Sunday, August 27, 2006

Nuclear looms large in first U.S. carbon cap-and-trade scheme

My August 20 post talked about the Regional Greenhouse Gas Initiative, a coalition of seven northeastern U.S. States that has started the first cap-and-trade system for electricity generation–related greenhouse gases (GHGs). I said the RGGI had set an ambitious cap of 121 million tons per year. Actually, the cap is a bit more realistic. I mistakenly compared the 121 million tons with published figures from the Energy Information Administration, which indicate that power generators in the seven RGGI states emitted 142 million tons in 2004.

According to figures from the Environmental Protection Agency (EPA)—which are more credible and accurate, says one of the RGGI’s coordinators—the seven states emitted 115 million tons in 2004. Power generators in the RGGI have, collectively, 5 million tons of room between now and 2009.

So how strict is the 121-million-ton cap? Much will depend on the weather. A hot summer, such as that of 2005, produces higher demand for electricity. Preliminary data suggest RGGI states collectively emitted more than 121 million tons in 2005. If extremely hot summers become the norm, as many predict they will, fossil generators covered by the RGGI will be under a lot of pressure to keep their emissions below the cap.

This puts the Constellation Energy opportunity into clearer perspective. As I mentioned, Constellation will likely apply for a license to build a 1,600 megawatt nuclear reactor at one of its existing plants in Maryland. When Maryland joins the system in 2007, Constellation’s fossil-fired capacity in the RGGI will be roughly 3,600 mW, compared with 5,300 mW of nuclear capacity (assuming the company does build the 1,600 mW unit). Thus, Constellation will be 1,700 mW in the black when it comes to emitting versus non-emitting generation.

Depending on how Maryland and other RGGI states allocate carbon allowances—it could be on the basis of generator output—and on how much electricity Constellation generates in a given year, and from what sources, the company would likely emerge from a normal year in possession of surplus emission permits which it could then sell. The value of emission permits will of course be ultimately determined by the proposed permit market. But with modern risk management techniques, it might be possible to forward-purchase and forward-sell emission rights. Techniques for valuing these rights are being developed right now, by European market players drawing on the rich data sets from current and recent ETS operations.

Combined with support from the U.S. government (in the form of nuclear production tax credits and construction delay insurance, both provided under the Energy Policy Act) and $300 million worth of local tax relief, sales of carbon permits might make Constellation’s nuclear expansion plans in Maryland economically feasible. A permit market thereby serves to help buy down the financial risk of nuclear projects.

At July’s G-8 summit in St. Petersburg, Canada’s prime minister voiced public support for the Canadian nuclear industry. If he meant what he said, Prime Minister Harper shouldn’t close the door on emission trading. As I have suggested in previous posts, nuclear energy is the best hope for reducing electricity-related emissions. Emission trading could prove to be a politically palatable means of providing financial support for new nuclear projects.

If he were to frame this properly, Harper could show the pro-Kyoto crowd how federal support for nuclear is the biggest step Canada has yet taken toward addressing climate change and clean air—bigger by far than any step his two most recent predecessors ever took, or even contemplated. It could help him win votes in Ontario and Quebec.

Sunday, August 20, 2006

Eastern Front flares up in U.S. Kyoto war; nuclear industry could be the big winner

Last week I outlined how the Arnold Schwarzenegger–Tony Blair pact spelled bad news to those who oppose the Kyoto Treaty. The Terminator’s alliance with Blair represents the first major beachhead won by pro-Kyoto forces in America. But now the anti-Kyotos will be dealing with a headache on their eastern flank, in the form of the Regional Greenhouse Gas Initiative (RGGI). The RGGI is an alliance of seven northeastern states. It was initiated by New York governor George Pataki (another Republican) in response to President Bush’s inaction over Kyoto.

The RGGI will cap members’ aggregate electricity-related emissions at 121 million tons per year, beginning in 2009.

As with the European Union’s emission trading scheme (ETS), the RGGI’s success will stand or fall on the strength of its due diligence. i.e., on how strict its authorities are in approving members’ estimates of their projected emissions.

You will recall the problems with Phase 1 of the ETS (see my July 2 post). The price of carbon permits crashed on the nascent European permit market when it became apparent that there was a surplus of permits. This reduced emitters’—including electricity generators’—disincentives to emit. The whole point of creating a carbon market was to make emissions expensive, and thereby force emitters to find ways to reduce emissions without curtailing economic output.

Why was there a surplus of permits? It essentially boiled down to the European Commission’s generosity in granting carbon permits based on numbers provided by the companies themselves, and approved by the companies’ host countries.

The RGGI’s designers appear to want to avoid something similar. As mentioned, the cap will be 121 million tonnes. According to the Energy Information Administration, the RGGI states’ electricity related CO2 emissions were over 142 million tonnes in 2004. This means that, by 2009, RGGI participants have to reduce their aggregate emissions by 21 million tonnes—an ambitious target.

Will this spur investment in “clean energy”? And does “clean energy” include nuclear energy? Surely it must, and if so I can think of one company that is well-placed to take advantage of the situation. According to Greenwire, local authorities have offered Constellation Energy, which currently owns and operates roughly 3,700 megawatts of nuclear capacity in the RGGI area, $300 million to build a new reactor at one of its existing sites in Maryland. (Maryland will join the RGGI in 2007.) The new reactor, if Constellations construction application is approved, will likely be an Areva Generation III 1,600 megawatt unit.

If this comes to pass, Constellation will thereby offset 1,600 megawatts of the coal-fired capacity it owns within the RGGI area. If this unit were to run for one year at 80 percent capacity factor, it would offset over 10 million tonnes of emissions.

And if the RGGI’s designers are able to solve the over-allocation problems that plagued Phase 1 of the European Emission Trading Scheme, those 10 million tonnes will be worth a lot of money to Constellation.

Nuclear power proponents in Canada would do well to study the U.S. nuclear industry’s response to the RGGI.

Sunday, August 13, 2006

Kyoto forces win major beachhead in Fortress America—Harper’s Kyoto dilemma, part III

Kyoto skeptics got some bad news last week. After months of slugging it out with Al Gore and his supporters over the size and nature of the scientific consensus on global warming, they found out they now have a more terrible enemy: California governor Arnold Schwarzenegger, in partnership with Europe’s most successful politician, Tony Blair.

Schwarzenegger-and-Blair’s recent pro-Kyoto pact, which includes an agreement to promote transatlantic emission trading, means that California—a major world economy in its own right—is willing to take action on Kyoto even if the U.S. federal government isn’t.

This can’t be good. In some ways, Al Gore is the perfect enemy for Kyoto skeptics. First, he’s a high-profile loser. As Richard Cramer pointed out, America defiles its losers. Second, he’s a sanctimonious liberal Democrat. This wing of the Democratic Party is a big reason the Republicans have kept the Dems bottled up in their New England stronghold over the past six congressional, and two presidential, elections.

The collective distaste for liberals’ holier-than-thou finger-wagging finally spilled north into Canada on January 23 of this year, when Canadian voters ousted the federal Liberal party, whose members most irritating characteristic was their sanctimonious liberalism. Nowhere was this characteristic more pronounced than in the Liberals stance on Kyoto and the environment, about which they talked much and did precious little.

The publicity generated by Gore’s brilliant documentary An Inconvenient Truth represents the widening of the pro-Kyoto base from the affluent Birkenstock-and-cappuccino crowd to the mainstream. Hence, while it presents a problem for Kyoto skeptics, it is also an opportunity: easier to attack a massed enemy, led by a lightening rod like Gore, than guerillas in the jungle.

And hence the skeptics’ stepped-up re-framing campaign, led, in Canada, by the Friends of Science, an oil industry–funded group of retired scientists who disagree with hypotheses that say we humans are the reason the globe is warming. They resent claims that a scientific consensus exists on these hypotheses.

The skeptics’ campaign has been getting more and more play recently, thus making the game a little more interesting.

But the Schwarzenegger–Blair pact is a daunting setback. Neither has Gore’s liabilities. Schwarzenegger is a hugely successful high-profile Republican, and Blair is the staunchest international ally of the Kyoto skeptics’ favourite politician (George Bush, another Republican). Combined, they represent a new middle way: a safe place for moderate conservatives to park electoral support. Which means it is possible that environmentalism is becoming the new mainstream.

And it gets worse. Schwarzenegger isn’t the only Republican to buck Bush in taking a pro-Kyoto position. John McCain, who lost to Bush in the 2000 primaries, is gearing up for another run at the Big Job. He tried last year to put a carbon-capping bill through the Senate. He’ll try again, and this time he might succeed. Republicans in general are looking at grim prospects in this November’s Congressional mid-terms, and many are distancing themselves from Bush. Bush’s aversion to Kyoto is competing with Iraq and Katrina for top spot among his vulnerabilities. Desperate Republican incumbents wont hesitate to jettison their Kyoto-phobia if they think it’s dragging them down.

Against this backdrop, Kyoto-phobia in Canada looks a bit anachronistic. Canada’s prime minister, Stephen Harper, appears philosophically aligned with the skeptics. He’s never been big on Kyoto, and his government is, rightly, labeled anti-Kyoto.

But the Conservatives’ fortunes in the next federal election might depend on votes from Kyoto supporters. Quebec is full of Kyoto supporters. Harper and company need more Quebec votes.

This means that Harper will have to overcome either his intellectual distaste for the groupthink that characterizes the mainstream Kyoto movement or his yearning for Quebec and Toronto votes.

What would you do?

Saturday, August 05, 2006

How to fund Kyoto programs without hurting Alberta

I recently spoke with a New Brunswick energy official about the possibility of the Harper Conservatives revisiting the Pt. Lepreau funding issue. (You will recall last summer’s announcement by then–New Brunswick minister Andy Scott that the federal Liberals would not provide funds for Lepreau’s refurbishment.)

We talked about a coalition of nuclear-power provinces—New Brunswick, Quebec, and Ontario—asking the federal government for help managing the early up-front financial risks of nuclear projects. During the discussion, I wondered if federal financial support for nuclear provinces could be based on the greenhouse gases (GHGs) avoided by generating power with uranium instead of fossil fuels.

My New Brunswick interlocutor pointed out that any funding would depend entirely on developments in Ontario’s nuclear power sector. This is where truly major projects are most likely to occur, and where truly significant amounts of money would be spent. Ontario is the reason New Brunswick’s Lepreau request was rejected: the federal Liberals took the $400 million for Lepreau (one reactor) and multiplied that by at least five (reactors in Ontario and Quebec requiring refurbishment or replacement). No wonder they said no.

The New Brunswick official then pointed out that whatever funding scheme was cooked up, it would ultimately be “Alberta money” paying for these projects.

Manning’s sermon on oil revenue shines light on Kyoto funding possibilities

He’s right. Earlier this week, former Reform party leader Preston Manning co-wrote an article (in the August 1 Globe and Mail) in which he laid out the extent to which Alberta’s oil sector contributes to Canada’s economy. The oil sector doesn’t just put billions of royalty and tax dollars into Alberta’s treasury, Manning points out. It enriches all of Canada, primarily because of its enormous capital spending but also because it sends $5 billion a year to the federal government in the form of taxes.

Cut to Kyoto. As I pointed out in my July 31 post, Alberta has a problem with Kyoto because Alberta’s oil and electricity generating sectors produce a disproportionate share of Canada’s GHGs. The problem for a federal politician is that Quebec loves Kyoto. Quebec has no energy intensive oilsands but it does have a huge amount of water running through it, with which it makes a huge amount of zero-emission electricity. Quebec can afford to love Kyoto.

A federal politician wondering what to do about Canada’s obligations under Kyoto might look at all this and see an impossible problem. But it’s not impossible.

My June 27 post described a push by Quebec sustainable development minister Claude Bechard to build a coalition of pro-Kyoto provinces. This coalition would collectively ask the federal government for money to implement Kyoto programs in the participating provinces. I pointed out that anti-Kyoto provinces like Alberta should be able to opt out without penalty.

Could such a scheme be funded from existing revenues? And would such a move pay electoral dividends? It would require a re-diversion of federal spending, and hence a battle, possibly in the cabinet. Politics is all about who gets what. To Stephen Harper’s minority Conservative government, it’s all question of whether a pro-Kyoto move will gain more votes than it will lose.