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

Paul Gipe, Contributor
October 30, 2012 | 6 Comments

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 determining an accurate strike price 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.

Lead image: Nuclear plant via Shutterstock

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6 Comments

Gerry Wootton
November 1, 2012

One problem tith FiT is that the 't' stands for tariff, which in the mind of the mark 1 unwashed voter sounds suspiciously like a tax. On the other hand, 'tax free loan' seems innocuous. The problem with 'reasonable' price is that it is very easy to ignore externalities. The 'cost of insurance argument' above is just one instance. The cost to the economy of locking up huge amounts of capital in projects that will only become productive in 10 or 20 years is also huge - alot of that cost comes back to the taxpayer in ways that they don't even suspect. The cost of these projects when they fail is even bigger.
Other externalities seem to be rather easily waved off. We know that acid rain and ozone are bad and, in fact, emissions are taxed, the problem being that the rates are way below the economic cost and, in most cases, the taxing is capped given mega scale polluters a 0 marginal cost of emissions. But when it comes to toxic emissions, even those with direct harm to humans, no one even wants to put a price on it. Everything has a price, even a human life, but since that's a thing too awful to contemplate, a fair price is never assigned so the default price is 0. Environmental impacts seem too soft a concept to assign a hard cost: for example, what is the cost of 5,000,000 dead loons? what is the value of a mountain? It appears that in general we are happy to assign a 0 cost to the former and a negative cost to the latter. This allows polluters to continue by arguing that to do otherwise would have a cost - and truly it would as compared to the $0 currently assigned. One study pegged the healthcare cost of conventional coal at 17.8 c/kWh.
So even though FiTs have a semblance of transparency, there's always going to be a large number of detractors who don't know 'why the cost is so high': after all, many of them vote for candidates that promise to sacrifice their health for someone else's economic gain.

lawrence elliott
November 1, 2012

In a country where a person such as a Romney can receive more than two votes,his and his wife's, it should not come as a surprise that feed in tariffs like this are contemplated for nuclear and coal without riots in the streets. One CEO in the auto industry recently described Romney as 'living in an alternate universe'. The USA as a whole increasingly seems to be taking up residence in the same space. What's next? Tax credits for malarial mosquito breeder farms.

DUNCAN JIM
November 1, 2012

The process for reigning in retail utility costs is simply decoupling of price from profit. Rather than a REP business model designed around selling as many kWh as possible, estimate the cost of wholesale electric power necessary to meet demand, include overhead, maintenance a reasonable profit, projected demand growth and divide by the estimated retail kWh sales.There is the retail unit cost.
If estimates are off and costs are higher than anticipated, the following years rates rise accordingly. And the inverse is true if costs are below projections.
This is the basis on which municipal & coop utilities are operated. It removes the greed factor so dear to the black hearts of the investor owned utilities.
Solarguy

Bastiaan Spanjaard
November 1, 2012

Dear Paul,

Thanks for your in-depth review of these FITs - they will certainly be interesting to watch!

In Germany, the recent boom-bust cycle of the solar industry was exacerbated by the the fact that FITs react too slowly to market price changes. The slow reaction of FITs is tied to them being a policy instead of a market price and is therefore hard to avoid.

Do you think this will be relevant to Indiana or the UK? Do the policies have a way to address this or is there a reason they do not?

Kurt Grossman
October 31, 2012

Do we need Feed In Tariffs for cereal, milk, and patio furniture? Wouldn't it be better to incent the utilities to cut costs and reduce pollution? The utilities have a form of monopoly that is regulated but there is NO incentive to lower the cost of energy. What if we told these 'greedy capitalists' (pardon the sarcasm) if you reduce your operating costs we will allow you to make a little more 'profit'; if you decrease your emissions and decrease your operating costs we will allow you to make more 'profit' and if you generate more electricity with renewable energy, lower your costs, and decrease your emissions you can make even more 'profit.' Much like litigation: the Plaintiff and the Defendant both lose and the legal system reaps the benefit. If you make the solution "Win - Lose" then the winners will always be the ones who have the power (plants). We will always be fighting a losing battle because the utilities own the wires and the substations.

Karl-Friedrich Lenz
October 31, 2012

(Cross-posted from Lenz Blog)

There are different opinions about the cost of renewable energy. Some people still try to say solar is too expensive.

But one thing is clear. All the figures are open for anyone to see. Everybody knows exactly how much is paid over the feed-in tariff to get solar energy deployed.

In contrast, the classic model of financing was: Add up whatever cost the utility had for their equipment, then add on some profit, and then fix electricity prices (requiring approval by a regulator) at a level resulting in that profit.

What exactly is the difference to the feed-in tariffs for solar energy?

For one, the feed-in tariffs are reduced all the time, since costs go down. Those costs go down as a consequence of the feed-in tariffs, but they go down. A lot.

In contrast, the costs of fossil fuel or nuclear have not gone down.

Next, the costs were never disclosed in the same way to the consumer the feed-in tariff does. Electricity bills don't have a "fossil fuel cost surcharge" or a "new nuclear plant cost surcharge". The utility just adds up all the costs in the model, without a need to disclose them to the costumer.

These are silent surcharges.

Arguably, the classic model of financing is rather similar to a feed-in tariff. The regulator looks at actual costs and sets the price.

If so, setting a feed-in tariff for nuclear energy, as the United Kingdom may do according to Gipe's article, would not be ever so different to what was done when most of the existing nuclear plants were built under monopoly structures.

The most important difference would be that the feed-in tariff would make the assumptions about costs transparent. That would be progress.

So yes, maybe it would be a good idea to have feed-in tariffs for all forms of electricity generation (except for countries where nuclear is illegal altogether, which would of course not have a feed-in tariff for nuclear energy).

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Paul Gipe

Paul Gipe has written extensively about renewable energy for both the popular and trade press. He has also lectured widely on wind energy and how to minimize its impact on the environment and the communities of which it is a part. For his...