Pricing carbon in North America

It was with great interest that most of us listened to President Obama put climate change back on the US agenda in his state of the union address this month.

After years of talking about it, we are finally poised to control our own energy future. We produce more oil at home than we have in 15 years. We have doubled the distance our cars will go on a gallon of gas, and the amount of renewable energy we generate from sources like wind and solar – with tens of thousands of good, American jobs to show for it. We produce more natural gas than ever before – and nearly everyone’s energy bill is lower because of it. And over the last four years, our emissions of the dangerous carbon pollution that threatens our planet have actually fallen.

But for the sake of our children and our future, we must do more to combat climate change. Yes, it’s true that no single event makes a trend. But the fact is, the 12 hottest years on record have all come in the last 15. Heat waves, droughts, wildfires, and floods – all are now more frequent and intense. We can choose to believe that Superstorm Sandy, and the most severe drought in decades, and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgment of science – and act before it’s too late.”

The real question is will there be policy to support acting before it’s too late?

I think most would agree that any strategy that would change behaviour requires an economic impact – because we all respond to prices.  This means we need a price on carbon; either a carbon tax or a cap and trade program.  In the past most jurisdictions in North America have favoured consideration of the cap and trade approach as new taxes (to nobody’s surprise) are very difficult to implement.  In North America (in contrast to Europe) we generally believe we have a right to low cost energy and there is genuine concern that higher energy prices further weaken the economy and negatively impact jobs.  And with jobs being a huge priority, many have said that there will not be any price on carbon in the foreseeable future.

But for all of those who have said there will never be a price on carbon in America, I am sorry to say – YOU ARE WRONG.  Today there is a price on carbon – the only problem is that it is negative.  That’s right – its negative.  In other words, we have significant subsidies on oil and gas that encourage more production and consumption; whereas pricing carbon positively would encourage reduced oil demand and use of lower carbon alternatives.

The 2012 World Energy Outlook (WEO) shows ever-growing subsidies to fossil fuels.  It only considers consumer and consumption subsidies, commonly applied in the developing world and in oil producing countries.  In 2011, this subsidy amounted to almost $300 billion, far greater than any other form of energy.

In North America we do not provide consumer subsidies for oil but rather producer subsidies in the form of tax relief through various exemptions and special provisions in the tax code.  Most talks by President Obama have quoted the cost of these subsidies at about $4 billion per annum federally (some estimates show that state subsidies are many times greater than the federal subsidy).  In Canada, subsidies to the oil industry are estimated at about $2.8 billion per annum (both federally and provincially).

The argument in support of these subsidies is that they are generally intended to encourage drilling, agreeably a very risky endeavour.  The arguments against fall into two categories:  first there are many subsidies that have outlived their usefulness but somehow are never removed from the books; and second, that at a price of over $100/bbl, oil companies are making record profits (the three largest oil companies made profits of $80 billion or $200 Million/day in 2011) so they shouldn’t need subsidies to encourage them to find more oil, i.e. the current price of oil is incentive enough.

Examining the subsidies a bit further, we can calculate the cost (if you see any errors in my calculations, please let me know).  Using production data from the WEO 2012, we can take $4 billion and divide it by 8.1 mb/d in the US and take $2.8 billion and divide by 3.5 mb/d in Canada.  The result is about $1.35/b in the US and $2.20/b in Canada.  Assuming a carbon content of about .43 t/bbl would result in a subsidy cost per tonne of carbon of just over $3 in the US and about $5 in Canada.  The US number is smaller because it is limited to federal subsidies while the Canadian number is for both federal and provincial subsidies.  What this shows is that carbon indeed has a price and it is negative, i.e. it incents more fossil, rather than less or alternatives.

So let’s take this one step further.  Again going back to the WEO, they assume a carbon price reaching $45/t in the New Policies Scenario (base case – continue down the current path) rising to $120/t in the low carbon 450 ppm scenario.  Or to put it more simply, a large positive price on carbon (equivalent to $20-50/b) rather than the current subsidy (i.e. negative price) is required to move the world to a low carbon scenario that will actually have an impact on climate change.

In summary, if a price on carbon is a key tool to help reduce fossil fuel use and combat climate change, then we are clearly going in the wrong direction.  Because yes, today we do have a price on carbon in Canada and the United States – and it is negative.

Note to readers – I did not comment on the benefits of nuclear in this blog as I was focused on making a point about the impact of subsidizing oil and gas prices.  There have been a number of other blogs that have done a good job on this point.  See Steve Alpin’s blog showing how Ontario in Canada has drastically reduced its carbon emissions through increasing production from its nuclear fleet while reducing coal use.  There is also the point to be made about how large a subsidy is required to implement renewables even with large carbon prices.  And there is the pressure that most are expecting to come to Canada from the US in exchange for approval of the Keystone pipeline.  But we will leave that for another day……

Nuclear competitiveness and the folly of forecasting

Hard to believe we have already come to the end of another year.  It was a year with both highs and lows for the nuclear industry. I will talk about this more in the new  year.  But for today, I wanted to close out 2012 by writing about something that I have been thinking about since I first addressed it in September of 2011 – gas prices.

It was about a year and a half ago when the then president of Exelon gave a speech to the ANS noting that “Nuclear is a business, not a religion”.  The premise was that nuclear needs sustained high gas prices to be competitive.  Since that time it has become a given that gas prices in North America are low and predicted to stay low for some time; the result being that new build nuclear plants are not competitive in this environment.  It is said in almost every article and discussion of the future of nuclear in North America. i.e. we love nuclear but low gas prices are making it impossible at the moment (albeit more in the US than in Canada).

And indeed, this was the year that gas prices seemed to go lower than anyone could have imagined.  Earlier this year the price actually dropped below $2/mmBTU and has stayed roughly in the mid $3 range ever since.

But this is the point.  Predictions are just that – predictions – and in most cases are notoriously wrong.   Just look at the change in prices from 2008 until now.  And I can assure you that in 2008 no one was predicting this to be the case.

I first cited Dan Gardner’s book “Future Babble” in my post of August this year.   I loved this book.  It was good fun to read and I strongly recommend it.  Basically the book explains why expert predictions fail and why we believe them anyway.  It includes some fun anecdotal examples.  “In 1984, the Economist asked sixteen people to make ten-year forecasts of economic growth rates, inflation rates, exchange rates, oil prices, and other staples of economic prognostication. Four of the test subjects were former finance ministers, four were chairmen of multinational companies, four were economics students at Oxford University, and four were, to use the English vernacular, London dustmen. A decade later, the Economist reviewed the forecasts and discovered they were, on average, awful. But some were more awful than others: The dustmen tied the corporate chairmen for first place, while the finance ministers came last.

And while giving examples of where expert predictions are wrong is fun, Future Babble does actually quote a bone fide study on the issue.  This study comes from Philip Tetlock who today, is a much-honoured psychologist at the University of California’s Haas School of Business. In 1984 Tetlock undertook a massive study on just this issue.

Scouring his multidisciplinary networks, Tetlock recruited 284 experts — political scientists, economists, and journalists — whose jobs involve commenting or giving advice on political or economic trends. All were guaranteed anonymity because Tetlock didn’t want anyone feeling pressure to conform or worrying about what their predictions would do to their reputations. With names unknown, all were free to judge as best they could.

Then the predictions began. Over many years, Tetlock and his team peppered the experts with questions. In all, they collected an astonishing 27,450 judgements about the future. It was by far the biggest exercise of its kind ever, and the results were startlingly clear.  The experts beat the chimp by a whisker. The simple and disturbing truth is that the experts’ predictions were no more accurate than random guesses.”

The reality of successful forecasting is captured in what I find to be a very funny current ad by Ally Bank in the US.

So what can we conclude from this discussion on the folly of predictions?  What will gas prices be in a decade?  Nobody knows.  Period.  Look at the history of gas prices.  In the last twenty years about half the time prices have been below $5/mmBTU and about half the time above.   The second graph is even more telling. Even with scores of predictions that prices will remain low for some time, forecasts by the EIA (US DOE) show that over the next six months or so there is a 95% confidence level that prices will be somewhere between $2 and $7/mmBTU, pretty much the same as they have been over the last twenty years with a few exceptions.

Natural Gas Futures EIA Dec 2012

Source: DOE EIA

Gas Forecast Dec 2012

While this is all in good fun – after all, it is the holidays – why am I discussing this and what does it mean for the future of nuclear in North America?  I guess I need to get a bit serious to close out the year and give you something to think about as we move into 2013.

So here are some truths:

  • Most nuclear plants in operation today are competitive as they are the lowest marginal cost producers in almost every market (and they were all built in a lower gas price environment)
  • New build nuclear is currently not competitive with $3/mmBTU gas
  • In a previous post, I showed that new nuclear in the US does well against $7 gas in the OECD./NEA report issued in 2010.   If we are able to reduce capital costs due to the benefits of series build (after FOAK projects), then new build nuclear should be able to compete with gas in the $5/mmBTU plus range.

The conclusion of this is that nuclear is competitive with gas over much of the range that gas prices are likely to be.  It struggles at the bottom, but excels at the top.  So a general conclusion is that a nuclear power is expected to be a competitive option for the future and as such, would be a reasonable part of any electricity supply system. This is the rationale for new plants currently being built in South Carolina and Georgia.

Now the real issue.  Nuclear plants take about 8 to 10 years to implement.  Do we have any idea what gas prices will be in a decade?  No we do not.  In fact we don’t even know what gas prices will be next year.  But we do know that overall, whatever they may be, nuclear plants will produce electricity at a cost that is within a reasonable range of gas and other alternatives.  And hence the issue.  If we can’t predict electricity prices next week, how can we ever make the decision to build a plant that will come into service post 2020?

This is where we need to question the current structure of the competitive electricity markets (which I have long said are really gas markets) [Note: the UK is struggling with just this issue at the moment as they work to move forward with new nuclear].  While the lowest cost at any time is a commendable objective, we must also accept that we do not want an electricity system with only one form of generation – and it is a truth that, at any point in time, only one form of generation can be the least cost option.  Add to this the fact that it takes time to build electricity generation and we can easily see how it is so difficult to take investment decisions, especially for capital intensive long schedule options like nuclear power.  The world is readily accepting that subsidies must be paid to encourage the use of renewables – and we certainly know that fossil fuels are heavily subsidized in many markets.  So what about nuclear?

We also know that today in Germany and Japan (at least temporarily), where decisions to not operate nuclear plants have been taken, costs have gone up with a huge impact to the local economies.  In fact high energy prices are becoming a very significant issue in Europe as recently reported in the NY Times.

So given we want an electricity generation system that is at least somewhat diversified and not totally dependent upon one form of generation, let’s consider the long term benefits of nuclear power:

  • Highly reliable and stable production
  • Extremely energy dense producing huge amounts of energy from relatively small amounts of fuel.
  • Relatively insensitive to uranium prices making the electricity costs very stable over the entire life of the plant.
  • Very low carbon energy source

So do we want a low marginal cost, reliable, and of most importance – stable cost alternative as part of the mix?  Well, given that we don’t know what gas prices will be, we do know one thing – that fossil prices vary with time and hence no matter what, gas fired electricity prices will be volatile.  So yes, I believe that having nuclear as part of the mix to help keep prices reasonable and stable is sensible and in the interest of consumers.

But all that being said, the future is up to us in the industry.  While we can’t control the cost of gas, we must do our best to continue to reduce the cost of new nuclear as we gain the benefits of series build, including learning lessons from China and elsewhere where these benefits are being proven.  And we must be able to demonstrate that we can build plants on time and on budget – and the rest will follow.

Wishing you all a very happy new year and thank you for reading my blog!   Looking forward to more interesting discussion in 2013.

The changing face of global energy – Is nuclear power being left behind?

I have just done my first pass of the Word Energy Outlook 2012 issued by the IEA this November.  Many of you will have seen some of the headlines – one of the most intriguing is that the US is expected to become the world’s largest oil producer by 2017 exceeding the output of Saudi Arabia.  With headlines like that how can you not want to read this report?

The trouble with trying to read and write about this report is that, as was the case with the Energy Technology Perspectives (which I talked about earlier this year), there is just so much in it to make you think that, agree or disagree, the report is full of interesting information that is worth discussing.

I have been a bit stuck on what perspective to take in this post.  Ultimately I decided to focus on some general points this month (of course with the outlook on nuclear as the key talking point) and then I will undoubtedly use the report for future discussions on more focused topics.

Reading the Executive Summary the report starts off with “The global energy map is changing, with potentially far-reaching consequences for energy markets and trade. It is being redrawn by the resurgence in oil and gas production in the United States and could be further reshaped by a retreat from nuclear power in some countries, continued rapid growth in the use of wind and solar technologies and by the global spread of unconventional gas production.”

When it comes to global energy production, this short phrase pretty much sums it up.  Strong North American oil production, more coal, less nuclear, more renewables and much more gas.  And not surprisingly, this  translates into more difficulty meeting climate change objectives.  It continues, “Taking all new developments and policies into account, the world is still failing to put the global energy system onto a more sustainable pathSuccessive editions of this report have shown that the climate goal of limiting warming to 2 °C is becoming more difficult and more costly with each year that passes. Our 450 Scenario examines the actions necessary to achieve this goal and finds that almost four-fifths of the CO2 emissions allowable by 2035 are already locked-in by existing power plants, factories, buildings, etc. If action to reduce CO2 emissions is not taken before 2017, all the allowable CO2 emissions would be locked-in by energy infrastructure existing at that time.”  Another testament to the continuing lack of progress on meeting the world’s climate change challenges.

And finally when it comes to the future of nuclear power it recognizes the changes in some countries to cut back while others continue to move forward.

“The anticipated role of nuclear power has been scaled back as countries have reviewed policies in the wake of the 2011 accident at the Fukushima Daiichi nuclear power station. Japan and France have recently joined the countries with intentions to reduce their use of nuclear power, while its competitiveness in the United States and Canada is being challenged by relatively cheap natural gas. Our projections for growth in installed nuclear capacity are lower than in last year’s Outlook and, while nuclear output still grows in absolute terms (driven by expanded generation in China, Korea, India and Russia), its share in the global electricity mix falls slightly over time.

I am showing all of the above quotes because in a few words from the Executive Summary, the report says so much.  The figure below shows the key changes in projected energy use from the 2011 WEO.  In summary, as I read this report we can conclude that:

  • Fossil fuel use is thriving.  Clearly North American policies to increase both oil and gas production are very effective.  Coal use is up again globally from the last WEO even with a larger increase in (mostly unconventional) gas use.  Fossil fuel subsidies continue to be the largest of any energy source estimated at $523 billion, more than 6 times that for renewables and a 30% increase from 2010.
  • Renewables use continues to grow without any real demonstration that increasing renewables to that extent is feasible.  Subsidies are at $88 billion and rise to $240 billion in 2035
  • Nuclear is being left behind as the 6% reduction in nuclear compared to 2011 is the largest single change in the new WEO New Policies Scenario.

And this path is taking us down the road to being unable to meet the 2 degree climate change scenario.  After trying everything else in past reports, this year they try to demonstrate that increased efficiency is a potential path to delaying the inevitable and make time for more policy change to support the environment.  This has the potential to extend the 2017 date for lock-in to 2022.  However we can also ask, without a real and substantive global commitment to reducing carbon emissions, what will these extra few years actually achieve?  Most likely – nothing!

So let’s look at the nuclear case in a bit more detail.  Compared to the 2011 scenario, nuclear use is decreasing in those countries with the most to lose, Japan, Germany, Switzerland and even France, while being economically challenged in North America; and rising in the more rapidly growing economies of the east led by China.  This leads to an important question.  Is nuclear power becoming a transient technology that helps countries develop and then once there, can be phased out over time by a policy shift to renewables?  This seems to be a possible theme going forward but in practice nothing can be further from the truth.  It is interesting to note that this past week was the 70th anniversary of the first sustained criticality at CP-1 by Enrico Fermi.  And here we are today with the countries named above all having substantial nuclear programs providing a large and important part of their electricity generation (Japan 30%, Germany 30%, Switzerland 40% and France 75%).  Clearly, with this much nuclear, replacing it is not trivial and will have significant impacts.   Even the WEO acknowledges that “shifting away from nuclear power can have significant implications for a country’s spending on imports of fossil fuels, for electricity prices and for the level of effort needed to meet climate targets.”

And that is what we are seeing today as Germany and Japan wrestle with these impacts as they try to reduce the use of nuclear very quickly.  Based on hysteria following the Fukushima accident, the politicians in these countries (even France) seem to have forgotten what they have achieved since that famous date 70 years ago and why they built such large nuclear fleets in the first place.  Building a successful nuclear program is a major undertaking requiring investment in regulation, infrastructure and industry.  Germany, Japan and France have all benefited from this investment as they developed significant technology, know-how and industrial capability with the result being, in all cases, a very large portion of their electricity generation being economical, clean and reliable.  Reducing its use as a result of a misguided view on nuclear safety will result in a large negative impact to industry and their economies.  In Germany, utilities are suffering financially and in Japan, there is the risk of losing capability and business to the new nuclear powers of Korea and China while having staggering increases in imported fossil fuels and a devastating impact to the local economy.

In fact, looking at the following figure from the WEO shows the bigger story.  Just compare the capacity bar with the energy bar in each case and one thing is clear.  Nuclear power is a key workhorse of the global energy system.  It is by far the most efficient investment as every GW of capacity produces more GWh of energy than every other type of electricity generation.  As I stated in my earlier post on the ETP, one of the reasons for the enormous investment in renewables is that you have to build about three times as much capacity as nuclear to get anywhere near the same energy output – and of course even then this energy is not dispatchable.  But even looking at the use of more tradition fossil fuels, because nuclear fuel costs are very small, they are dispatched before more expensive coal and gas plants and, as the figure shows, 3 times as much coal capacity and almost 4 times as much gas is projected to each only generate twice the energy as nuclear.

It is important to remember that the WEO is not a forecast per se; rather it is a projection of how government policies would look once implemented.  And what we see is a world investing heavily in fossil fuels to protect the status quo while also investing in renewables as a token path to the future.  The fall in nuclear power use in developed countries is an important testament to the ongoing impact of the Fukushima accident on government policies in the west.

While the 2012 projection is less than 2011, nuclear power does continue to grow and in 2035 it is projected to supply 12% of world electricity (13% in 2011 projection).  Yes, it is being left behind relatively but, as I see it, this report clearly demonstrates the importance of nuclear power as a clean, efficient and reliable source of non carbon electricity going forward.  Implementing policies that reduce its use is folly as it definitely will result in expanded fossil use, higher costs, trade imbalances  and higher carbon emissions; all leading us down an unsustainable path.

Therefore the policy answer is not to limit and reduce the use of nuclear energy, but to expand its use because even a small expansion in capacity results in a relatively large increase in energy generated.  And that means that we need to work harder to address the issues resulting from the Fukushima accident in the developed world and remind those governments who are reacting to short term pressures why they went nuclear in the first place; and of the consequences of reducing its use to their societies so they can rethink potential policies that may move them away from this very important part of our global energy mix.

The obvious answer to a low carbon electricity system – More Nuclear Power

I started writing this while sitting on the very long plane ride on my way to China.  The Rio+20 conference had just started, the largest ever UN conference and yet it was receiving relatively little press.  I remember the first Rio conference 20 years ago when there was so much hope for the environment and the conference was seen as an important beginning in addressing climate change.  Now 20 years later, expectations were low and interest even lower.  I guess it’s not surprising.  With economic crisis ongoing in Europe, a weak recovery in the US and a slowdown in China, environmental issues have fallen way down on many people’s list of priorities.

In advance of this conference, the IEA recently issued its Energy Technology Perspectives Study (ETP 2012), where they make a passionate case in support of the environment and the need to develop a low carbon energy system.  Love it or hate it, this study is a gold mine of interesting and useful information in its almost 700 pages.  This study takes the 450 ppm scenario in the World Energy Outlook 2011 and extends it out to 2050, now calling it the 2 degree scenario (2DS).  This is then compared to the status quo (6 degree scenario) with a 4 degree scenario in between.  It then goes a step further to see if a zero emissions energy system is possible by 2075.  It is just not possible to discuss the entire study in one short (actually not so short) blog post, so I will focus on a few key issues and will likely continue to use it as a valuable source of data in future postings.

The study makes the case that environment and energy development must go hand in hand.  Here are some of the findings:

  • A sustainable energy system is still within reach and can bring broad benefits
    • Technologies can and must play an integral role in transforming the energy system.
    • Investing in clean energy makes economic sense – every additional dollar invested can generate three dollars in future fuel savings by 2050.
    • Energy security and climate change mitigation are allies.
  • Despite technology’s potential, progress in clean energy is too slow
    • Nine out of ten technologies that hold potential for energy and CO2 emissions savings are failing to meet the deployment objectives needed to achieve the necessary transition to a low-carbon future. Some of the technologies with the largest potential are showing the least progress.
    • The share of energy-related investment in public research, development and demonstration (RD&D) has fallen by two-thirds since the 1980s.
    • Fossil fuels remain dominant and demand continues to grow, locking in high-carbon infrastructure.

It then goes on to focus on how energy policy must address the key issues and the role of government in making it all happen, finally concluding with recommendations to energy ministers (assuming these recommendations were to be considered at Rio+20).

When considering “technologies” the focus is on renewable technologies such as wind and solar, energy efficiency technologies to reduce demand and carbon capture technologies to clean up the ever-expanding fossil infrastructure.  Nuclear is also shown to be important although it role is somewhat less than the other technologies.  It is these same technologies, primarily renewable and Carbon Capture and Sequestration (CCS) they are talking about when they say “progress in clean energy is too slow”

Focusing on a few key issues, consider the following two figures.  The first illustrates the change in electricity generation mix for each of the three scenarios.  Improved energy efficiencies is the most important source of clean generation.  The figure shows that in the 6DS there is almost 50,000 TWh of generation required dropping to about 40,000 TWh in the 2 DS.  It can be seen that there is huge growth in renewable generation (wind, solar, hydro and biomass) and an increase in nuclear capacity.  Most of the remaining fossil generation is assumed to have CCS installed.

The next figure is somewhat more telling.   It shows the needed capacity and illustrates that due to the variability and low capacity factors of renewables such as wind and solar, capacity must still increase even though total generation decreases by 20% (50,000 to 40,000 TWh Fig 1.10).  This demonstrates the importance of nuclear as it has high efficiency relative to other forms of generation.  With less than 5% of the generating capacity (about 550 GW), it produces close to 20% of the electricity!  i.e. nuclear is an essential technology in a low carbon electricity system.

The main tool in achieving CO2 reduction targets for the 2DS is CO2 price, increasing from USD 40/tCO2 in 2020 to USD 150/tCO2 in 2050.  This greatly increases the electricity generation costs of CO2-emitting technologies and thereby improves the relative cost-competitiveness of low-carbon power technologies.  The following figure is a bit busy but important as it clearly shows how CO2 pricing is implemented to achieve this result.

The cost increase to effect change is one of the key points made in Jeff Rubin’s new book “The end of Growth”.  In an excerpt published in the Globe and Mail on May 5,  Jeff talks about the electricity and transport systems in Denmark.   The Danes have achieved a heroic drop in carbon emissions of 13% over the past twenty years while those of us in North America have seen an increase in emissions of 30% in the same time period.  Often praised for its commitment to renewable energy, now producing 20% of its electricity from wind power, what often goes unsaid is that the remaining 80% of its electricity is generated by coal.

So how is Denmark achieving this great carbon reduction?  Simple – price.  At $0.30/KWh, the price of electricity in Denmark is 2 to 3 times higher than in most jurisdictions in North America.  And at this relatively high price has a significant impact on behaviour and usage drops dramatically.

This is absolutely consistent with the IEA report as it suggests the only way to achieve a low carbon world is to price carbon aggressively to force behavioural change; first by reducing demand and second through the implementation of higher cost low carbon technologies.

Now while this may work in Denmark and in other countries where there is no choice but to implement higher prices to manage the transition such as in Japan and Germany (due to their need to replace idled nuclear), any politician who takes the position of significant increases in energy costs in North America will not keep his or her job for very long.  In North America the population believes that cheap and abundant energy is a right and anyone who tries to say we need to do otherwise won’t make it very far at voting time.

So what are we to do?  I do believe that the IEA’s ETP report has this answer as well.  And for us in the nuclear industry it has always been quite clear.  More nuclear power.

I have talked about the IEA’s nuclear roadmap before.  In effect, they prepared a number of “roadmap” reports for various technologies and this ETP report is where they bring them all together in a cohesive model of a clean energy system for the future.  When it comes to nuclear the IEA continues to be positive and sees an increase in nuclear generation from about 14% of electricity supply to almost 20% in 2050.  While the increase in nuclear capacity may appear to be modest, as stated earlier this modest capacity provides a significant portion of the needed electricity generation!

It should be noted that this target represents a decrease from their original target of 24% in their nuclear roadmap due to the impact of the Fukushima accident on public acceptance which has become the limiting issue.  This is based on a 2011 post Fukushima survey in which support for nuclear power drops due to an increased concern about nuclear safety with more people now supporting nuclear shutdown due to its inherent dangers.

Of importance, the study continues to include a “high nuclear” sensitivity case for the 2DS scenario.  In the 2DS-hiNuc case, nuclear generation is increased to 34% in 2050. Compared with the base 2DS, nuclear replaces fossil power plants with CCS and renewables, whose share in 2050 falls: in the case of CCS from 15% to 7%, and in the case of renewables from 57% to 49%. This scenario reflects a world with greater public acceptance of nuclear power. On the technical side, the average construction rate for nuclear power plants in the period 2011 to 2050 rises from 27 GW/yr in the base 2DS to 50 GW/yr. The cumulative investment costs of this case are only USD 0.2 trillion higher than in the base 2DS and are more than offset by costs savings for fossil fuels in the order of USD 2 trillion (10 to 1).

Going back to the cost figure above, this is not surprising because nuclear is competitive with other forms of generation and can be built now without the need for high carbon costs to incentivise it.  (I know in North America current low gas prices are challenging new nuclear and this was my topic last time – but keep in mind this study is looking at the bigger picture over a longer timeframe).

A system with about one third of the generation provided by nuclear seems very sensible and achievable so long as the industry can overcome the major issue of public acceptance.  Therefore the challenge is clear.   The industry should focus on the high nuclear scenario as our base case and work hard to regain public trust – no small task that will certainly require a long term sustained effort.

In the end, our world will become more electrified and we need to move forward with a cleaner, sustainable electricity system for our future.   So what is harder for the public to accept – very high carbon costs and a very large increase in variable renewable generation or a bigger role from a relatively modest increase in the number of nuclear power plants??

Nuclear Power – The Dream lives on!

It seems as if a day doesn’t go by when we don’t hear about the low price of gas in North America and its impact on potential growth in the nuclear industry.  In the past month, the price of gas actually dropped below $2 /million BTU; a price that was unimaginable just a few years ago.  Back in September I wrote about this when John Rowe, then Chairman of Exelon, America’s largest nuclear operator, said ““Nuclear is a business, not a religion”.  Mr. Rowe has been even more vocal about the impact of low gas prices on nuclear since his retirement.

Now it is clear that at $2 / million BTU, new build nuclear is not competitive.  Not a big surprise.  However it does need to be put in context and the time has come to make a few key points about the economic competitiveness of nuclear power on a global scale, not just in North America.  This is especially important following the article in the Economist on the first anniversary of the Fukushima accident.   With a cover that read “Nuclear Energy – The Dream that Failed, the Economist provided an analysis that was strong on data, but weak on insight resulting in understandable but still (in my view) wrong conclusions.

First let’s talk about gas prices.  Yes, gas prices are at a historical low in North America.  But this is the exception, not the rule globally.  In most markets as can be seen in the figure below, gas prices follow oil prices with Europe (UK’s National Balance Point – NBP and German Border Price) and Asia experiencing gas prices 3 to 5 times those in North America (Henry Hub).  It is easy to see the issue Japan is facing where LNG and Oil (Brent) are high so that nuclear power remains very competitive and as such is a needed source of supply to prevent electrical utilities from going bankrupt.

                    Fuel Prices ($/million BTU)

Source: Didier Houssin “International Energy Outlook” presented at the World Nuclear Fuel Conference, Helsinki April 2012

Second, the Energy Information Administration (EIA) in their 2012 Annual Energy Outlook Early Release continue to project gas prices below $5 million BTU for America until 2024 and thereafter rising to about $6.52 million BTU by 2035.  While this is below the $7.78 million BTU used by the International Energy Agency (IEA) in its “Project Cost of Electricity Generation 2010” that shows nuclear being competitive in the US, prices in the mid to high $6 range are sufficient for nuclear to be competitive. (Note: nuclear was about 15% less costly than gas in the IEA report).  And since most new plants will come in to service in the post 2023 time period, there is every likelihood that nuclear can be competitive in the US with gas in this crucial time period.

And finally, while the resource estimate for gas in the US continues to increase, there is rarely a discussion of price.  Yet resources are related to price.  The higher the price the more resource is exploitable and the lower the price, the less resource will come out of the ground.  With gas there is a bit of unique situation where the price has become decoupled from oil in the US and so for conventional gas, drilling will continue coincident with high oil prices.  However will we see much drilling for new shale gas at these low prices?  One thing the oil and gas industry knows how to do is make money and they are quick to walk away from projects that do not make economic sense.

In the short term, low gas prices in the US will likely reduce green house gas emissions as gas is used to replace coal.  At current prices, gas has become competitive with coal and emits about half the carbon when compared to coal.  But in the medium to long term, nuclear remains the only very low (essentially zero) carbon option for reliable base-load generation.

Source: TVA President’s Report to the Board February 2012

Going back to the article in the Economist let’s put some context on their conclusions related to nuclear competitiveness.

Economist: In liberalised energy markets, building nuclear power plants is no longer a commercially feasible option: they are simply too expensive.

What we think: New build nuclear has never been built into liberalized energy markets.  The reasons are somewhat complex and go beyond the discussion in this blog post.  The issues are more related to the fact that open markets work best with projects that can be built quickly with low capital costs.  And most markets have been designed with gas in mind.  Gas prices set the market price so the risk for gas plants is very low.  On the other hand, even when their energy cost are very competitive, nuclear plants have relatively high capital costs and long project schedules requiring predictable electricity prices into the future.  So this is nothing new although the UK will be the first to build such plants by modifying the market to try and accommodate the issues related to nuclear.  On the other hand, nuclear plants, once in operation, operate very successfully in liberalized markets due to their very low production costs.

Economist:  Existing reactors can be run very profitably; their capacity can be upgraded and their lives extended.

What we think: Very true

Economist:  But forecast reductions in the capital costs of new reactors in America and Europe have failed to materialise and construction periods have lengthened.

What we think: While the first new units in America and Europe have had challenges resulting in not meeting budgets or schedules, we cannot forget that in Asia where there are many plants under construction, the benefits of standardization and series construction have been and continue to be proven.  With a small number of plants being built in the western world, now is the time to ensure that lessons learned in Asia are transferred to the west so that the same benefits are achieved.

Economist:  Nobody will now build one without some form of subsidy to finance it or a promise of a favourable deal for selling the electricity.

What we think: The context of this statement is incorrect.  Modern liberalized electricity markets work well for gas and sometimes coal, but for nothing else.  Large complex projects such as nuclear and large hydro are not amenable to the current market structures.  The Economist does not mention that all wind and solar are heavily subsidized by governments around the world as they are not in any way currently economically competitive.  Yet somehow this is acceptable.  On the other hand, in most jurisdictions, nuclear is indeed competitive, but needs stability of electricity price to enable the large up front capital investment. So the issue in most cases is not requiring subsidy per se, but rather stability.  Yes, in the US the first movers are offered some support to help overcome first of kind issues related to not building in over 30 years.  But in the medium to long term, this support is expected to fall away whereas renewable support is expected to remain required for the foreseeable future.

Economist:  And at the same time as the cost of new nuclear plants has become prohibitive in much of the world

What we think:  As discussed above exactly the opposite is true.  In most parts of the world where nuclear is being built it is very competitive.  Higher gas prices and lower nuclear costs result in very economic new build plants in China and elsewhere.  The experience in Europe and the US is primarily due to building after a very long hiatus and now it is up to the industry to demonstrate that the price can come down in line with other markets.

Economist:  Nuclear is getting more expensive whereas renewables are getting cheaper

What we think:  Again, in China, Korea, India and other locations nuclear is indeed coming down in price with series new build of standardized designs.  As I discussed in my previous posting, the cost in the west is increasing due to the lack of new projects resulting in a lack of confidence.  Each bad experience causes estimates to go up while in the east each new project results in lower costs than the preceding project.  This is why the Asians are now becoming nuclear exporters.

Economist:  Nuclear power will continue to be a creature of politics not economics, with any growth a function of political will or a side-effect of protecting electrical utilities from open competition. This will limit the overall size of the industry.

What we think:  Nuclear power will always be a creature of politics.  However for success, it must also be economic.  In most jurisdictions there will be very little political will to move forward with new nuclear and all of its associated issues unless the project can be shown to be economically attractive.  China is building in large quantities because they need large scale base-load electricity and nuclear is very competitive with the alternatives.  The same goes for Korea and other markets.

In summary, nuclear is not a dream that failed, but rather is one of the most extraordinary discoveries of the 21st century that can still realize its potential for supplying global electricity for millennia.  The Asians see the benefits and are moving forward with nuclear power to meet their ever growing energy needs.  The question is will the western world wake up and learn from this eastern success.

For fully global success, new build nuclear must demonstrate that it is competitive in an economic sense.  The current state of gas prices and other issues will continue to present challenges to nuclear power but these can all be overcome in the longer term as standardization and series construction  continues to demonstrate that it is the most  economic, reliable and safe method of electricity generation.  The nuclear dream lives on.

Climate change or peak oil – does it really matter?

Has it been that long since my last blog entry?  Been extremely busy this winter and of course, busy is good!  But on the other hand, I have a set of topics piling up that I would like to write about.

Earlier, I blogged when I read Jeff Rubin’s book “How the World is going to get a Whole lot Smaller”.  When I posted the blog, I had good feedback.  I was told that if I read this book, then I should definitely read “The Long Emergency” by Jeff Kunstler.    Having been written in 2005 it is getting a bit dated.  This makes it even more interesting because as you read, reality can be compared to the author’s predictions over the last 5 years.

I really did enjoy the book. The concepts are similar and predate Jeff Rubin.  In summary, Jeff Kunstler is convinced that the age of peak oil is upon us and that the world is going to be a very different place sooner rather than later.  A number of his predictions have come to pass including the housing crisis and the very deep economic recession that we are just coming out of.  Unfortunately the book then goes on to predict doom and gloom- basically the complete collapse of society as we know it.  While he may be right, and I hope not, the trouble with this is that it discourages readers from paying attention to the main message.  And this message is an important one now being put forward by Jeff Rubin as well.

I do believe him when he says that we are at or near peak oil.  I also believe that there is no magic bullet to replace oil and that those who postpone decisions to adapt on the basis that “technology will save us” tend to be somewhat deluded – or in reality are just avoiding the issue.  On the other hand, I don’t believe that the world will come to an end and I do believe that there is technology that will help us delay the large scale effects to give us even more time to adapt.   But remember, adapting means changing behaviour. 

For example, look at one industry.  Publishing. How much carbon is used in the manufacture and distribution of books, magazines and newspapers?  Look at the business model.  Books are published in a big print runs.  They are then transported to book shops where they are to be sold, generally on consignment.  If not sold, the books are returned (more transport) to be destroyed.  While I don’t have the numbers I can assume the carbon costs to be significant.  So why am I talking about this?  Well, along comes technology – an e-reader or now an Apple IPad and what happens?  Millions of books, magazines and newspapers no longer have to be distributed in hard copy, but can now be distributed electronically thus reducing the carbon footprint of this one industry by a huge amount.  Now I don’t want to get into the discussion about the merits or e-readers here – and in fact I do want to blog about it at a later date – but just assume that it does come to pass.  Then assume there are other industries that can also do the same.  You see where I am going.

So now let’s bring climate change into the equation.  I am one who certainly does believe that the carbon we are putting into the atmosphere is having an impact on our climate.  But even if you don’t, then focus on peak oil.  If we take action to curb climate change then we can put in place policies to reduce oil consumption before the natural economics affect us too drastically.  i.e by implementing carbon reduction policies to reduce carbon, we must price it and thus try and reduce use.  Bacuase as we all know from the recent events, nothing is as effective in changing behaviour than changing costs.  This artificially pushes us to the same situation that would come naturally once peak oil has come and oil becomes scarcer.  Of course people like Jeff Kunstler believe we are already too late!

This is why Copenhagen was such a big disappointment,  In a sense it re-enforces  the views in the Long Emergency that our dependence on oil is so great that we just don’t have the political will to go in the right direction.  Very discouraging.

As we saw from this last recession, when demand drops so does the price of oil. In fact what we see is that it doesn’t really take that much of change to impact the price quite dramatically.  With the price risking to almost $150/bbl in early 2008, it dropped to less than $50 by the end of 2008 and has continued to rise modestly since then.  Now at over $80, once again there is fear that high oil prices will impact the economic recovery!  Therefore the only policy is to price carbon and keep the price of oil from dropping by adapting the carbon price as necessary.  Anything else will just lead to short term change and then back to the status quo.

One thing is certain.  Oil is a finite resource. Yes we may find more but yes it will be more expensive to exploit.  At some point we are gong to have to accept that we need to start to shift to a less oil dependent economy. And given oil’s uses outside of energy doesn’t it make sense to use alternatives?  So I will conclude by suggesting that climate change is our warning – start to act now to save the environment or wait until the oil is well past peak and have no plan to save society.

What do you think?

Lower demand and more renewables – is Surplus Base Load Generation here to stay?

Late in November I blogged about a recent phenomenon being experienced in some systems – Surplus Baseload Generation (SBG).  This is being experienced in Ontario, Canada due to falling electricity demand and the increased use of variable renewable energy sources such as wind and solar.

At that time, I started a poll asking about the future of baseload power.  Since then, the IESO in Ontario has published its latest Reliability Outlook.  The numbers are striking.  Demand was down 6.4% in 2009.  The following graph shows that demand is not expected to reach pre-economic crisis peaks even by 2018.

Ontario Demand Forecast

As of result the province continues to experience Surplus Baseload Generation (SBG).  Forecasts of SBG are now made daily.  With the growth of renewable generation SBG is expected to continue into the future.  This will certainly impact any decision for building new nuclear, as nuclear plants are most suited to providing long term stable baseload power and energy. 

The commitment to renewable energy continues to grow.  Wind generation in Ontario rose by more than 60 per cent in 2009 over the previous year, to 2.3 TWh.  Ontario has implemented the Green Energy Act, arguably making it one of the “greenest” jurisdictions in North America.  Just this past week, government announced a $7 Billion deal for 2,500 MW of new renewable generation from a Korean consortium led by Samsung C&T.  The deal includes the implementation of new manufacturing in the province for both wind and solar components.

While the above chart does not show baseload, with 1,000 MW of wind on the system and 11,500 MW of nuclear, this spring, Ontario started to experience SBG on a weekly basis.  This resulted in nuclear unit reductions on 54 days, nuclear shutdowns on five days and water spillage at hydro facilities on 33 days.  In the Reliability Outlook the projection is for 1600 MW of wind by 2013.  With the Samsung deal and other FIT program renewables, we could be approaching 4,000 MW of wind and solar in the coming years while the overall demand is not expected to increase dramatically.  Therefore, the baseload requirements will be further squeezed from the bottom as renewable generation has priority to the system when available.  In other words, both renewables and nuclear are “non flexible” load i.e. not readily dispatchable.  Clearly SBG will be an ongoing issue. 

And now, for the results of my earlier poll.  Although the number of votes was somewhat modest, the trend was clear. 

While the comments suggested that baseload is important, only 10% of respondents thought that renewables will have a small impact on the use of baseload.   The most votes were for “Medium Impact” as it seems to be recognized that renewables are here to stay and that the nature of electric grids are going to be changed forever.

Happy New Year 2010!!

As usual at this time of year I find myself asking “Where did the time go?”  Seems like just yesterday the year was beginning.  And in this case, it was a very busy year.  I am thankful to have been busy as we have been going through the worst economic times in recent history.

There have been a number of events that have defined the year in the nuclear sector.  And it was a decision at the very end of the year that clearly demonstrated the nuclear industry strength moving from west to east.  The announcement that the Koreans have won the bid for four new nuclear units in the UAE was HUGE.  With an estimated value of $40 billion ($20 billion for construction of 4 units and $20 billion for their operation), this is an absolute “game changer” in the nuclear industry.  The Koreans have now achieved their desire to become a global nuclear player exporting their domestic designed APR 1400. Of more importance it shows that commercial issues have won out over political strength in this case. The Korean bid was reported to be significantly less costly than the alternatives from Areva and GEH. So far I have not seen any mention of the commercial conditions, so I cannot comment on if or how much the actual commercial conditions (i.e. how much risk the Koreans were willing to take) impacted the decision.

Never under estimate the capability of Korea!! The nature of international nuclear competition has changed!  Of course, they still have to deliver.  Given my own long experience in Korea, I would expect them to succeed.

This caps a year where nuclear growth in the east was substantial.  Sticking with Korea for a moment, in addition to winning their first nuclear export, their new electricity plan calls for a large increase in nuclear capacity within the country to 2030.  Korea also made a big investment in uranium as KEPCO purchased 17% of Denison Mines this year.

In China, nuclear growth exploded!  With 11 units in operation, China now has 18 under construction.  They have increased their target for 2020 from 20 GW to 60 GW or more and growing even faster after that.  With construction under way for AP1000 units and EPR units as well as the existing CPR1000 units, their program is as broad as it is large.  As domestication of the industry continues, the first CAP1400 – a Chinese derivation of the AP1000 was announced this year to be launched in 2013.  China also continued its entry into international uranium development.  CNNC bought Western Prospector with a property in Mongolia this past year and CGNPC bought a 70% interest in Energy Metals in Australia.

And of course, there is India.  In 2009 India truly joined the international nuclear community.  With just under 4,000 MW in operation, India is now on track to meet its target of 20,000 MW in service by 2020 and more than 60,000 MW by 2030.  With new agreements from Russia for VVER units, agreements to build the EPR from France and new agreements anticipated to build US designed units, the PWR program is expanding quickly to supplement their home grown PHWR program.

Of more importance, India now has access to international supplies of uranium to meets its domestic fuel needs.  So far there have been arrangements made with Russia, France and Kazakhstan to import uranium and agreements are in place to enable uranium importation from Mongolia and Namibia.  Towards the end of the year, India also concluded a Nuclear Cooperation Agreement with Canada opening the door for uranium imports. Cameco has opened an office in India and has big plans for this country.

With all this activity in Asia, how about the west?  Well, while there was progress with projects in the USA and the UK program is continuing to develop, there have been no new firm commitments this year.  Hopefully 2010 will see the continued growth with a new build project formally starting in the US.  In the UK government suspport for new build nuclear has continued to grow while EDF concluded its purchase of British Energy.  In the US, there was progress in a number of states.  The DOE has announced that it will provide its first loan guarantee when a utility receives a COL from the NRC.  Activity is increasing in both markets.

In Canada, the year started with a bang.  Ontario looked to be leading North America with its international bidding process for new units.  This fizzled later in the year when the project was suspended.  The other three provinces with nuclear ambitions also had major decision points.  In New Brunswick, the government is proposing to sell its utility NB Power to Hydro Quebec, Saskatchewan has decided against nuclear power in the short term and Alberta has stated that it is open to keeping nuclear as an option for implementation by the private sector.

Definitely a busy year for the nuclear industry.  Of course, 2009 was also an important year for the climate change issue.  I think that this posting is already long enough so I will comment on Copenhagen and the move to reduce green house gases in a subsequent posting.  There were also many developments with renewables that deserve attention.  More to come.

One thing is for sure, energy continues to be high on the agenda.  With the economy starting to recover, energy issues are expected to continue to be of importance going into 2010.

Is there a future for base load generation? Please respond to the poll?

System operators have recently seen something rather new  – SBG – or “Surplus Baseload Generation”.  This is due to falling demand related to the current economic situation and a newer phenomenon; the displacement of base load by variable load renewable generation.

With governments everywhere and the public strongly supporting new renewable generation, primarily wind and solar; these forms of variable generation are displacing base load by being must run when the resource is available.   So the question is “Is there a future for base load generation?”.  Please respond to the poll at the bottom of this blog entry

This issue was addressed at last week’s Association of Power Producers of Ontario (APPrO) annual conference where a session was dedicated to this new phenomenon.  The following shows the amount of time Ontario experienced SBG over the past 18 months.  Excess generation of well over 1,000 MW was experienced!  This resulted in shutting down low marginal cost nuclear plant as well as spilling water at hydro plants.  The 18-month forecast by the IESO in Ontario expects SBG to continue to be an issue going forward.

Surplus Base load Generation

IESO Presentation to APPrO 2009

IESO Presentation to APPrO 2009

The variability of the wind is shown in the following chart illustrating how two days in a row the wind at the same time varied from 989 MW to 7 MW on the following day.

Wind Capacity on Consecutive Days

IESO Presentation to APPrO 2009

IESO Presentation to APPrO 2009

So what does this all mean?  In the smart systems of the future is the concept of large scale base load generation doomed?  Do you have to be able to manoeuvre to survive?  Or will policies change to ensure that low cost base load generation is not displaced for higher cost alternatives?

This is just the beginning of the discussion for this subject.  Please answer the following simple poll.  I would like to get your views.  More work is needed on this issue as we plan the systems of the future.

The precarious world of uranium supply and demand

Last month, the supply of uranium was severely interrupted when BHP declared force majeure on its deliveries of uranium as the main haulage system failed at Olympic Dam.  Production has been reduced to about 20% of nominal and it is expected to take a number of months to repair and bring production back to its full output.  Olympic Dam is a major producer of uranium, producing about 4,000 tonnes U per annum or just under 10% of global primary production.  Therefore, losing the equivalent of 3,000 tonnes per year for six months or so (say 1,500 tonnes) represents a significant event in overall production that affects the delicate balance between uranium supply and demand.

Many people do not appreciate that the supply / demand situation for uranium is somewhat unique amongst commodities.  I first gave a paper on this topic in 2007 to the Raymond James Uranium conference in New York (when the price of uranium was at its peak).

So what makes uranium so special in the world of commodities?  A few things come to mind immediately.  First, uranium is a single use commodity. Its demand is completely dependent upon how many nuclear power plants are in operation and how much fuel they need.  In recent years, the global nuclear fleet has been consistently improving its operations but now has pretty much achieved it maximum.  This means that demand cannot go up for the current fleet of nuclear power plants – there can only be negative shocks if a plant performs poorly. For example, following an earthquake in Japan, some plants were shut down for an extended period. This means that they are not using fuel so demand decreases.

As for the future of demand, the forecasts are for a dramatic growth in new nuclear plants. The WNA is projecting growth of more than 50% in the number of GW in production over the next 20 years.  This means a significant increase in demand that must be accommodated in future supply plans.  However, it takes from 10 to 15 years to implement a new nuclear project from conception so there are really no surprises in demand in the short to medium term.  We all know what plants are under construction so the projection for new demand is quite stable for the next 5 to 10 years with some uncertainty starting to appear at the 10 year mark.

So what does this mean?  It means that demand increases in a predictable fashion and that the potential is always there for negative demand shocks if existing units perform poorly or are taken out of operation for any reason.

Now for supply.  Similar to nuclear power plants, bringing new uranium mines into production takes quite some time and effort.  Many projects are delayed as companies have been having difficulty in bring on new mines.  Therefore, supply potential is also quite predictable for at least 5 years going forward.  Again, as with nuclear power, the risk is that shocks affect the system negatively as there have been a number of events over the past few years that have halted production or delayed new mines.

And finally, as a fuel, uranium is also unique in that it is bought in batches.  The volume of fuel required to operate a nuclear power plant is quite small so utilities can carry a significant inventory to reduce their risk.  This means that buying and selling is not completely in step with usage.  This is different from say, coal or gas that must be consistently delivered to keep fossil generating plants operating.

In the end, uranium prices have remained rather low over the past 20 years with a short term blip in 2007.  These prices remain low because in most scenarios, supply and demand are in balance making it difficult for price increases that are needed to encourage new supply.  However, for utilities the risk remains.   Therefore, the trend is now for utilities in the east (Japan, China, Korea and India) who are fast becoming the world’s biggest users of fuel to invest in the resource itself to help them mitigate the risk.  These countries also have little domestic supply so need to rely on supply from other countries.

Events like the one at Olympic Dam demonstrate how precarious supply can be. So we should expect countries with growing demand and little domestic supply to continue to step up their efforts to invest in global resources to reduce their overall supply risk.