Thursday, September 14, 2006

Federal support for Ontario nukes: making it work

There has been a lot of speculation in recent months about exactly how the U.S. Energy Policy Act (EPAct) of 2005 will support new nuclear projects in that country. The EPAct introduced a series of measures—construction delay insurance, loan guarantees, and power production tax credits—designed to underpin a new wave of nuclear construction.

As I pointed out in some recent posts (August 20 and August 27), the RGGI cap-and-trade system for electricity-related GHGs, involving seven northeastern U.S. states, introduces a potential further avenue of support. In the new permit market, nuclear generators might be able to earn offset credits and sell them to fossil generators.

However, there is now some question as to whether this, in combination with the support measures in the EPAct, gives an unfair competitive advantage to nuclear over fossil generation. This question will acquire greater urgency if and when generation source becomes an issue—and a selling point—as power hungry jurisdictions enter into new supply agreements, especially if these involve trade between covered and non-covered jurisdictions.

For this reason, I predict the emergence of a further form of integration in power companies: integration based on generation type. Because of carbon trading, generating companies’ output will be valued and marketed at least in part on the basis of its emission intensity, measured in grams emitted per watt-hour. This will push up the cost of operating coal-fired plants, thereby removing at least in part their current cost advantages. Fossil-dominated generating firms that operate in cap-and-trade areas—like NRG Energy, which has 6,800 megawatts of fossil-fired capacity in the RGGI—will acquire, or be acquired by, firms with nuclear fleets.

How will this play out in Canada? In Ontario, we have an interesting situation. The biggest generating company, Ontario Power Generation (OPG), operates fossil, nuclear, and hydro plants. Bruce Power, Canada’s only private sector nuclear generating company, operates six CANDU reactors. Collectively, Ontario’s generating companies produce electricity with an emission intensity of 272 tonnes per million kWh. OPG, and by extension the Province of Ontario (its only shareholder), owns Bruce Power’s reactors, which cranked out nearly 33 billion kWh in 2005 and were a major reason for Ontario’s relatively low emission intensity.

In this configuration, who would and should get credit for the carbon-free electricity that Bruce Power generates in a future cap-and-trade system?

Difficult question, but not unanswerable. The critical thing is that the federal government should support Ontario’s nuclear expansion. It is sound industrial policy—Ontario is the engine of Canada’s economy, and electricity powers that engine. And it is sound environmental policy—using nuclear to offset emissions from the fossil plants dovetails perfectly with both climate change and clean air policies. If you reduce carbon dioxide, you also reduce nitrogen and sulphur emissions.

The problem is the partisan political landscape in Ontario. I’ll take this up in my next post.

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