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The challenge of financing nuclear plants – financing energy requires huge investment

 

Quite often we hear about the problem of attracting financing to support new build nuclear projects. In fact financing will be a topic of major interest at a number of upcoming nuclear conferences. While it is easy to agree that financing nuclear projects is a big challenge, in my view difficulty securing financing is not the issue – rather it is a symptom of a number of other very important issues that are the root cause. Necessary conditions to secure financing for any project is first and foremost, an economically viable project. Next comes the project structure – or to state it more simply – ensuring the risks are managed in a way that can satisfy investors that they will receive an adequate return for their investment. These concepts will be discussed further in a future post.

For today, I will look at the $40 trillion energy industry and consider nuclear’s share of the overall expenditure needed for energy over the next 20 years. I would like to put some context on the issues related to financing nuclear plants by looking at a recent IEA report called the “World Energy Investment Outlook” or WEIO. I found this report of interest because it provides useful data on global funding required to support energy. Or as stated in the Forward to the report “…. data on today’s investment flows have not been readily available and projections and costs for tomorrow’s investment needs are often absent from the debate about the future of the energy sector.”

We often talk about the large size of nuclear projects and how they require huge amounts of funds. Nuclear projects are very capital intensive and have relatively long project schedules; both important issues when trying to secure financing. When we talk about large, a good first step is to try and understand how much funding is required for nuclear projects relative to the rest of the energy industry. And for this we turn to the WEIO.

With annual spending in 2013 of $1.6 trillion rising to about $2.0 trillion by 2035, meeting global demand for energy requires an enormous amount of money. This excludes another $500 billion or so per year to be spent on energy efficiency to try and moderate this growing demand.

Of even more interest, the report specifies that less than half of the $40 trillion dollars required to meet energy demand between today and 2035 goes to meet demand growth; the larger share is required to offset declining production from existing oil and gas fields and to replace power plants and other assets that reach the end of their productive life.

WEIOinvestment for replacement

A staggering statistic – more than $20 trillion is required over the next 20 years just to stand still. And of course, most of this investment is in fossil fuels that continue to emit carbon as the world tries to find a way to turn the corner and find alternatives.

WEIOtotalinvestment by sector

If we drill down and focus on the electricity sector, we can see that of the above $40 trillion about $16.4 trillion is investment in the electricity sector. The largest component of this investment (about 40%) is in transmission and distribution. In the developed world this essential infrastructure is ageing and requires significant investment to meet growing needs. In the developing world, there is a huge need to build up the infrastructure for a population hungry to enjoy the benefits of using electricity.

WEIOglobal Power sector

Looking further we can see two important facts.   First, nuclear power only needs about 6% of the funds for the electricity sector; this is assuming the very modest growth for nuclear in the WEO New Policy Scenario. The other is that renewables are demanding a very large share of the available funds as more and more markets turn to these forms of energy to meet their growing energy needs while trying to curb carbon emissions.

What can we learn from this high level look at the funding requirements for the energy industry? On the one hand, nuclear projects require only a very small portion of the total funds being invested today and for the next 20 years in energy. The main uses of funds are to replace existing depleted fossil fuel reserves – usually at a cost higher than the resources they replace; to invest in critical T&D infrastructure, in part due to the need to expand transmission to be able to accommodate renewable energy generation; and the investment in renewable energy generation itself, virtually all of this last investment subsidized by governments to encourage growth.

On the one hand, there is tremendous competition for funds in the energy industry meaning nuclear projects need to be an attractive financial proposition to get its share of these funds. And on the other hand, much of the competing technologies are being supported by governments with subsidies based on policy decisions.

So what is it that makes nuclear plants so difficult to finance? As I said at the start of this post, there are a number of issues that need to be discussed. These include project economics, energy market structures, poor project construction performance in a number of markets; and of course, public perception that skews the risk profile of nuclear projects in a way not seen in other industries. But a discussion of these factors will have to wait until another time…….

Note:  all figures above are from the IEA World Energy Investment Outlook.

As a solution for climate change – nuclear power is falling behind

Recently, the 2014 edition of the International Energy Agency’s (IEA) Energy Technology Perspectives (ETP) was issued. The ETP is issued on a two year cycle; the current edition takes the World Energy Outlook 2013 forecasts and looks to the longer term out to 2050. With climate change now becoming even more pressing I thought it would be interesting to see the progress over the last two years (I wrote about the 2012 edition back in June of that year). According to the report, as an important contributor to meeting climate requirements going forward, nuclear power is falling behind.

On the positive side, the IEA sees the opportunity by which “policy and technology together become driving forces – rather than reactionary tools – in transforming the energy sector over the next 40 years.” The report looks to balance energy security, costs and energy-related environmental impacts. But in the end it concludes that “Radical action is needed to actively transform energy supply and end use. ”

Why is radical action required? Of all the technologies required to meet the 2D target (this scenario sets a target of only 2 degrees C change as compared to 6 degrees in the status quo scenario), the IEA suggests that only renewables are on track while pretty much every other clean technology is not moving fast enough. Two important technologies not meeting targets are Carbon Capture and Storage (CCS) and Nuclear Power. To no one’s surprise, CCS has yet to be proven and become a viable commercial option to de-carbonize fossil fuel emissions. As for nuclear power; after the Fukushima accident, growth has been slower than previously predicted and is expected to be 5 to 25% below the level required by the 2D scenario in 2025.

This leaves much of the burden on renewables to meet the need for lower carbon emissions. Surprisingly, in the hi-renewables scenario, solar becomes the dominant source of electricity reaching 40% penetration by 2050. Realistic or pipe dream? I don’t know. One thing is certain, (see chart below), with almost half of future electricity generation coming from variable renewables, compared to almost nothing today, the IEA is demonstrating the need for a huge technology transformation in how the world generates electricity.

IEAETP2014ElectricityGenerationbyTechnology

The following chart is the most telling of all. Over the past 40 years carbon intensity (the amount of carbon emitted per unit of energy supplied) has barely budged. Almost no change at all. Yet now we require the carbon intensity to be cut in half in the next 35 years (meaning less than half as much carbon produced per unit of energy supplied). This requires a complete change in how energy is delivered.

IEAETP2014CarbonIntensity

The reason is simple. Fossil fuels still represent 80% of global electricity generation and most of the energy used for transport. To disrupt the curve requires going off fossil fuels to cleaner alternatives. To achieve the 2D scenario, electrification is paramount given the option of generating electricity with clean alternatives. Fossil fuel use must then be cut in half to about 40% of electricity generation and much of the remainder makes use of CCS to reduce its carbon footprint. The report notes that gas must only be a bridging technology to support renewables in the short to medium term as gas still represents a major carbon source. So what’s left? Solar and wind to replace fossil fuels and CCS to make them cleaner.

Of course nuclear power is an obvious candidate to make a larger contribution. It is a mature technology and already is an important source of low carbon energy. Given its energy intensity it is certainly feasible to implement more nuclear power on a very large scale. And even with recent set-backs, there are now clear signs of renewal as the industry puts the Fukushima accident behind it.

For example, China continues to expand nuclear power at an ever increasing pace. Japan has reconfirmed its commitment to nuclear although restarts are slower than anticipated and the ultimate level of nuclear in post-Fukushima Japan remains unknown. Russia is increasing its commitment to nuclear and, of most interest, is becoming a major exporter offering innovative risk and financing structures that have not been seen in the market to date. Other markets are also starting to move; the latest being Hungary which has just approved a new plant for the PAKS site. However some other important nuclear markets are having challenges. Korea has cut back its long term plans and France is looking to limit the contribution of nuclear power in the future.

While nuclear power has challenges with public acceptance, this report notes the commercial issues – economics and implementation risk. As can be seen in the following chart, the IEA estimates nuclear to be the most expensive option after off-shore wind. I have not had time to delve into the details and review the numbers. However, taking this at face value, we know that some projects in the west are not doing as well as they should be. On the other hand, standardized series-build in countries like China and Russia are demonstrating a strong path to lower project costs and risks.

IEAETP2014economics

There is no hi-nuclear scenario in this edition of the report. That is quite unfortunate as a strong renewed commitment to nuclear power is a very good way to help move this plan to achieve a 2D future become a reality. By stating that nuclear power is not meeting expectations, the report lays out a clear challenge. Now it’s time to show the nuclear industry is up to it. If we really want to bend the carbon intensity curve, then more than ever, the world needs more nuclear power as an important part of a low carbon future.

The British are coming – new nuclear committed in the UK

After many years of effort, this month it finally happened. The UK government and EDF Energy, the French-owned UK integrated energy company, agreed to a strike price making the first new nuclear build in the UK in a generation, at Hinkley Point C, a reality.

It was a long hard road.  New nuclear first came up about a decade ago when it became clear that Britain’s nuclear fleet was aging and would soon need to be retired.  At that time British Energy was advocating to replace the existing fleet with a new fleet over the coming two decades.  Unfortunately the timing was not right.  Late in 2002 British Energy got into severe financial trouble requiring a significant restructuring to keep it solvent and early in 2003 the British government declared war in Iraq.  Both of these events made it difficult for the then Labour government to take on the issue of new build nuclear.  So in 2003 the Energy White Paper issued by government focused on reducing carbon emissions primarily with renewables and nuclear was but a footnote as government declared its intention to “keep the nuclear option open”.

What a difference a decade makes.  Over the ensuing years as it became clear that renewables on their own would not be able to carry the load if carbon targets were to be met and concerns about security of supply as the UK became a net importer of energy (primarily Russian gas); once again government turned to nuclear energy.  The history of events over this decade it too long to describe here although I think it would make an excellent business or public policy school case study.

Slowly the issues were tackled one by one through aggressive policies that resulted in among other things:  EDF Energy buying British Energy, the creation of a generic design approval process by the regulator, changes to the electricity market to support non carbon producing projects to be built; and most of all – continuing effort to support positive public opinion even after the Fukushima accident in Japan.

And this is all in the context of the UK slowly and deliberately dismantling its domestic nuclear industry.  The UK was an early leader in the development of nuclear power in the 1950s.  Over the next 40 years it developed a large domestic infrastructure culminating with the transition to PWR technology at Sizewell B to the extent that in the 1990s BNFL actually bought the Westinghouse nuclear business – Britain was back in the nuclear business as a vendor.

Yet over the past decade, Westinghouse was sold to Toshiba, British Energy was sold to EDF and British Nuclear fuels Limited (BNFL) was completely dismantled (all at great profit to government).  The new UK nuclear industry is comprised of a domestic manufacturing and services sector using foreign technology with plants being built by new nuclear operators also owned by foreign companies.

After all the hard work, the agreement reached this week is of tremendous importance to the global nuclear industry for a number of reasons.

The UK is forging ahead with a strong nuclear program while others in Europe are going in the opposite direction. Germany is abandoning its nuclear industry and even France is looking to reduce its reliance on nuclear over time.  The lesson learned here is that need trumps all else.  The UK is strongly committed to reducing carbon emissions; recognize they can’t do it with renewables alone and are not prepared to become overly dependent upon fossil fuel imports.

The project is being built in a liberalized (deregulated) market.  Although there is much discussion about subsidy being provided by government, this project will demonstrate that a new nuclear plant can be built with outside investment in a western open market.  The CFD (contract for difference) model is necessary to provide the stability needed to invest the huge sum of money required (estimated at £14 billion) with a very long payback period.  In Canada this model has been used successfully to refurbish the Bruce Units 1&2 reactors but this will be the first time it is used for a longer duration and higher cost new build project.

While some are critical of the price (€92.50 /MWh) it should be clearly noted that this price is below all other forms of carbon free electricity even if it is higher than imported gas at the moment.  Just imagine trying to set a rate today for a project coming into service in 2023 and then lasting for 35 years.  And most of all, it has been reported that EDF Energy is expecting about a 10% return on its investment – very reasonable given the expected risk profile of a large nuclear project, especially with the experience so far in Finland and in France with new build.

So why can EDF Energy take such a risk?  Primarily because this will be the 5th and 6th EPR built and the third project in Europe after Finland and France.  At this point, the design is well developed, the supply chain is in place and the costs are well understood.  What is new is that it is to be done in the UK and there will be new local suppliers likely taking on a significant scope.

The UK government has accepted a significant Chinese investment in the project.  CGNPC, the Chinese operator of a number of nuclear plants and the constructors of the two EPRs at Taishan and its Chinese partners will bring about 30 to 40% of the money needed for this project.  This is huge!  First of all it is a clear acceptance of the size and strength of the Chinese nuclear program – CGNPC has the most active nuclear construction program anywhere.  And it opens up the potential to ensure the expertise from the Taishan project, arguably the most successful EPR to date, will be available to support Hinkley Point C.

The public is supportive of this projectPublic support for new nuclear in the UK has become somewhat more positive in recent years, with similar proportions of people now supporting (32%) and opposing (29%) the use of nuclear power, compared to 26% (supporting) and 37% (opposing) in 2005.  And of more interest, a similar number of people want to continue nuclear at current levels or with expansion (43% in 2005, 46% in 2010 and 44% in 2013), while fewer people now want to see nuclear power phased out or shut down (50% in 2005, 47% in 2010 and 40% in 2013).  This is a result of a number of factors. First, there is a need for energy and nothing drives support more than worrying if the lights will go out.  Second, the environmental sector is behind nuclear.  The British are very serious about their commitment to reducing carbon emissions.  George Monbiot came out in favour of nuclear energy within a month of the Fukushima accident.  Mark Lynas has become a strong supporter and has been profiled in the recent documentary “Pandora’s Promise”.

So what can we all learn from this process?  First of all developing new nuclear takes time.  With a decade of effort behind this agreement, the time it took to reach agreement is just as long as the anticipated time to build the plant.  A decade to get ready and now a decade to get the project into service (scheduled for 2023). Amazing isn’t it?

So to all of our friends in the UK, you have reached a critical milestone on your journey.  Keep up the good work and we wish you all the best as you move to the next phase of your new build programme.

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.

The nuclear renaissance gathers steam…….the importance of Southern Company receiving its COL for Plant Vogtle.

If 2011 was all about the events at Fukushima, 2012 is shaping up to be a big year in moving forward with the nuclear renaissance.

For the Chinese, this is the year of the dragon.   This is, in fact, the major symbol of good fortune in Chinese Astrology.  Of the 12 signs of the Chinese zodiac dragon is the most special, as it is a mystical being rather than an earthly animal.  In this context that means we can expect grand things this year. Bigger than life is very much a dragon thing.

And bigger than life is what was achieved last week – the granting of the COL for Plant Vogtle in Georgia – the first COL ever granted under the NRC process and the first license issued for a new nuclear plant in the USA in over 30 years.

We have been writing for some time now on how the nuclear industry is moving from west to east with China and India having more than 50% of the new plants under construction and planned while they only have 3% of the current nuclear capacity.  This shift is important but so is the restarting of nuclear new build in the established nuclear countries of the west.  Of the over 400 plants in operation globally about half of them are in Europe and one quarter are in the United States alone.  With 104 plants in operation, the US by far has the world’s largest nuclear operating fleet.

Recent global decisions are starting to show a broad based nuclear renaissance with new build finally taking hold in the west.  In the UK, regulators have granted interim design acceptance of both Areva/EDF’s UK EPR and Westinghouse’s AP 1000; and planning application from EDF Energy for Hinkley C was accepted late in 2011.  More recently Finland accepted bids for its next nuclear plant following the first of a kind EPR under construction at Olkiluoto; and the French have embraced life extension for the current fleet and the French regulator has has given its preliminary approval of the safety options for the Atmea1 reactor design.  So even without the good news in the US last week, nuclear power is alive and well in the western world.

So why is the granting of the COL for Plant Vogtle so important to the future of the industry?  First of all, it clearly demonstrates that the US, the world’s largest nuclear operator remains committed to nuclear power going forward and what can be more important for the industry than that?  With the COL for SCANA’s Summer plant expected to follow shortly, there will be five nuclear units under construction in the US including TVA’s Watt’s Bar 2 which is nearing completion.  TVA also plans to complete its idled Belefonte plant.

It is somewhat unfortunate that in its decision to grant the COL, the chairman of the NRC was the sole abstaining vote – still overly focused on the impact of Fukushima, wanting conditions related to post Fukushima improvements added to the license.  To their credit, the remaining commissioners felt differently with Kristine Svinicki stating “There is no amnesia individually or collectively regarding the events of 11 March 2011 and the ensuing accident at Fukushima.” She added that NRC staff did not recommend and did not support Jazcko’s idea of a condition being attached to the licence, “because we found it would not improve our systematic regulatory approach to Fukushima, nor would it make any difference to the safety of operating or planned reactors.

It is interesting that just a few days earlier, a NRC sponsored long running study concluded “A severe accident at a US nuclear power plant would not be likely to cause any immediate deaths, while the risks of fatal cancers caused by such an accident would be millions of times lower than the general risks of dying of cancer”.  This study is very important going forward because as we have written before, while Fukushima has been a terrible accident, the actual consequence to human life of radiation releases has been very modest with no immediate deaths and no longer term deaths expected.

Now the other issue, again as we have written about in the past, is the price of gas.  Recent prices have been below $2.50 mmBTU – which is making it even more difficult for any alternative form of generation to gas to be economic.  So what does this mean for future commitments to nuclear power in North America?  Well, while gas prices are low right now, the gas industry is not without its own issues.  Recent studies are suggesting that at today’s prices, gas companies are losing money and that the cost of subsequent shale fields will continue to rise.  And of interest is new study reported in Nature magazine suggesting that with fracking, the carbon footprint of gas is becoming similar to coal, rather than half that of coal as it is for conventionally produced gas.  Now I don’t want to start a big conversation on the future of gas – the issue is that nothing is perfect and we can expect gas to have its issues as well.

So what’s the next step?  The industry needs to remain focused.  The cost of gas is not within our control.  However, delivering on our promises is!  After delays in Olkiluoto 3 and Flamanville, it is essential for the new US projects to be successful – meaning achieving costs and schedules.  As stated by Southern CEO Tom Flannery “We are committed to bringing these units online to deliver clean, safe and reliable energy to our customers. The project is on track, and our targets related to cost and schedule are achievable.”  Good luck Tom.  These units will be the 5th and 6th AP1000s to be built and we know that the first units in China are on schedule.   The industry is behind you and we are counting on you to make this project a success demonstrating that plants built in the west can indeed meet targets and be important parts of our future generation mix.

What a difference a year makes! With New Build taking hold in the west in 2012 now is the time to sell the benefits of nuclear power to overcome the Fukushima effect.

The good news is that as 2011 comes to a close, Fukushima has achieved cold shutdown and the recovery is moving to the next stage.  The emphasis is now on decontamination and getting the dislocated people back into their homes as soon as possible.  Does this mean that nuclear will overcome the effects of Fukushima starting in 2012?

It was only a year ago that the International Energy Agency (“IEA”) issued its Nuclear Roadmap 2010.  This report clearly demonstrates the important role that nuclear power can play in meeting climate change targets.  With a 50% CO2 reduction targeted by 2050 in the so-called IEA Blue Map scenario, nuclear capacity triples and its share of electricity generation rises from 14% today to 24%, the largest of any generation technology.  Under a postulated High Nuclear scenario, the nuclear share would reach as much as 38%!

IEA Nuclear Roadmap 2010 share of nuclear

But that was then and this is now.  On March 11, as we all know, a devastating earthquake and tsunami struck Japan with horrific consequences – killing more than 20,000 and causing a nuclear accident at the Fukushima Daiichi Nuclear Plant.    There was significant fuel melting in three units resulting in radioactive releases to the environment.  Even though there have been no fatalities due to radiation and there is little risk of any future radiation health impacts, the global impact of this event to the nuclear industry was overwhelming.  While many countries re-confirmed their commitment to nuclear power after reviewing plant safety and implementing lessons learned, some countries in Europe led by Germany have taken the decision to scale back or even move away from nuclear power.

In the IEA’s World Energy Outlook 2011 released in early November they added a new scenario – Low Nuclear – to account for a possible post-Fukushima shift away from nuclear power in addition to the New Policies (reference) and Current Policies scenarios.  In the reference case, global nuclear power is expected to rise 70% by 2035 with China, Korea and India leading the growth.  This case is only slightly less than the projection last year.  In the new Low Nuclear Case, the total amount of nuclear capacity actually falls from 393 GW at the end of 2010 to 335 GW in 2035.   According to the IEA, this scenario has severe implications for energy security, diversity of the fuel mix, spending on energy imports and energy-related CO2 emissions.

In this low nuclear scenario, by 2035, coal demand increases to over twice the level of Australia’s current steam coal exports. The increase in gas demand is equal to two-thirds of Russia’s natural gas exports in 2010.  The increase in renewables-based generation is equal to almost five-times the current generation from renewables in Germany.  Energy-related CO2 emissions also rise with increased use of fossil fuels in the power sector.  This clearly has significant implications for global energy supply making it extraordinarily difficult to meet carbon targets.  As stated in the IEA’s WEO report “Following this trajectory would depend on heroic achievements in the deployment of emerging low-carbon technologies, which have yet to be proven. Countries that rely heavily on nuclear power would find it particularly challenging and significantly more costly to meet their targeted levels of emissions.”

WEO New Policies (Reference) and Low Nuclear Scenarios nuclear capacities

And now, Europe has issued its Energy Roadmap 2050 with the overall emphasis on renewables and energy efficiency; a policy document that has been clearly impacted by the post Fukushima shift in thinking in Europe.   As illustrated in the chart below, even with five different scenarios, the one thing they all have in common is a large increase in renewable energy generation.  No other form of generation increases anywhere near to that of renewables; and in fact most other forms decline over the plan period with only the size of the decline depending upon the specific scenario.  But even with this emphasis on renewables, the report does make important positive points on the role of nuclear power noting that nuclear energy is an important contributor to meeting the roadmap objectives.

In fact the report notes that today nuclear energy is the decarbonisation option providing most of the low-carbon electricity consumed in the EU.   It then goes on to note the post Fukushima reality.  “Some Member States consider the risks related to nuclear energy as unacceptable. Since the accident in Fukushima, public policy on nuclear energy has changed in some Member States while others continue to see nuclear energy as a secure, reliable and affordable source of low-carbon electricity generation.”

When it comes to cost, the impact is clear.  Consistent with the IEA Nuclear Roadmap, this report states “the scenario analysis shows that nuclear energy contributes to lower system costs and electricity prices. As a large scale low-carbon option, nuclear energy will remain in the EU power generation mix.”

This is critical since the average capital costs of the energy system will increase significantly due to investments in power plants and grids, industrial energy equipment, heating and cooling systems, smart meters, insulation material, more efficient and low carbon vehicles, devices for exploiting local renewable energy sources (solar heat and photovoltaic), durable energy consuming goods etc.  And the reality is that renewables are expensive with the highest electricity costs in the “near 100% RES power” scenario which the RES power generation capacity in 2050 would be more than twice as high as today’s total power generation capacity from all sources (I am assuming primarily due to the low capacity factors of renewable generation).  Other scenarios such as the High Energy Efficiency scenario and the Diversified Supply Technology scenario have the lowest electricity prices due to somewhat lower renewable penetration (60 to 65%) taking advantage of the lower costs of efficiency, gas and nuclear.   The report notes that many renewable technologies need further development to bring down costs.

So as we enter 2012, where does this leave us?  One lesson from Fukushima is that many in the world are still very afraid of nuclear power because of the huge fear of radiation.  There was an interesting piece on this in a CNN Health article this past week which argues that public trust in nuclear energy should be built on the existing acceptance of medical radiation dose levels.  The public welcome moderate medical radiation levels from both internal and external sources, for medical imaging (CT, PET, SPECT scans) yet fear the much smaller levels from nuclear plants. And as I stated in my last blog entry, as an industry our work is cut out for us in changing this thinking.  Reducing the public fear of radiation is no small task and will take time and a carefully coordinated approach from us all.  Professor Wade Allison argues that the ALARA principle has hurt us and increases this fear of radiation and suggests that this policy should be replaced with “As High As Relatively Safe (AHARS)”, mindful of other dangers, local and global.  An interesting approach indeed.

One thing is clear from the above IEA studies and the European Roadmap 2050.  Reading between the lines nuclear power is essential to meeting long term carbon reduction goals.  Relying too much on renewables is far too risky an approach and is more of a wishful thinking scenario than a realistic one.  To achieve global carbon reduction objectives, it makes no sense to not take advantage of the one true large scale low carbon technology – nuclear power.  It is here today – it is safe and in most jurisdictions it is economic.

So what about 2012?  So far it looks like it can be a good year for nuclear power.  Important progress in new build is being made in the UK; the US will see its first COLs enabling the first new builds to start construction in a generation; Canada may make a decision on its new build; and, of course China and others in Asia will continue to expand their programs.

Work in Japan will continue and will not be easy as the government works to decontaminate the area around Fukushima and hopefully many will get to return to their homes.  Of importance we can expect to see many of the idled plants in Japan get approvals to restart easing the electricity shortage caused by these units not running.  Again a recent Japanese study shows that nuclear remains the low cost option to 2030.

But of most importance, this is not time for industry complacency.  This has to be the year where the industry marshals its forces to get the message out – in a thoughtful, clear, unambiguous way.   The future is up to us so let’s get on with it and tell our story.  Even though truth may be on our side, the path is going to be long and the work hard……..but in the end it is worth it for us all………

We offer a proven large scale clean, economic and, of utmost importance, safe option for electricity generation.  As the only proven large scale low carbon option that can meet the world’s energy needs, nuclear power must continue to be an important part of the electricity generation mix now and into the future.