Penn State report: Existing studies flawed; state subsidies not validated

2098

The studies being used to support state subsidies for uneconomical nuclear power plants are insufficient validation for such payments, which have the potential to dramatically impact competitive electricity markets, a team of Penn State researchers concluded in a recent report.

“The body of studies as a whole are characterized by assumptions and methodological gaps that influence the findings in support of subsidies and/or are framed in a way that could imply to many readers that subsidies for existing nuclear plants are needed,” said the report, which was supported by PJM.

“Many of these approaches neglect potential problems with subsidies that could impose costs on consumers, and could overstate the benefits of such programs.”

The report notes that the researchers’ analysis is not exhaustive enough to conclude whether subsidies are warranted, but it generated concerns that existing subsidies are based on incomplete analysis.

State subsidies to prevent the exit of uneconomic generation conflict with two key principles of competitive market design, according to the report: Prices rise and fall to reflect scarcity and surplus, serving as signals for market entry and exit, and the market places the risk of financial consequences on investors, not consumers.

The study cites three reasons subsidies are problematic for a competitive market:

  • They are among the least efficient mechanisms to reduce emissions.
  • Subsidies shift the risk of financial investment to consumers from investors.
  • Subsidies tend to breed more subsidies.

“A number of recent studies on the impacts of subsidies to existing generation units, particularly nuclear plants, ignore this basic economic logic and conclude erroneously that subsidies will lead to lower overall electricity costs,” the report said.

The report also identifies what it calls three “modeling fallacies” before offering suggestions to achieve more accurate analysis. These modeling fallacies are:

  • An increase or decrease in prices in one electricity market is a fair indicator that overall electricity costs will do the same.
  • Retirement decisions are considered as occurring all at once or not at all, ignoring market dynamics.
  • If a negative effect, such as the impact on air emissions of losing nuclear generation, can be quantified, that a subsidy of equal magnitude is the best option for restoring market efficiency.

For example, the cost-benefit analysis for consumers in these studies may not be realistic, the report said. Enabling uneconomic resources to remain in the market in the long run could increase the costs of achieving reliability.

In addition, many of the studies build on incorrect assumptions of the current state of the energy market, the report said – for example, that its operating capacity is at or near an efficient level.

“In fact, most observers of the electric power market sector in recent years would make a starkly different argument: namely, that current markets have excess generation capacity,” the report said.

Subsidies are not the lone state initiative to affect the market, the report said, they’re just the latest. Other state policy actions that undermine market principles include renewable portfolio standards, programs to incent the construction of new generation and the implementation of demand-reduction or efficiency targets.

The report singles out Pennsylvania’s Act 129, which requires utilities to reduce retail peak and average load annually.

“This action by a single state has been found to have affected wholesale energy market outcomes throughout the PJM territory,” it said.

The subsidy studies reviewed by researchers have focused on one or more of four justifications: environmental benefits, fuel security and resilience, consumer cost of electricity, and economic development.

However, the report said, “This is extremely surprising because decades of rigorous and peer-reviewed economic theory and analysis have shown that subsidies are almost never the preferred mechanism for achieving policy goals.”

Finally, the study provides a model framework for future analysis of nuclear subsidies.

“Going forward, the research community should engage in clearly formulated, rigorous and transparent analysis grounded in economic and engineering principles to compare alternate policy options for achieving a power system that is economically efficient, reliable, resilient and has minimal environmental impacts,” the report concludes.

“By exploring several market, regulatory and technological designs and their tradeoffs across these objectives, such studies would provide a better basis to inform policy decisions by legislators and regulators.”