Where will the clean energy come from?

Last week, the president proposed a new push to reduce GHG. It’s not clear how (or if) the Congress will go along, or how much can be legally accomplished without legislative support.

One of the major targets is, as expected, coal generating electricity plants. Obviously the coal miners and the coal-intensive electric companies would try to push back, but again, it’s unknown how successful they will be. It’s also not entirely clear what the point of reducing US coal consumption is, if the entire US consumption is about a billion tons while Chinese demand has risen from 3 to 4 billion tons in only 5 years and India is also increasing coal generation.

That said, if the plan (or some other approach) succeeds in getting rid of US coal plants, where will the replacement electric generating capacity come from?

Hydro is maxed out, and wind and solar can only ramp so quickly. The remaining no-CO2 option is nuclear, but it’s becoming increasingly uneconomic. As the WSJ reported last week:

Nuclear power produces two-thirds of the nation's emission-free electricity, but that industry is in the doldrums now because of slack power prices in deregulated markets and generally low demand for power. The plants also suffer from high fixed costs.
…
Dominion Resources Inc., D +0.60% a big owner of nuclear plants and utilities, shut down its Kewaunee nuclear plant in Wisconsin last month because it can't operate it profitably in the current energy environment. "Longer term, nuclear has to be a major part of the solution," said Tom Farrell, chief executive of Dominion, which is based in Richmond, Va.

Nuclear is plagued by high capital and other fixed costs, despite low variable costs. With natural gas prices plummeting, it’s hard to see how it will ever be cost-competitive again.

Natural gas generates half the carbon emissions of coal plants, but that’s still more than zero. Fixed costs (and nuclear waste) aside, nuclear would be a better GHG solution but one that seems increasingly out of reach.

A call for government inaction

A recent S&P report suggests that the US electric utility industry would be better off if the US government picked consistent inaction over inconsistent intervention in the energy sector.

The report, “U.S. Electric Utilities Seek Clear Direction From Washington On Energy Policy,” suggests major uncertainty for US utilities until more coherence is achieved. (I haven’t seen the report because it seems to be only for RatingsDirect subscribers unless you want to pay $500.)

Energy policy is of course one of the messiest examples of government intervention in the entire country, with national, state and municipal policies that include direct regulation, taxation, subsidies and land use. A consistent policy is essential for industry to make long-term capital investments, whether it’s a 10 year search for oil or gas, a 20 year lifespan for solar panels or a 30-40 year lifespan for a power plant.

A posting by Mimi Barker on RiskCenter summarizes the problem:

Standard & Poor's Ratings Services believes that U.S. electric utilities and their bondholders would benefit from a clearly articulated, comprehensive, and consistent U.S. energy policy.
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Any energy policy evolves from a complex and intertwined system of legislative bodies, executive departments, and courts, not all of which are federal, that influences how the private sector develops energy resources and allocates capital. So when we say energy policy, perhaps what we mean is political leadership that coalesces and shapes public opinion in a way that supports long-term investment in energy assets.

"In some ways, overall regulatory risk in the sector has moved slightly from the states to the national stage as big-picture issues--with big price tags--like climate change, economic stimulus, and the reliability of the transmission grid threaten to overtake the mundane matters of rate cases and earned returns as the key factors supporting credit ratings," said Standard & Poor's credit analyst Todd Shipman.

Sheila McNulty on the FT offers another quote from the report:

Making resource decisions and committing a utility’s balance sheet to support those decisions has never been more complicated or littered with more potential pitfalls, and diminishing credit quality is a result.

And, as she notes, industry is starting to feel the confusion.

John Rowe, chairman and chief executive of Exelon, the power producer, spoke about this issue in a recent speech when he said US energy policy has been driven by a mess of mandates and power subsidies for nuclear, cleaner coal, gas, wind solar and other renewables – a constant urge to pick winners and losers. In his words: “Congress needs to slow down. We are already doing enough to give all of these things a chance.”

We have a fundamental collision between the political world — where the goal is a 15 second soundbite on tonight’s new and long term is an election 2 years away — and the long-term time horizons of all companies in the energy sector.

In the US, we’ve come to take a steady reliable supply of electricity as a given, something that distinguishes us from, say, rural India. The mismanagement of California’s electricity deregulation shows us that policy that can make the system less reliable and more expensive. And the recent contraction of Japanese industrial production due to electricity shortages shows us the broader economic impact of an unreliable energy infrastructure.

It would be nice if that would be enough to make the politicians pick stable rules and then butt out, but of course that’s not going to happen. This is one of those rare cases where I wish we had a Lee Kuan Yew.

Sunny and dark side of deregulation

10 years ago, the California energy crisis came to fruition. Blackouts and shortages rocked the state, made us a mockery of the country and brought down a governor.

Since that time, it’s been tough to find a balanced appraisal of this event. Leftists blamed evil corporations, rightists blame inept government while accounts that consider both perspectives are few and far between.

Economist Seth Blumsack of Penn State offers the rare exception, writing in December’s issue of IEEE Spectrum and posted to the public website this month. (The website comments are also helpful.)

Against the government, there was only partial deregulation which never engendered real competition. Against business, a few companies (notably Enron) were able to game the system for their own ill-gotten gains.

As Blumsack points out, electricty markets are not (and perhaps never will be) fully competitive. In this regard, the last mile resembles wireline telephone companies and other “natural monopolies.” Meanwhile, all energy markets are plagued by demand that is highly inelastic in the short run. (If gas prices double, over time I can buy a smaller car or move 15 miles closer to work, but I can’t do it tomorrow morning.)

Overall, the results are mixed. The partial liberalization has increased efficiency. On the other hand, increased pressures for efficiency have changed the energy grid from a cooperative effort to a zero-sum battle.

Blumsack contends that deregulation means higher cost of capital and thus higher project costs. It’s also possible that deregulated developers have more incentives to cut costs while regulated utilities — like a government entity — will quite freely spend money not their own.

Finally he points to the role of markets in promoting green energy. Markets can be used to buy anything, and most American states are using them to procure geen energy.

To nuke, or not to nuke?

Nuclear power’s disadvantages — technical, economic, social acceptability — will probably prevent it from making much difference in solving climate change problems. Energy, both literal and metaphorical, spent on nuclear power is energy not spent working on other parts of the menu of choices for addressing climate change issues.”
— Lee Clarke, “The Nuclear Option,” in Routledge Handbook of Climate Change and Society

In a countries like France and Japan, the lynchpin of efforts to reduce carbon emissions (and imports of fossil fuels) is electricity generated from nuclear power. Overall, Clarke says that fission reactors generate 14% of the world’s electricity, and 20% of that in the US.

In the US, proponents of nuclear power argue that it’s a proven technology, it substitutes directly for the dirtiest of electric sources (coal), and the greenhouse gas emissions are zero. This option is particularly salient for moderate environmentalists (or at least liberal Republicans) who worry about GHGs but consider the nuclear question long since settled.

Of course, opposition to nuclear power in the US dates back more than three decades. I recall rock concerts and traffic jams in a futile effort to block PG&E from building the 2.2 gigawatt plant in the isolated Diablo Canyon — opening in 1985 as one of the last new nuke plants in the US.

Some of the environmental opposition is dispassionate and logical, focusing on the lack of political will (and technical uncertainties) regarding storage of spent nuclear fuel. Other opposition is hysterical, right up there with the anti-vacinnation campaigners who worry about imagined mercury risks (from vaccines that no longer use mercury as an antibacterial).

Similarly, some of the economic arguments are more sound than others. Nuke plants have huge capital budgets, long approval processes, and require complex and expensive technical and security training to operate safely. As with all economic policy arguments, the arguments against (or for) plants are subject to the usual lies and distortions because no one checks who was right 30 years later.

Some try to combine the approaches. Just as death penalty opponents claim (rightly or wrongly) that death penalty litigation is more expensive than 40 years of room and board, some environmentalists say that whether or not the plants are safe, they put too much of a rate burden on ratepayers.

In his chapter from the Routledge Handbook of Climate Change and Society, sociologist Lee Clarke is openly skeptical of environmentalists (such as Stewart Brand) who believe the threat of global warming is greater than the threat of nuclear power. While not anti-corporate like some authors in this edited volume, he clearly has the same objections to nuclear power today as did leading environmental groups 20 years ago long before IPCC, Kyoto and “An Inconvenient Truth.”

Still, one doesn’t have to agree with the motivations of people like Prof. Clarke to agree with his conclusions. Even if nuclear power is the right solution, is it a feasible one? Even with a major push, given the restrictions on where plants can be placed American voters and regulators are unlikely to approve more than a modest increase in the number of reactors. Another complication is the need to replace 40+ year old reactors as they come up for decommissioning, perhaps (as in Southern California) building them alongside the old ones.

Meanwhile, US (and IAEA) policy is not going to promote putting up fission reactors across South America, Africa, Asia and the Middle East.

If politics is the art of the possible, then the reality is that nuclear power (at best) will make a small difference. While those who want to reduce manmade global warming might want to support any proposed nuclear projects, they can’t be counted on to solve the entire problem.

Meanwhile, from a business standpoint, the stagnant industry already concentrated with four manufacturers consolidated to three: GE Hitachi, Westinghouse and Areva NP of France. What business there is will go to incumbents, not new entrants.

And even these companies recognize the long odds: none are placing all their eggs in a nuclear basket. GE has leveraged its turbine skills to remain (for now) the dominant seller of wind turbines in the US market, one of five major players overall, while Hitachi is concentrating on turbines for the Japanese niche market. It also has a solar business, as does Westinghouse (through its partnership with the company formerly known as Akeena) and Areva (which bought the SV firm Ausra in 2009).