if Friedman’s conditions are also intended to signal the possibility of intentionally designing a “perfect” (i.e., rational) carbon market, then we should be concerned. As social constructions markets are not inherently rational.

Finally, my biggest concern involves Friedman’s comparison between the Earth Race strategy and the Space Race, in which “two countries competed” to “be the first to put a man on the moon.” While a potentially interesting analogy, apart from sharing the word “race” it is unclear to me what the two scenarios have in common. In particular, it is not clear how (if at all) market dynamics played a role in the space race — either in the United States or (especially) in the Soviet Union.  Instead, if there is a parallel between the space race and climate change, it seems to me the lesson is that creating public goods may require massive government investments in technologies, and protection from market dynamics.

In short, I find Friedman’s latest article thought provoking. His contrast between Earth Day and Earth Race strategies provides a compact way of thinking about alternative approaches to a complex problem. And yet, while inclined to support his conclusion that we need a carbon market, if anything, such a policy seems entirely inconsistent with the lessons of the space race. It would not be inaccurate to describe the space race as dependent on a singular enemy, driven by an appeal to nationalistic fervor, and indebted to massive governmental investments in the industrial-military complex.

In other words, if Friedman is right, if what we need is an Earth Race strategy, and if the Earth Race is like the Space Race, then it seems the last thing we need is a carbon market. Instead, what we need is an enemy, more nationalism and massive spending. However, in the case of climate change, the problem is that we have seen the enemy. The enemy is us. “Them” in this case is “Us.” Pushed in this direction, an Earth Race strategy suggests annihilation is victory. If that is the case, there can be no winner in the Earth Race. Thus, I am inclined to think that solving climate change is probably not at all like putting a man on the moon. And considering the moon walk remains an enigma, perhaps that’s not such a bad thing.

But then, to what shall we liken climate change?