Fukushima, from Gary Rogan

March 14, 2013 |

 I believe the Prime Minister backed off his statement about restarting Japan's nuclear plants. In all likelihood, some of their nuclear units may return to service, but now seems too soon.

Japan's commercial nuclear power plants can produce bulk power for approximately $12 per megawatt-hour. Importing Liquefied Natural Gas (LNG) to fuel gas turbines produces power at approximately $144 per megawatt-hour (assuming ~ $18/MMBtu for delivered natural gas and an average heat rate of ~ 8,000 Btu/kWh).

With 48,000 megawatts of undamaged nuclear capacity in Japan's fleet, the difference between $12 and $144 is significant. Assuming a 85 percent capacity factor, the simple difference adds up to approximately $50 billion per year.

In fact, the cost difference is greater than $50 billion. First, utilities must continue paying operations, maintenance, capital and fuel management costs even if their nuclear plants are idled. Idled plants produce no revenue to offset costs.

Second, the power market is punishing. The $144 would be a base bid in any power auction. Market-clearing prices would start at $144 and shoot up to higher heat rates, depending on hourly demand. (Higher heat rates suggests higher production costs)

The economic pain associated with high energy costs should cause Japan's policymakers to think hard about practical options. In all likelihood, Japan will restart some of their newer units, but not right away. Any restart will likely be slow, deliberate and sequential.

In the meantime, Japan will invest heavily in renewable energy. Production costs for wind, solar and demand-response are near $0 per megawatt-hour. More importantly, power from renewable power displaces the market's costliest fossil-fueled plants watt for watt.

The world seems to be betting Japan will continue to shun nuclear power production. Australia, Qatar, Indonesia and the US are eyening Japan as their prime customer for new LNG production. It appears their collective bet may not fully consider Japan's options of renewable energy and nuclear restarts. But that is another topic for another thread.

As an aside, Japan's power grid has an unusual design. Half of the nation is 60 Hz (because it was designed by Americans). The other half is 50 Hz (because it was developed by Europeans). Japan cannot easily move bulk power between 50 Hz and 60 Hz systems. The fact the grid is not homogeneous means the energy flowing within the grid is not fungible. It also means Japan's power markets are not efficient.

Carter Dimitroff writes: 

From a market perspective, the near zero production costs of wind and solar are reached without government subsidies. Government subsidies drive production costs into negative numbers or they reduce capital costs. Some nations use feed-in tariffs, which subsidies capital expenditures, production costs and margins.

Many in the utility industry are befuddled by production costs. For decades, utilities in the US have been regulated. Regulated assets need not respond to market forces, because there appears to be no market in regulated regions.

The fact is that where there are no formal markets, utilities create virtual markets. Responsible utilities dispatch regulated power assets using market principles. First, they dispatch low production cost assets, then they dispatch progressively expensive assets. The virtual market becomes distorted when there is limited liquidity. Small utility regions with few assets will often dispatch "must run" assets even if they are uneconomic.

Production costs are not levelized costs, nor are they operating costs. They are market-based costs. From an energy production perspective, production costs are the incremental costs incurred when a facility changes its state from offline to production. Those incremental costs are mostly made up of fuel and fuel handling costs. They also include additional costs for manpower, operating based maintenance and, in the case of US nuclear, waste disposal costs. But for the most part, fuel is the big driver in production costs (after all, a power plant is just an energy conversion device that wastes two thirds of its fuel in the conversion process).

Wind and solar facilities are largely passive machines. They need no costly fuel as feedstock and no incremental manpower to operate. They just sit passively and wait for sun or wind to manufacture energy.

Carder Dimitroff adds: 

First, the US has no feed-in tariffs for solar or for wind. There are negotiated power purchase agreements scattered about, but no formal feed-in tariffs exist like we see in Europe.

Second, no grid has an over abundance of solar power needed to spark the imagination suggested. At best, solar acts as a peaker. It is difficult to imagine a case where solar could supplant base loaded production. It is also difficult to magically arrive at a point where there is no cash flow. Investors would have throttled back before reaching this point.

Third, the case you cite for solar is extreme and hypothetical. But it has happened for wind. The locational marginal price has blown past zero on several occasions. But that was a signal there was a problem with transportation, not production. It was also a signal that higher cost producers refused to respond to market signals and as such, they refused to exit.

What does "h" mean?

Anonymous comments: 

Japan's fossil-fueled generation remains high because of continuing nuclear plant outages. Because Japan's thermal energy is imported, solar is beginning to look cheap.

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