Sunday, October 29, 2006

Coal-based power generator contemplates acquiring nuclear, IGCC plant
In my September 14 post, I predicted that coal-based generating companies operating in carbon trading areas would begin acquiring nuclear assets as a way of hedging against carbon prices. Platts Commodity News quotes an NRG Energy official as saying the company (which operates in the RGGI area, and whose generating assets are primarily coal-fired) is thinking of building nuclear and coal-gasification (IGCC) plants.


I and others have throughout the summer been advocating a carbon market in Canada as part of our response to our country’s Kyoto commitments. And, as I and others have pointed out, nuclear generation is by far the most realistic means of reducing generation-related emissions in areas, like Ontario, that lack or have tapped out hydro resources.

However, nuclear is also the most capital-intensive, and carries the biggest long-term financial risk. This is why so few private companies are willing to invest in it.

Of course, a carbon market will not by itself solve this problem. But in combination with other incentives—such as the construction delay insurance, loan guarantees, and power production tax credits that were written into the U.S. Energy Policy Act of 2005—the creative financing available under a carbon market could spur investment in nuclear generation plants.

And there are other approaches, such as long-term power purchase agreements based on fixed prices. These would provide additional stability in highly or even partially regulated markets (like Ontario’s). In liberalized markets, long-term purchase agreements could entice major power users, as they did in the case of Finland’s Olkiluoto plant, to contribute to construction project financing.

What role could Canadian governments have in these? Ontario already provides power price guarantees to major power consumers. Up to now these have usually been one-off agreements, done in secret and on the fly, in response to economic pressure from companies threatening layoffs.

In principle, there is nothing wrong with the government providing a private-sector power consumer with insurance against price increases. But this should be written into policy. The government wants to encourage public–private partnerships in electricity investment. This is a perfect opportunity for the Ontario government to kill two birds with one stone: add much-needed new generating capacity, and dramatically reduce emissions.

Such arrangements could and should also spur investment in coal gasification plants. But that is another post. Stay tuned.

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