The Blockbuster Conundrum

Issue 5 and Volume 118.

Brian Schimmoller   By Brian Schimmoller, Contributing Editor

Remember Blockbuster Video? Not too many years ago, Blockbuster was a business titan. At one point, the company was valued at more than $5 billion, employed about 60,000 people, operated more than 9,000 stores, and even had the naming rights to a college football bowl game.

So what led to its demise? Some might point to Redbox, which certainly played a role, but the origins of the demise are more fully traced back to the evolution of the internet and personal electronic devices. That’s what set in motion the technological and commercial advances that led to streaming video, kiosk video delivery, and on-demand entertainment – advances that made Blockbuster irrelevant and bankrupt by 2010.

It’s no great insight that disruptive forces like the Internet and personal computing can have far-flung impacts across business, industry, politics, even culture. Predicting the course and range of impacts is folly. Recognizing that there will be a new reality – and planning for that new reality – is smart business.

Distributed generation and the natural gas boom clearly have the look and feel of disruptive forces. Horizontal drilling, hydraulic fracking, energy storage, lower-priced photovoltaic cells: all are heavily impacting the electric power industry. Whether or not they really are disruptive forces is immaterial. Nuclear plants have to behave as if they will be.

A looming question in this context is how the value of generation assets, including nuclear plants and other baseload resources, will be recognized in electricity markets. A white paper by Samir Succar of ICF International examines the impact of distributed generation on U.S. capacity markets. The statistics are heady stuff: ICF projects 29 TWh of energy efficiency by 2020, offsetting most load growth; 12 GW of solar by 2020, representing a 600 percent growth; and 5 TWh of electric vehicle charging demand, much of which could be supplied by distributed generation.

Succar points out that while net metering and the intermittent availability of distributed generation resources have drawn the most attention, bigger impacts may be in store. “As variable, distributed generation increasingly becomes a prevalent source of generation in regions, changes in capacity market dynamics will have a profound impact on generating assets and their future economic viability. Without commensurate changes in capacity market structure to account for these changes, system reliability will be compromised.”

The nuclear industry is already feeling the pressure. A number of merchant nuclear plants are at risk due to their smaller size, lack of support in deregulated markets, and competition from other generation sources. While some plants may find refuge in new power contracts, others may need help from state legislators. According to an article in Crain’s Chicago Business, Exelon may be “…laying the ground work with state leaders for legislation next year that…may be necessary to keep half its Illinois fleet from closing.” One option reportedly under consideration is a new clean energy standard that would give nuclear generation extra payments for their round-the-clock, CO2 emissions-free power.

Another interesting nuclear-related aspect of the changing nature of electricity markets can be seen in California in the aftermath of the San Onofre Nuclear Generating Station (SONGS) shutdown in early 2012. In a blog post on the Energy Economics Exchange, Lucas Davis and Catie Hausman of the University of California, Berkeley’s Haas School of Business use the SONGS closure to examine the value of transmission in electricity markets. They found that the SONGS shutdown increased the cost of electricity generation by $370 million during the first 12 months following closure.

SONGS sits in a load pocket between Los Angeles and San Diego, and because of transmission constraints, a large portion of southern California’s generation must be met locally. This resulted in a segmentation of the market between north and south. “After the closure, there were many more days with positive [price] differentials, including a small number of days in which prices in the south exceeded prices in the north by more than $40 per megawatt hour.”

The analysis found that, of the $370 million in increased generation costs, about $40 million could be attributed to the transmission constraints. The authors acknowledged that this figure is not precise because there were other factors at play during this time, but emphasized that transmission constraints were rarely binding before the SONGS closure.

What this all means is that the electricity marketplace is increasingly bearing the markings of a “modern family” as it feels its way through this transition period. Nuclear will be part of the family, but its role and its relationships with its siblings will never be the same.

When Blockbuster was entering bankruptcy, I recall seeing a top 10 list of proposed new slogans. One said simply, “Blockbuster. We still exist.” Macabre humor, admittedly, but I see it as incentive to keep nuclear alive and well.

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