The Electric Power Industry: A Post-Election Assessment

Commentary by H. Sterling Burnett

Source: Power

With the passing of the 2012 election, one is reminded of the saying, “The more things change, the more they stay the same.” This, of course, stems from the fact that President Obama was reelected and both the Senate and the House remain in control of the same parties that held power, Democrats and Republicans respectively, before the election. For at least the next two years, expect more of the same.

Nuclear

Nuclear power will see some modest growth in the medium term. Even with no new reactors being built during the past 20 years in the U.S., the nuclear power industry has a great deal to brag about. In 1980, the average nuclear plant operated at 58.5% of its rated capacity. Today’s nuclear plants average more than 90% of capacity. Indeed, the increased electricity produced by existing nuclear plants since 1990 could power 26 cities the size of Boston.

Nuclear’s improved performance, combined with a new generation of purportedly less-expensive reactors and renewed concerns about America’s energy security has brought nuclear power construction out of the post–Three Mile Island mothballs. Still, the industry is only likely to grow as long as the federal government offers loan guarantees to back the construction of new reactors. At the moment, four new reactors at two existing sites are in various stages of construction and a fifth reactor that had been mothballed during construction in 1985 is being finished out. Twenty-two more are in various stages of the proposal and/or planning processes. Many of these, however, won’t be built for two primary reasons: relatively high construction costs and low natural gas prices that have undermined the push for new nuclear power plants for the near future. In the push to fund “core” programs to reduce the deficit, loan guarantees, and other programs that have helped restart the industry will likely be reduced—if they’re not zeroed out of the federal budget.

Coal

For coal, expect the bad news to keep on coming. In swing states where the “war on coal” directly competed for votes with the “auto bailout,” auto workers beat coal miners. The administration’s take-away message is likely to be that there are no serious repercussions for continuing to wage an assault on the coal industry from mine mouth to power plant to port.

There were few bright spots for the coal power industry during the Obama administration’s first term. Every clean air regulation that was made stricter had a disproportionate impact on coal plants. These regulations combined with low natural gas prices have made new coal plants undesirable from a cost perspective. Both trends also have made a number of existing coal plants unprofitable to operate and, in light of natural gas as an alternative, too expensive to upgrade to meet stricter air standards.

On the other end of the coal front, federal, state, and local governments are actively working to block ports’ expansion that would allow increased coal exports, while the Obama administration has taken steps to restrict mountaintop mining. New regulations are in the pipeline that will make coal plants even less viable.

Natural Gas

Although with little encouragement from the Obama administration, the natural gas industry has boomed over the past six years as a result of the fracking revolution. This trend is likely to continue. President Obama needs the gas boom to continue because it’s key to the administration’s claims that the U.S. is on the road to energy independence.

Despite his need for the natural gas boom to continue, the president seems committed to making public lands less accessible for oil and gas development. In addition, the administration is threatening to raise costs to producers by instituting nationwide fracking disclosure regulations. States that desired more drilling transparency have shown themselves more than capable of instituting disclosure regulations. Federal regulations would be duplicative and unnecessarily reduce new production. Most fracking is carried out by relatively small independent operators. While the largest producers can afford the costs of the new regulations, many smaller operators cannot. As a result, less gas will be produced, and the president will strike the very segment of the economy that he has consistently claimed is the backbone of economic recovery—small businesses.

Having said this, the biggest threat to the fracking revolution is its own success. Large production increases have resulted in extremely low prices—good for consumers, not so much for producers who are struggling to produce natural gas at a profit. If this continues, more and more gas wells will be shuttered and fewer new wells drilled until prices allow operators to cover the costs of construction and continuing operations with a profit thrown in.

Congress

In the end, although Senate Republicans are likely to offer a number of bills to expand off-shore drilling and expedite domestic production, few if any of these initiatives are likely to make it out of the Senate. And unless some Republicans cross party lines and support Senate Democratic energy legislation, gridlock will continue. This is bad news because it will leave energy policy to the whims of federal regulatory agencies. Legislation through regulation is almost always bad for the energy industry, but especially so under the current regime.

— H. Sterling Burnett, PhD (sterling.burnett@ncpa.org) is a senior fellow at the National Center for Policy Analysis in Dallas.