Policy Analysis and Proposal

Game of Loans: Considering Successors to Old King Coal and the Role of
Public Policy in Americas Energy Future



Of all the challenges confronting the world today, none is likely to prove as daunting or vital to
the global economy and the very future of this planet, as that of energy. (Kessides and Wade
2011, 1)








Michael Mays
POLSC 710: Policy Analysis and Evaluation
Dr. Bernick
Spring 2014

Mays 1
Abstract
The American energy generation market is at a crossroads. Americas aging fleet of coal
plants is in need of replacement due to strong regulations from the Environmental Protection
Agency and hydraulic fracturing, which have made natural gas-fired plants attractive and cost-
competitive. These push and pull factors effectively preclude new coal-fired plants from being
built in the US. The question for public policy, then, is whether the shift in the US energy
markets composition is desirable and if not, what is to be done about it. This report seeks to
answer these questions by evaluating the recent trends in US energy generation and extrapolating
pitfalls which public policy might be suited to redress. In short, I find that infrastructure sectors
tendencies toward natural monopolies create externalities and information asymmetries that
generate social costs.
More closely aligning market prices and social costs necessitates a government policy.
To that end, I will identify three potential policy alternatives to the status quo and advocate one.
First, I will consider stabilizing the markets transition to natural gas by providing incentives to
slow the investor flight from coal plants. A second policy alternative would piggyback on state-
level Renewable Portfolio Standards, improving the market prospects for decentralized
renewables by investing in Smart Grid infrastructure to counteract their structural shortcomings.
Finally, rather than embracing the status quo or decentralized renewables, the military could
reclaim the role of progenitor and first mover of nuclear energy technologies that it occupied
during Americas initial wave of nuclear expansion in the 1960s and 70s. In section 3, I
advocate that the Defense Department utilize its procurement power to issue power purchasing
agreements for new nuclear technologies.
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1. Current Energy Market Trends and a Role for Public Policy
I ntroduction: Coal and Natural Gas
The American energy generation market is at a crossroads. The choice currently facing
energy decision-makers is which new technologies ought to replace Americas aging fleet of coal
plants. Coal-fired energy generation facilities, historically the leaders of the United States
energy mix, are facing strong regulations from the Environmental Protection Agency (EPA)
(ibid; IER 2012). While mid-2013 saw a temporary resurgence of coals contribution to the
energy mix, hydraulic fracturing (fracking) has introduced a natural gas boom, making natural
gas-fired plants uniquely attractive and cost-competitive (Plumer 2013; Perry 2012). Over 250
additional gas-fired power plants are expected to be built in the US between 2011 and 2017
(Hughes and Hayashi 2012). In 2012, it made up over 80% of new US grid capacity and more
than 30% of overall electricity generation, which could reach 50% by 2030 (ibid). The markets
push and pull factors effectively preclude new coal-fired plants from being built in the US
(Elmquist 2012). Between 2011 and 2013, 138 of Americas then-1191 coal-fired plants were
retired, while 150 more are already scheduled for retirement in the next 5 years, and nearly 330
more are at risk of succumbing to natural gas (Plumer 2013). The question for public policy,
then, is whether the shift in the US energy markets composition is sustainable and if not, what is
to be done about it. This report seeks to answer these questions by evaluating the recent trends
in US energy generation and extrapolating pitfalls which public policy might be suited to redress.
I will also identify three potential policy alternatives to the status quo, namely easing coal
regulations, supporting decentralized renewables with Smart Grid technology, and increasing
government financial support for nuclear power.
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Despite being touted as a bridge fuel, natural gas may prove a dead end and a potential
market problem (Jones 2012). Its present boom will do nothing to end the structural causes of
the commoditys long track record of price volatility (Perry 2012). Because of natural gass
increasing uses and popularity, the fuels empirical market volatility is accelerating as it takes
over Americas energy mix (Jones 2012). In fact, the weeks between February 10 and 24, 2014
saw without question the most volatile pricing environment [] ever witnessed for natural gas
(Philips 2014). Natural gas is still a hydrocarbon fossil fuel, meaning it has to be mined
somewhere and used elsewhere; that dynamic is inherently vulnerable to unpredictable supply-
side disruptions or demand spikes due to expanding gas exports and shortfalls in expected output
from fracking wells (Rosner and Goldberg 2011). Supply-demand mismatches could cause prices
to soar and leave the overall grid vulnerable; plant operators will no longer have sufficient coal-
fired plants to provide inexpensive baseload backup (IER 2012). Should natural gas continue to
cheapen, there will be less and less incentive to find additional reserves, creating the conditions
for boom-and-bust cycles as key wells dry up (Spencer 2012). The risk of unintentional lock-in
via energy infrastructure investment is not a challenge to be underestimated, because natural gas
has the potential to undermine the American energy grids diversity (ibid). It is vital for the US
to maintain a diverse fleet of large-megawatt baseload energy facilities; even if one fuel is cheap,
over-reliance on any single energy source creates fragility and risks higher costs across the board
(ibid).
Private Sector Stakeholders
Most generally, the relevant stakeholders for a public energy policy are actors whose
goals and values such a policy would affect. These goals and interests are personal,
circumstantial, and sometimes mutually exclusive with the goals and interests of other
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stakeholders. For example, operators of energy production facilities and potential investors
make decisions in the interest of securing their financial investments. For market share of an
energy technology to increase, its market price for energy must fall or its efficiency must
improve in a niche market (Fouquet 2010). These marginal improvements act as catalysts for
initial diffusion of new technologies (ibid). Energy infrastructure is created when sunk costs
facilitate repeated behaviors by reducing marginal costs; baseload energy generation facilities are
long-term investments with high up-front costs designed to recoup their costs over decades
(Jones 2012). Thus, this group of stakeholders values both security (making durable decisions)
and efficiency (using limited resources for maximum gain) (Fouquet 2010).
In past energy transitions, it was shown that consumers and producers delay uptake until
the energy service price (combined price of energy and efficiency) become favorable relative to
the status quo (ibid). For precisely this reason, energy sector decision-making relies on models
of market behavior to construct long-term risk assessments; the energy return on investment
(EROI) is exceptionally high for natural gas, especially compared to alternative energies (ibid).
This characterization is demonstrated by coals rise to prominence in the US during the 60s and
70s, when a coal boom similar to that of the current gas market made coal-fired plants cheap,
attractive, and seemingly future-proof (Black et al 2005). And, intentionally or not, these
investments became long-term decisions; coal has been the safest bet in the US energy industry
for the past forty-odd years.
Energy policy should consider the interests of more actors than simply energy producers,
however. Natural gas price spikes, grid unreliability, and future-blind energy decisions are
potentially detrimental to the US economy writ large because electricity generation is the
backbone of all other market activity, and as such may create bottlenecks if insufficiently
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available (Cooper and Sovacool 2007; Fouquet 2010; Straub 2007). Deficient electricity
infrastructure plagued by power shortfalls and unstable voltage may raise costs and even deter
investments (Straub 2007). American manufacturers, industrial consumers, and investors depend
on energy prices staying not only low, but consistent in order to plan investments securely
(Cooper and Sovacool 2007). If they cannot do so because the mix of energy technologies causes
unpredictable cost fluctuations, they might well decide to forego the risk altogether and shift
investment overseas (ibid). This was demonstrated when a series of price spikes in 2005 caused
several manufacturing and industrial consumers that relied heavily on natural gas to move their
facilities overseas (ibid).
Residential energy consumers (RECs) have a bevy of interests, values, and goals when it
comes to energy and energy policy. Generally, RECs prioritize energy market conditions that
favor personal welfare (Ansolabehere and Konisky 2008, 2009). RECs might theoretically
support new energy facilities that might reduce energy costs or create jobs, but want it built
elsewhere; certainly not in my back yard (NIMBY) (ibid). The central question in power plant
siting is whether NIMBY is a strong, constant reaction, or whether it varies based on
characteristics of the facilities in question (Ansolabehere and Konisky 2009). A persons risk
attitude, gender, and race all factor into preferences about plant location, but much less than the
perceived harms and costs of specific fuels (Ansolabehere and Konisky 2008, 2009). For a plant
to be approved and built, RECs must be convinced that the projects potential benefits outweigh
the personal costs that underlie NIMBY arguments. A survey on energy facility construction
found that every source faces similar levels of opposition when considered individually
(Ansolabehere and Konisky 2008, 2009). When asked to compare sources, RECs first expressed
concern about well-known environmental harms (like nuclear radioactivity or coal ash), followed
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by consumer-side costs (ibid). Respondents associated the most environmental harm with coal
and nuclear power, followed by natural gas (ibid). But NIMBY is a one-size-fits-all argument:
people oppose building anything near them (Ansolabehere and Konisky 2008, 1). Wind farms
are considered noisy and obtrusive, as in Cape Cod where residents successfully argued that 130
turbines located 5 miles out to sea will destroy their ocean view (Runyon 2014). Solar farms
require too much space, and household solar panels have generated lawsuits by neighbors who
felt that the panels were unsightly and would lower their own home values (ibid).
Additionally, perceived risks to health and safety are paramount to understanding
NIMBY (Ansolabehere and Konisky 2008). Communities are concerned about maintaining the
health, environmental, and social goods that new energy generation facilities could disrupt (ibid).
Like others in the private sector, these include low and predictable energy prices (ibid). RECs
money is fungible; it comes from salaries and sales rather than paying off infrastructure
investments over a 40-year plan (ibid). Increased energy or healthcare costs for RECs could
trade off with discretionary spending that drives demand in Americas consumer economy (ibid).
However, more than money is considered when RECs evaluate an energy projects impact on
welfare. For example, a policy might seek to improve health and reduce healthcare costs by
reducing coal smog. If closing the necessary plants would incur a substantial economic cost,
such as job losses, cost-benefit analysis could guide the decision about which value to prioritize
for that policy.
Key Government Stakeholders
The United States federal government as an entity has both a theoretical and practical
stake in energy infrastructure. Energy and energy infrastructure are private goods (because sold
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energy is rivalrous and excludable) that underlie many public goods, like healthcare, education,
and national security (Straub 2007). Because they often have characteristics of natural
monopolies, infrastructure sectors are vulnerable to negative externalities characterized by
inadequate competition and imperfect information, including credit constraints, intergenerational
infrastructure lock-in, and unequal distribution of social costs (ibid). Information asymmetries
prevent energy markets from achieving desired efficiency, lead to costs in excess of market
prices and, cause waiting games when confronted with new investments (Clastres 2011). For
example, NIMBY pressures from affluent communities combined with investors desire to
minimize up-front costs have meant that plants in the US are disproportionately sited near
minority populations, a solution known as PIBBY (place in blacks back yard) (Bullard
2000, 5). There are also positive side-effects from energy infrastructure investment, such as
marginal production cost reductions and increases in efficiency, but these are increasingly
recognized and touted as benefits by the private sector, meaning they are not true externalities
because they are being accounted for (Straub 2007). It is implausible that the market as-is could
maximize social welfare, even if returns on investment occur as predicted, because market actors
simply do not account for the necessary costs and benefits (ibid).
Government has an interest in accounting for and mitigating externalities because prices
fail to reflect the true cost of these activities to society; in the energy sector, this is done via
regulatory frameworks and financial incentives (Straub 2007). In the US, energy and
environmental regulations are promulgated through the EPA, whereas the Department of Energy
(DOE) is the agency with primary responsibility for day to day energy concerns, like energy
conservation, energy-related research, radioactive waste disposal, and domestic energy
production (USDOE 2005; USEPA 2014). Both the EPA and DOE can issue financial
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incentives for energy-related projects, including DOE loan guarantees for electricity generation
facilities (where the government agrees to assume debt if the borrower defaults) and a wide
variety of job- and administration-related EPA grants (ibid).
State governments must also be considered. In the last half-decade, a leading policy
option has been state-level Renewable Portfolio Standards (RPS) or Renewable Electricity
Standards (RES), which require or encourage electricity producers within a given jurisdiction to
supply a certain minimum share of their electricity from designated renewable resources
(USEIA 2012b). Over 30 states have either created enforceable RPS or otherwise mandated
renewable capacity (ibid). States and state-level RPS will be discussed in-depth with policy
alternative #2, which deals with improving the effectiveness of these state policies.
The Department of Defense (DOD) might seem like an unlikely stakeholder in general
energy policy, but in reality it is among the most central. In fact, DOD is the worlds single
largest energy consumer (Davenport 2012). At the moment, DOD is struggling to address grave
concern [] over the fact that U.S. military bases are tied to and entirely dependent upon the
civilian electric grid from which they receive 99% of their power (Andres and Loudermilk).
DOD is investing in renewables to island bases from civilian grid failures, but the projects are
not scaling or incentivizing investors to replace large-megawatt fossil fuel-fired plants (ibid).
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2. Considering Policy Alternatives and Deciding how to Decide
Conflicts in Status Quo Energy Trends and Policy Evaluation Criterion
The current conflict over defining Americas energy future is fundamentally a conflict of
values. Energy stakeholders disagree about what goods ought to be of value and/or how to
prioritize mutually agreed upon values. This disagreement creates the potential for externalities
because of the free-rider problem: it is unlikely that a sufficient amount of consumers or
producers will pay a premium for the social benefits associated with alternative energy sources,
thus furthering the monopolization of new natural gas plants (Fouquet 2010). There are any
market barriers to the penetration of various energy technologies, but only some of these
barriers represent real market failures that reduce economic efficiency (Sathaye et al 2011).
The economic perspective suggests that diversification is more costly than technology-focused
analyses alone would let on, and it emphasizes market-based policies like carbon taxes (ibid).
This emphasizes that there are trade-offs between economic efficiency and energy diversity it
is possible to get more of the latter, but typically only at the cost of less of the former (ibid).
However, the distinction between market barriers and failures is precarious: for example,
insufficient information could represent failure of a market to adequately distribute necessary
information, while the public and private good character of information means that information
can be acquired by consumers only insofar as they are willing to pay for it (ibid).
The product cycle from the creation of a niche market to widespread adoption of energy
technologies has thus tended to require government assistance backed by civil society (Fouquet
2010). A historical policy lesson from energy transitions is that governments will need to
support and protect these niches, which will involve prioritizing the long-term provision of
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services and minimizing the negative aspects of new technologies (Fouquet 2010). The best
energy price (which policy should prioritize) is the price with full payment of all costs: social
costs and private costs without subsidies and rents (Sathaye et al 2011). Accounting for invisible
social/monopoly costs may significantly alter end-users preferences; in practice, these costs are
externalities created so that companies can turn a larger share of the charged prices into profits.
The correspondence between costs and prices is not a one-to-one technical relationship but is
tricky, multi-faceted and policy influenced. For example, a high priced, non-sustainable energy
may be due to good policy applying full social costs, or to high monopoly profits as a result of
weak governance. The same price tag could betray two opposite realities with quite diverging
impact on the development of renewable energy (Sathaye et al 2011). Policy interventions into
energy diversity could involve a near-infinite number of carrots, like financial incentives, and
regulatory sticks. Three promising routes to resolving Americas status quo energy issues are
slowing and stabilizing the rise of natural gas, incentivizing investment into current renewables
like wind and solar, or promoting a new wave of nuclear power development.
Organizational, Economic and Political Constraints
Because Congress controls yearly budget allocations for executive agencies, the
overarching economic, organizational, and political constraint on new energy policies is
approval and funding by Congress (Straub 2007; Fouquet 2010). Not only are Congresspersons
beholden to their districts constituents, who may be profiting from coal and natural gas, but they
also fall under the purview of politically powerful fossil fuel lobbies, which are unlikely to
concede without compensation (kick-back) or equally stiff measures enacted against
competitors (ibid; Fouquet 2010). Most recently, scandals such as the Department of Energys
investment in failed solar startup Solyndra and anti-coal EPA regulations have made all federal
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energy policies lightning rods for fiscal conservatives, lobbyists, and all others who oppose the
government picking winners (Stephens and Leonnig 2011; Wolfgang 2013). However, in past
infrastructure transitions, it was precisely the lack of institutional redistribution from winners
to losers that favored politically and economically well-connected agents (Straub 2007). Pork
barrel spending, electoral pandering, and risk aversion provide justifications for suboptimal and
politically-motivated investment; that is, the status quo (ibid).
Current and historical programs at the federal level by DOE, EPA, and DOD all prove
that organizational infrastructure exists for expanding federal energy policy, but only where
political will exists; decisions to invest in infrastructure, whether directly through public budgets
or via public-private partnership, must account for political motives rather than just economic
efficiency or social considerations (Straub 2007). This is demonstrated by the EPA coal
regulations, which used expansive readings of existing authority under the Clean Air Act to
circumvent Congressional jurisdiction for a potentially controversial policy. It is also
substantiated by both studies and models, which find that infrastructure investments are mostly
determined by electoral and interest group concerns, to the detriment of grid diversity and
stability (ibid).
Policy Alternative 1: Embrace Coal and Natural Gas
First, it is worth considering whether public policy could stabilize the markets transition
to natural gas by providing incentives to slow the investor flight from coal plants. The New
Source Performance Standard (NSPS) and Mercury and Air Toxins Standards (MATS) are the
first EPA regulations created under authority from the Clean Air Act (CAA) to create a single
emissions limit for all stationary energy generation sources (Hallerman 2012). The limit as
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currently set effectively requires that new coal plants be natural gas plants to be built, which
some have termed a fuel bait and switch: the emissions profile and maximum achievable
technology standard that the regulations rely on align only with gas or carbon capture and
sequestration (CCS), a very immature and expensive clean coal technology (Lewis 2012).
Rather than going back to the drawing board, EPA could more closely align present regulations
with historical practice by creating source-specific regulations (Hallerman 2012). This could be
done quickly by scaling back EPA regulatory action internally, avoiding the political and
organizational costs that an affirmative EPA policy might create (ibid). A policy of this sort
would aim to embrace natural gas while keeping its destabilizing attributes in check because it
would make use of existing infrastructure, which is already built to facilitate a coal- and gas-
heavy generation mix.
However, this transaction might not be optimal when considering sunk and social costs.
EPA has sunk costs in the promulgation, legal defense, and implementation of regulations
(McCarthy and Copeland 2011). Additionally, the regulations were promulgated in order to
mitigate externalities, namely carbon dioxide, coal ash and mercury (ibid). Private sector energy
investors have sunk costs in closing or shuttering their plants, and even if the regulations were
made to exempt coal, it may be too late to truly revive coal-fired plants because a plant built
today would not be a secure investment over its expected life (Efstathiou and Drajem 2013).
Plus, state RPS policies, coals NIMBY concerns and natural gass current appeal might cause
utilities to opt for the seemingly future-proof latter option, even if prices were competitive and
regulation was mitigated (ibid).

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Policy Alternative 2: Decentralized Renewables
A second policy alternative to the status quo could entail improving the market prospects
for decentralized renewables. Currently, the contribution of new decentralized renewables, like
wind and solar, is minimal in the US. In 2011, less that 10% of US energy was generated by
renewables, but over half (6.65%) of that was old renewables like hydroelectric plants and
burning waste wood from lumbering (Smil 2014). State-level RPS has done moderately well at
encouraging market penetration for renewables. A comprehensive study of state RPS policies
found that their results were mixed: well-implemented RPS policies can be cost-efficient
methods of eliminating monopolistic companies through resource diversification, but are sub-
optimal because they are not designed for long-term power purchase agreements, lack
accountability and can provide a false sense of accomplishment for political gain (Grant 2011).
Additionally, even though RPS policies encourage diverse technologies, they also risk
magnifying the dominance of the current least-cost technology because of the high costs of
diversifying renewable energy technology (ibid).
Structural features of the energy market preclude decentralized renewables from
becoming anything more than novel supplements to the current model of large-megawatt
baseload plants (Kessides 2012). In short, these amount to cost, location, and constraints on
delivery from source to demand (ibid). Even as solar and wind become more economically
viable, their costs relative to maintaining fossil fuel dominance remain high because they require
substantial investments in backup generation capacity (ibid). Additionally, there is also no
energy storage technology capable of balancing off-peak and peak demands if the input is
intermittent (ibid). Wind and solar demand larger plots of land to generate an equivalent energy
load (and only intermittently at that), meaning they must be located far from cities and will
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require that many thousands of miles of new high voltage power transmission lines be
constructed (ibid; Miller 2013). When investors could cheaply and easily retrofit coal-fired
plants (which are already connected to the grid and near population centers) into reliable natural
gas plants of the same generation capacity, the appeal of bankrolling miles of new energy
transmission infrastructure is marginal to nonexistent (Kessides 2012).
To hedge against natural gas dominance, decentralized renewables must overcome the
soft cap imposed by Americas perception of renewables and aging energy infrastructure. RPS
policies now need grid updates and investment; if compliance is a goal, states should first
develop the necessary foundation to adequately support the advancement of renewable energy
resources through funding and transmission (Grant 2011, 850). This is being done to a limited
extent in the status quo with new Smart Grid technologies, which are communicating
instruments (sensors and networks) measuring actual output or consumption in real time that may
broadcast that data in one or two directions (Clastres 2011). Smart Grids can increase renewable
market penetration by monitoring demand and supply, as well as absorbing variations in output
by pooling decentralized renewables to form virtual power plants (Clastres 2011).
The uncertainties regarding potential gains and free-riding strategies delay investments
by market actors who are waiting for lower-risk returns before heavily investing in the
technology (ibid). And the fragmentation of the US grid across states and agencies means that
the improvement will require a national strategy (Amin 2013). Many actors will benefit from
these investments, which complicates the mechanisms for redistributing the resulting costs.
Market actors require more detailed information to prevent waiting games and free-rider type
behavior (Clastres 2011). Prices diverge from marginal costs when information asymmetry
obscures the costs, behavior or capacity of competitors (Clastres 2011). That information,
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particularly unbiased price signals and distribution of costs along the value chain, is necessary
for energy decision-makers and regulators to provide a framework for a competitive market
(ibid). Increased government investment is currently a necessary means of funding Smart Grid
investment; higher smart grid density would increase the usefulness of the new meters and boost
the expected gains for private actors (Clastres 2011; Amin 2013). A policy framework will be
needed to provide incentives for collaboration between state utilities and federal agencies,
particularly those that incentivize electricity producers to plan and co-fund the process. A public-
private national bank could be created to fund repairs and upgrades by lending money on a
sustainable basis according to performance metrics (Amin 2013).
Policy Alternative 3: Nuclear Power in a Post-Fukushima World
Finally, rather than embracing the status quo or decentralized renewables, the
government could reclaim its role as progenitor and first mover of nuclear energy technologies
(Andres and Breetz 2011). Large-scale nuclear reactors, like the internet and many laser
technologies, are clear-cut examples of general-purpose technologies that, in the absence of US
government (specifically, military) procurement, might not have been developed at all (ibid).
Since then, nuclear has contributed a steady ~20% of the US grids capacity; it currently
generates 19.7% of US energy, and is expected to generate about 21% of total electricity supply
in 2030 (USEIA 2012a; Hughes and Hayashi 2012). This is in spite of the fact that reactors are
being retired faster than they are being built; merely five new nuclear facilities are even being
planned for the foreseeable future, and these experimental projects are succumbing to delays,
unexpected costs, and public scrutiny (Plumer 2014; Swartz 2012). The increase in generation is
due to a process called uprating, where existing plants are approved to increase their output
(Plumer 2014). Uprating has logistical and economic limits; it cannot overcome a physical
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insufficiency of nuclear facilities (ibid). Nuclear power has the best characteristics to hedge
against natural gas, but remains hamstrung in the US by inadequate government support (Rosner
and Goldberg 2011). Roughly half of US nuclear plants are owned by merchant generators who
sell energy in competitive wholesale markets, while regulated utilities get a guaranteed price for
the electricity they sell (Plumer 2014). These independent generators have been hit hardest by
competition from other energy sources (ibid).
New nuclear power plants designed for large-output baseload capacity require
significant upfront investment and must confront NIMBY (USDOC 2011; Ansolabehere and
Konisky 2008, 2009). Due to the chilling effect created by Three Mile Island, Chernobyl, and
most recently Fukushima, a new large-scale nuclear plant has not been built in the US since the
1978 (Holt et al 2010). Fukushima also affected the affordability of nuclear power. Additional
safety measures, more stringent regulations, higher interest rates, and the longer construction
period are expected to result in increasing capital costs, which may discourage investors and
lenders (Hughes and Hayashi 2012). Although the cost of nuclear was increasing even before
Fukushima, these additional costs can tip the scales away from nuclear, especially in the US
where affordable fossil fuels are readily available (Hughes and Hayashi 2012). However, if
natural gas prices increase or environmental regulations are enacted, the nuclear option could be
reconsidered (Hughes and Hayashi 2012).
Globally, however, nuclear has been surging ahead of other alternative energies; the
accident has not changed the fundamental dynamics of global energy policy and the need to
improve energy security (ibid). Despite the recent incident at the nuclear power plant at
Fukushima, 62 [nuclear] reactors are currently under construction worldwide, while another 484
are either planned or proposed (Koven 2012). Small-scale nuclear plants, called small modular
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reactors (SMRs), have recently become economically feasible and thus ready for market testing.
Although the technology is mature, the Department of Energy is only funding two test SMRs in
the status quo, and they will not begin operation until 2020-2025 (Thesman 2014). And even
if tests occur and a market exists for SMRs, the size of the upfront capital investment relative to
the financial capabilities of the nascent SMR industry is challenging for potential investors
(Rosner and Goldberg 2011).
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3. A Policy Proposal for Building a Nuclear Future
Recommendation and Market Effects
This paper recommends that the Department of Defense (DOD) should fund the
acquisition of small modular nuclear reactors (SMRs), either via procurement of the reactor itself
or by issuing Power Purchasing Agreements (PPAs) for energy generated on-site by private
companies, using the funds currently allocated for wind, solar, and efficiency projects (Andres
and Breetz 2011; Madia 2012). A DOD first mover role for SMRs could fulfill the many
competing interests that make federal energy policies politically and economically challenging
(Andres and Breetz 2011). While interest groups will instantly shoot down requests for fresh
spending on Energy Department programs that could be likened to the one that funded Solyndra,
many support alternative-energy programs for the military that are perceptually tied to national
security (Davenport 2012). Implementation of an SMR policy would also not necessarily require
any Congressional debates over fresh spending because DOD is already allocated money for
on-base energy experiments and new energy projects must compete against other renewable
energy projects as well as energy efficiency projects (USGAO 2012). Specifically, PPAs allow
Federal agencies to fund on-site renewable energy projects with no upfront capital costs, by
buying the energy the reactor produces at a higher cost and reimbursing the reactor owner over
the life of the plant (USDOE 2011).
Using PPAs or procurement to purchase the first few hundred MWs of SMR generation
capacity and dedicating it to federal use [] would both reduce licensing and economic risks to
the point where utilities might invest in subsequent units, thus jumpstarting the SMR industry
(Madia 2012). The single largest energy consumer in the world, DOD, acting as a first mover
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would guarantee a subsidized market for initial units, bridging the valley of death and
resolving the prisoners dilemma between early adopters and future investors (Davenport 2012;
Andres and Breetz 2011). A DOD also contract exempts the early adopter from NRC licensing
requirements for initial manufacture, production, or acquisition by the Department of Defense
[] or the use of such facility by the Department of Defense or by a person under contract with
and for the account of the Department of Defense (USNRC 2013). By using DOD bases, the
NIMBY argument would be marginalized as the installation would be the somewhere else,
and the private sector will see that nuclear reactors can indeed be utilized safely and effectively,
resulting in a renewed push toward the expansion of nuclear power (Clifton 2011; Andres and
Loudermilk 2011). Finally, SMRs are functionally immune to Chernobyl-style meltdowns, with
new passive cooling systems and a smaller radioactive source term that slow accident
progression to hours or even days (Wheeler 2010).
Applying the Evaluation Criterion
Predicting the magnitude of the effects of procurement or PPAs would entail evaluating
the marginal reduction in levelized cost of energy (LCOE) and EROI as initial units are produced
as well as market buy-in (that is, acceptance of PPAs/procurement contracts by the private
sector) (Rosner and Goldberg 2011). LCOE effectively signifies the end market cost of a single
units entire production chain, so unit-by-unit improvements in LCOE signal that the
manufacturing process is improving in efficiency, and also indicate improving EROI (ibid). An
important long-term evaluative metric for energy diversity would be observing nuclear powers
energy market share to determine whether the incentive policy is impacting market behavior. To
maintain energy diversity and regain the investment security that caused the initial spread of US
nuclear reactors in the 60s and 70s, the LCOE for nuclear plants must be competitive with
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large-megawatt fossil fuel plants and overcome NIMBY stigma created by high-profile reactor
disasters (ibid; Clifton 2011). With new technologies like SMRs, companies often cannot
appropriate all the social benefits of an innovation and so fail to invest in what could be socially
optimal technology (Milford 2011). The current roadblocks for SMRs are bridging the valley
of death between laboratory and marketplace by developing economies of scale and overcoming
the costly and lengthy Nuclear Regulatory Commission (NRC) licensing process for new nuclear
technology (ibid). Absent DOD intervention, it is unlikely, at best, that private industry will
succeed in bringing new reactors to the U.S. market and offsetting natural gas (Andres and
Loudermilk 2010).
A study by the Energy Policy Institute at Chicago found that manufacturing learning
from the first 18 units alone would make SMRs LCOE competitive with the upper end LCOE
for natural gas-fired generation and two-thirds of the way to competing with the low-end LCOE
(Rosner and Goldberg 2011). SMRs are attractive replacements because the 250-300 MW
footprint for a typical older coal-fired plant would be comparable to a replacement SMR plant
and current fossil fuel sites already have the necessary water, rail, and transmission facilities
and the necessary infrastructure (ibid; Colvin 2011). Whereas large reactors force investors to
tie up massive investments in one project (called a single shaft risk), SMRs are modular and
manufactured instead of being built on-site (Andres and Loudermilk 2010). This creates lower
pre-completion risk due to shorter construction schedules [] lower market risk because there is
significantly less power than needs to be sold [ and] the modular nature of SMRs affords the
flexibility to build capacity on an as-needed basis (Rosner and Goldberg 2011).
Mays 21
4. Conclusion
Americas looming energy decisions demand complex solutions. No one policy can
optimize social costs while also checking the necessary political and logistical boxes. My goal is
not to solve the US grids every problem, but rather to update energy policy discourse from the
Cold War-era presumption of fossil fuel desirability and inevitability. Diversification of
Americas energy options today might provide breathing room for more ambitious future energy
policies. Re-centering the rose-tinted, short-sighted discourse of natural gas advocates is a
necessary first step to understanding and counteracting the potential costs that lock-in might
create. Certainly, a proposal for nuclear power is not without flaws, but energy policy cannot
afford to make the good the enemy of perfection; it is certainly preferable to the status quo
within the organizational and political constraints that control energy policy.
Mays 22
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