Monday, February 20, 2012

Japan's Electricity Crisis and Nuclear Power in the US

Japan's has imposed on itself a real "Electricity Crisis."
Some people like to throw around the words "Energy Crisis" when talking about US dependence on foreign oil. But Japan is facing a real energy crisis...a lack of electricity.
I've stated many times before that the US doesn't have a energy crisis, instead our problem over the last decade has been a lack of growth. By this I mean, the US needs to return to growth and one way to do this is to figure out ways to lower the price of electricity (i.e. wind and solar are not solutions to the growth problem. Wind and solar electricity increases the price of electricity and/or increases our taxes, and hence makes it harder to grow.)
Well, Japan is facing both an energy crisis and a lack of growth. Pretty soon, all of Japan's nuclear power plants will be closed. In fact, only 2 of Japan's 54 nuclear power plants are currently operating. By April, the number will decrease from two to zero. Nuclear power used to provide nearly 30 percent of the electricity in Japan.

This means that Japan will be producing roughly 30% less power than it was producing a year ago. Sure, they have been able to quickly turn on some natural power plants to make up for the loss of power, but their power production has decreased ~30% in the span of a year. That's a negative growth rate. This is unsustainable, unhealthy, unwise, and just plain against fundamental human values. More people will die from the lack of electricity and more people will not be born because of the lack of power than will have been killed by the Fukushima Daiichi nuclear accident.

There's plenty to fear from nuclear radiation, and Japan has every right to be scared, considering the fact that three of the four worse nuclear accidents/attacks have occurred in Japan. But people in Japan need to realize that nuclear power can help grow life. (While the rate of return on investment of nuclear power plants is much smaller than most fossil fuel power plants, Japan is not rich in fossil fuels, and so, like in France, nuclear energy makes a lot of sense.

The Japanese government needs to release information that can help the public make an informed decision on whether to let the nuclear power plants go back online. This information includes:
1) How many people were killed directly because of the tsunami?  (~10,000)
2) How many people were killed directly or will die from cancer because of the nuclear accident? (Between 10 & 100)
3) How many people will die because of higher electricity prices and/or electricity rationing due to the inoperable nuclear power plants?  (53 have died so far this winter in Japan, but it's not clear how many would have been saved if electricity prices were lower. It's not that people use electricity directly to heat their homes. The problem is that natural gas is being used to generate electricity and this inevitably increases home heating costs. An important question to ask is: how many people will die at hospitals because of the higher electricity prices and natural gas prices?)
4) How many less people will be born in Japan because of higher electricity prices and/or electricity rationing due to the inoperable nuclear power plants? (It would be important to know the answer to this question, but it's probably impossible to estimate it accurately.)

Like in the Story "The Fallacy of the Broken Window," you have to look at both the direct and the indirect effects of any action. Not operating a nuclear power plant decreases the chances of death by nuclear radiation, but it also increases the chances of death from natural causes (such as the cold or tsunamis.) For example, if electricity is expensive due to the lack of operating nuclear power plants, then it will be harder and more expensive to build barriers to protect people from tsunamis. What I'm saying is the following: more people will probably die due to high electricity and natural gas prices than will die because of the nuclear accident. The time/money/energy that could be going towards protecting coastal towns or building hospitals will likely go towards building new power plants. (And if these power plants are wind or solar, then they will be extremely expensive compared to restarting the existing nuclear power plants in Japan. Why not just restart the existing nuclear power plants and use that energy to help rebuild Japan? The main cost of a nuclear power plant is its upfront costs, which can be considered to be a 'sunk cost' because most of the equipment at a nuclear power plant can't be picked up and moved elsewhere.)

The best way for Japan to save people's lives and to help re-grow their society is to restart their existing nuclear power plants. This doesn't mean that certain individuals shoudn't be blamed for building nuclear power plants in an active seismic zone; it's just that, now that the power plants are already build: what option will lead to less people being killed and lead to re-growing their population? I suspect that more people will die from the cold or die from lack of protect from future tsunamis than will die from a future accident at one of the ~54 existing nuclear power plants in Japan.

But with that having been said, that does not mean that nuclear power is the solution to the growth problem in the US. This has nothing to do with safety; it has to do with economics. So, while I think that the decision by Japan's and Germany's public to close existing nuclear power plants  is not wise, building new nuclear power plants in the US is not a wise choice either.

In fact, I think that it is ridiculous that an electric utility company (Southern Company),  who is building a nuclear power plant near Augusta, Georgia, can raise electricity rates for those people living in the region before the power plant even comes online. This is monopoly at its worst. The state of Georgia needs to pass electricity deregulation legislation and end the monopoly of public electricity companies. (Here's a list of states that have electricity and/or gas deregulation.)

It makes me sick that the people around Augusta will have to pay more for electricity even before the nuclear power plant comes on line. What's worse is that Southern Company could have build a natural gas combined cycle power plant, and they could have lowered the electricity bill of every resident of the region. The Georgia Public Service Commission is supposed to be a watch-dog agency, and should not have approved the rate hike to build an expensive nuclear power plant. The residents of Augusta should be angry that Southern Company is allowed to raise electricity rates to build a nuclear power plant. What's immoral is that Southern Company is probably guaranteed a certain 'rate of return on investment.' Note that this is not the real 'rate of return on work invested.'  The real 'rate of return on work invested' for a nuclear power plant in the US is roughly 5%/yr.  However, I'm guessing that Southern Company will be guaranteed a >7%/yr rate of return, i.e. Southern Company will be allowed to earn profits (typically between 7%/yr and 11%/yr) by raising electricity prices even if the real rate of return on work invested from the power plant is only 5%/yr or less. This is one of the major problems with electricity regulation:  electricity consumers have no choice in rate hikes,  and the public agencies, like the Georgia Public Service Commission, do not actually protect electricity consumers. The whole point of investing is that you are supposed to take the risk in order to achieve a rate of return on that investment. However, if Southern Company is allowed to raise electricity prices before the nuclear power plant is built, then this is a mockery of the whole idea of investing. If you are guaranteed a certain return on invest, then it's not investing because there's virtually no risk to Southern Company. The whole point is that the company taking the risk should be the one that gets the return on investment. In this case, Southern Company gets the return on investment but assumes virtually no risk. (The US tax payer is also shouldering some of the risk via Department of Energy loan guarantees...and guess what...the US tax payer doesn't get an return on $8.3 billion dollar investment from this project. The DOE loan guarantee program is absurd as well. Why is the government doing loan guarantees to nuclear, solar and wind when we should be generating cheap electricity by building unsubsidized natural gas combined cycle power plants?)

We all know the problems with California's deregulation attempt around 2000-2001, but the story of the nuclear power plant being built in Georgia should remind us that there's a price to pay for regulation and a price to pay for energy subsidies (higher electricity prices and higher taxes.) Even though the case of California's deregulation was horrific at first, there are far more success stories for deregulation than there are horror stories. For example, Pennsylvania is a shining example of the success of electricity deregulation for the following reasons: 1) Consumers have choices on which company they would like to purchase electricity; 2) The PJM is the world's largest and the world's best example of an electricity free market; and  3) Electricity prices have remained low because companies have to compete on PJM's electricity market (like an auction). You couldn't build a new nuclear power plant in a state like Pennsylvania (nor should you given the abundance of natural gas in the state.)

If you're interested in learning more about electricity regulation and deregulation, following this link to a post I wrote on this subject back in July. My hope is that you, the reader, do more research into the pro's and con's of electricity deregulation. I also hope that you see the problems with government subsidies for energy production (higher taxes.)

So, let me recap the conclusions of this post...
Restarting existing nuclear power plants in Japan is an incredibly smart plan, but building new nuclear power plants in US is a bad idea because it will cause electricity prices to increase. What we are doing in Georgia is even worse...first, the US tax payer is subsidizing part of the cost of the nuclear power plant, and the rest of the burden is placed on the shoulder of those people in Georgia who will have to pay more for electricity. In a free market, Southern Company and its investors would share the risk and therefore would deserve to share in the profits. But since the overall rate of return on work invested from a nuclear power plant is marginal (~5%/yr), Southern Company and its investors would never have invested in it given that there are much better options for investing, such as natural gas combined cycle (~20%/yr ROI).


  1. What an incredibly circular article.

  2.'s hard to describe growth without using circular reasoning.
    When discussing economics, it's easy to talk one's self into knots if you don't model the entire system (and estimate the growth rate of the entire system.) Given that it's impossible to describe the entire global economic in one blog post, any article on economics is ultimately approximate and it's easy to go round and round in circles.

    As an update, on May 5 2012, all 54 of Japan's nuclear reactors were shut down.
    As of March 18th 2013, only two reactors (Ohi Units 3&4) have been restarted.

    For more information, see: