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.

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