Wednesday, February 27, 2008

Forget about AECL privatization, for now: federal cash means reactor maker will stay Canada-owned
Finance Minister Jim Flaherty put to rest rumours about AECL’s impending privatization yesterday when he announced his government will follow the Auditor General’s advice and put up $300 million to help the CANDU manufacturer finish critical work on its Generation III reactor.

Good move. The CANDU has too much potential in the dawning closed-fuel-cycle world to be unloaded at a fire-sale price, something its many detractors have urged. Nuclear power is Canada’s technological route to massive greenhouse gas (GHG) reductions. The feds’ help for AECL is another nudge to the Ontario government to quit pretending it is seriously considering buying light-water reactors—i.e., in the prime minister’s words, to fish or cut bait. Ontario is the scene of North America’s most dramatic GHG reduction since we signed Kyoto; this was because of the return of four nuclear units after 2003.

Flaherty’s other environmental move, pledging $250 million for yet another study into carbon capture and sequestration (CCS), was not so good. CCS, as I pointed out on February 6, is more PR than anything else. Flaherty’s PR did not mollify his intended audience, the mainstream green lobby.

Still, one out of two ain’t bad. And the bigger money went to the better project.

Monday, February 25, 2008

ROK-ing the nuclear world: is Ontario the first stop for new act’s North American tour?
Back in mid-December, the Asian press was abuzz with rumours that two of the major players in South Korea’s recently de-regulated power industry—KEPCO and KHNP—consider themselves serious contenders to sell nuclear reactors to Ontario. If this were to pan out, it would represent South Korea’s first foreign reactor sale. It would also be Ontario’s, and Canada’s, first light-water reactor.

If the rumours are true—and why wouldn’t they be, since the Koreans are also expected to offer reactors to Turkey, in competition with five other vendors including AECL—it adds a new dynamic to the North American nuclear scene. South Korea’s power reactor fleet is one-fifth CANDU and four-fifths light water, while CANDUs make up nearly 17 percent of the North American fleet. The isotopic content of spent light-water fuel makes it suitable for use in CANDUs; this is the whole idea of DUPIC.

Could DUPIC, or something similar, be a solution to the spent fuel disposal problem in the U.S.? South Korea is an ideal place to test answers to this question, and in collaboration with the U.S. and Canada, the Koreans have been studying it in detail for over a decade.

Which means their dreams of foreign sales may also involve the U.S., though they might not necessarily be thinking of light water reactors. Other competitors may have the inside track to the U.S. reactor market, but the Koreans, with their working-level experience with DUPIC, may have an ace in the hole. Their nuclear research organization, KAERI, spent a lot of time trying to convince KHNP to implement DUPIC in its fleet. (Apparently, de-regulation did not apply to the websites of KEPCO, KHNP, and KAERI.)

While KHNP recently decided not to pursue DUPIC because of the fuel fabrication costs (which, according to a Korean study, are $616 per kilogram), the Koreans’ experience with DUPIC over the past decade could prove invaluable in the U.S.

The current cost of direct disposal of spent fuel in the U.S. is about $551 per kilogram, according to Congressional Budget Office testimony to the U.S. Senate Energy and Natural Resources Committee last November. This makes DUPIC about 11 percent more expensive than direct disposal. Cost estimates for the reprocessing scheme currently envisioned in the Global Nuclear Energy Partnership (GNEP), which would use fast-neutron reactors to destroy chemically- or thermally-isolated elements in spent fuel, range from six percent to well over 100 percent over the cost of direct disposal.

So what will the GNEP’s fast-burners cost? In his testimony to the same committee, Matthew Bunn criticized the six percent estimate for assuming that the proposed fast burners would operate at capacity through their lives, and that their costs could be contained enough to make their power attractive in a competitive market. Both assumptions, he says, are dubious. The CBO thinks the fast burner option would cost at least 25 percent more.

With this kind of uncertainty, policymakers might be more willing to look at a process whose characteristics are better known. A U.S. official told Platts in 2006 that DUPIC could cut in half the number of fast reactors required under GNEP.

Monday, February 18, 2008

Nuclear diplomacy: Canada’s role in India’s entry to the Great Power Club
On February 6, I talked about Canada’s position on whether India should be exempted from Nuclear Suppliers Group (NSG) rules regarding nuclear trade with countries that are outside of the Non-Proliferation Treaty (NPT). Exemption could mean de facto recognition of India as a nuclear weapons state—in the same league as the U.S., Russia, China, France, and Britain—because India has refused to allow International Atomic Energy Agency (IAEA) inspections at “strategic”, i.e., military, nuclear sites. It also won’t commit to refrain from weapons testing, and won’t stop producing explosive fuel for bombs.

I mentioned that there were pro and con arguments circulating through the Canadian government. According to Mark Hibbs of Platts, the Department of Foreign Affairs (DFAIT) supports the exemption and the Canadian Nuclear Safety Commission (CNSC) opposes it, and DFAIT is getting its way. The issue still requiring diplomatic resolution between Canada and India is India’s use of plutonium from a Canadian reactor to make its first nuclear bomb in 1974.

Canada has been trying to patch this up for a few years now. Our position appears to be to let bygones be bygones when it comes to India, in service of the twin goals of finding a research partner on thorium fuel development and supporting the U.S. effort to strengthen relations with the biggest country on the Asian sub-continent. Here’s what David Malone, Canada’s High Commissioner to India, told a university audience in India on February 12: “[The cool relationship between Canada and India] changed … when both governments … woke up to the fact that allowing [the nuclear] issue to dominate the relationship was a bad idea, and that we could agree to disagree about what happened in 1974 and move on recognizing that India had not proliferated internationally since it created nuclear weapons.” (Note the reference only to 1974, though that wasn’t the only instance of India using Canadian know-how in its weapons program. But this is diplomacy.)

What does “move on” mean? Does it mean agreeing to unconditionally exempt India from NSG export rules, an issue which is being debated right now? Perhaps: it appears that influential NSG countries, including Canada, are cool to the idea of restrictions on exports of enrichment, reprocessing, or heavy water production technology to India. India certainly wants this technology.

This is where it could present a challenge. India wants to base a future generation of reactors on fast breeder technology, and will need plutonium to fuel them; hence its desire for enrichment/reprocessing imports. A breeder program would provide plutonium for enough weapons to allow India to present simultaneous, credible nuclear deterrents to certain of its nuclear neighbors.

But the cardinal rule of the NPT is that no signatory should aid in another country’s weapons program. How could the NSG ensure that no sensitive material goes into India’s weapons? In theory, by subjecting all Indian nuclear installations to permanent international safeguards. If this is not possible, such an exemption could create a hole through which NSG-supplied material could slip into India’s military program.

For the above-mentioned strategic reasons, as well as domestic political ones, India has long refused to allow permanent safeguards at all its facilities. Because of this, the Arms Control Association demanded in a recent open letter that NSG countries not export any enrichment, reprocessing, or heavy water production technology to India. However, as mentioned, Canada appears ready to allow such exports. This might mean that, if we are to avoid entirely abandoning our non-proliferation principles, not to mention forgetting about 1974, we will have to be polite but firm on safeguards.

Is this a show-stopper? India’s position against full permanent safeguards may yet contain some wiggle room. Domestic Indian opposition is strongest in the case of the deal with the U.S., which says that transferred material and equipment is “subject to safeguards in perpetuity in accordance with the India-specific Safeguards Agreement between India and the IAEA.” It may not be so vociferous if the other NSG members, such as Russia, were to insist on similar terms.

So proponents of nuclear trade with India are pulling out their best diplomacy. David Malone’s “move on” may therefore be an attempt to convey Canada’s strong desire for a deal while encouraging India to reconsider some aspects of its position on safeguards.

Friday, February 15, 2008

Backing the winners II: power generation squeeze play in North America
In 2005, the U.S. government passed legislation (the Energy Policy Act, or EPAct) giving incentives to financiers of new nuclear power plants. These incentives included construction delay insurance, power production tax credits, and most important, loan guarantees. I have suggested that Canada follow this, and provide similar incentives.

How have the EPAct incentives worked so far? In the first year after the EPAct, there was some confusion as prospective project proponents and financiers tried to figure out what portion of a project’s debt the government would guarantee. Naturally this led to delays in decisionmaking. The Nuclear Energy Institute
says there are 21 U.S. intended construction projects in various decision stages. Many observes have seized on this relatively low commitment as evidence for the general claim that the up-front capital costs of new nuclear plants—by far the most significant part of a build project—pose an insurmountable obstacle to a nuclear expansion. This, some say, makes natural gas by default the strategic winner in the generation investment wars.

This is a bit simplistic. Let’s put the situation into context. The sub-prime market fiasco has made investors skittish about putting down big money. The means the cost of debt is higher and it is hard to leverage deals. But this is just part of the boom-and-bust cycle. Besides, how many major investors put big money into companies in the second half of 2001? The skittishness will pass.

When it does, the EPAct’s loan guarantees, together with nuclear fuel costs that are lower than or equal to those of coal (the cheapest fossil fuel), will make the long-term prospects of nuclear much more attractive. A recent Public Utilities Fortnightly article reports a prediction that uranium spot prices will rise from $1.21 per million Btu to $2.25 in 2011. They will then settle to $$1.30 by 2017.

Because of the projected price surge between now and 2011, the Fortnightly piece waffled on the prospects for nuclear, and said that high uranium prices cancel any advantages of carbon regulation that would accrue to nuclear power, which emits no carbon. But without an indication of how toothy the regulations would be, this is an empty claim.

I’m more optimistic. Let’s not forget the way the board is tilting in the U.S. As I pointed out on February 1, the three major state-driven emission control schemes, together with strong indications that the next U.S. president—whether it’s McCain, Obama, or Clinton—will support some sort of emissions regulation, indicate that real carbon costs are coming to America.

Besides, while the predicted $2.25 uranium price in 2011 represents a daunting 85 percent increase over the current price, it is still in the neighborhood of the price of coal. More important, it is only one-third of the average Henry Hub price of natural gas in 2007 (which was well over $6 per million Btu). While nobody can predict what gas will cost in 2011, it is safe to say the price will stay high.

If and when carbon costs come to the U.S. utility sector, the already-high price of gas plus the cost of emissions is likely to keep gas where it is today: perfect for peaking and black-start capacity, but too expensive and emission intensive for baseload. Nobody should expect LNG to play price-cavalry in the North American market. LNG will sell into the continental market at the prevailing—high—continental price.

This leaves nuclear and coal for baseload. Again, with carbon costs likely coming to the U.S.—possibly spurred by another successful emissions-related lawsuit against a major emitting company (see article)—nuclear comes out on top.

The Fortnightly article reminds readers that “the US is a good place to invest in an uncertain world.” It's true. Money is coming, and it’s just a question of where it will go. When credit markets ease up, we’ll see how significant the EPAct’s nuclear incentives really are.

Wednesday, February 06, 2008

Climate change and nuclear policy in Australia: lots to do with Canada
Two months ago, Australia’s anti-Kyoto PM, John Howard, lost that country’s general election. One of the first moves of his successor, Kevin Rudd, was to bring Australia into the Kyoto club.

The pro-Kyoto crowd has applauded this move. From their point of view, anything that gets in George Bush’s face is good. But let’s take a real look at Australia’s newfound Kyotophilia. Will it lead to actual emission reductions, which, though only dimly remembered, were the main point of Kyoto? Or will it just add another voice to the politically correct cacophony that drowns out intelligent climate change discussion in international circles?

Sadly, the second alternative is the right one. Rudd’s next move was to put a freeze on his predecessor’s ambitious plans to introduce nuclear power to Australia’s highly coal-dependent electricity generation sector. This virtually ensures that Australia’s climate change contribution will be negligible.

Rudd’s alternative to nuclear is carbon capture and sequestration (CCS), a fanciful scheme whereby the CO2 from fossil fuel exhaust is captured and pumped underground. CCS is a familiar concept to anyone who has followed the travails of the U.S. utility sector. While it may be viable in certain limited instances, it is more public relations than anything else; Rod Adams has a good piece about it.

The CCS PR gambit seems to be succeeding, and not just in Australia and the U.S. Politicians from western Canada have seized on it as a way of dealing with the massive emissions from the oil sands. But it is a big strategic gamble, especially in the U.S. By the time people figure out they’ve been had, many new coal-fired plants will have been built. And if a climate-change lawsuit against a coal-fired generator succeeds in the U.S., we could see a corporate meltdown that rivals the bust of 2001.

Rudd hasn’t limited his nuclear moves to domestic power generation. He has also reversed a Howard decision, taken in mid-August 2007, to consider uranium exports to India.

Howard’s India move followed the U.S.-India nuclear cooperation deal of 2005. India is not party to the Non Proliferation Treaty (NPT), and won’t allow IAEA inspections at some of its nuclear sites. For this reason, the Nuclear Suppliers Group (NSG) doesn’t allow its members, which include Australia and Canada, to export nuclear material or equipment to India. The U.S., for strategic reasons I discussed back in September, wants the NSG to make an exception in the case of India. Howard said he would consider it.

It is difficult to tell if Rudd’s India reversal is more a product of overheated election rhetoric than sober deliberation. My guess is that, unlike the electricity decision, it is the latter.

Regardless, it puts Canada into a delicate position. We joined the Global Nuclear Energy Partnership (GNEP) very recently, presumably as a supplier state. We have also been under concurrent pressure from the U.S. and India to ease the NSG trade sanctions in order to clear the way for the U.S.-India deal.

The problem is, we have an, uh, history with India when it comes to nuclear issues. India manufactured the plutonium for its first bomb using a Canadian research reactor, which we sold in the 1950s on what we felt was the condition that India would use the reactor for peaceful purposes only. Well, India successfully tested a plutonium bomb in 1974. It now refuses to allow the IAEA to inspect the reactor, and this is a bit of an issue with the Canadian government.

In light of this, how have we responded to the pressure from the U.S. and India to change the NSG rules, and from the Arms Control Association to maintain them?

There are voices pro and con in the Canadian government bureaucracy, and according to Mark Hibbs some of the strongest con voices last summer were at the Canadian Nuclear Safety Commission, whose president was fired two weeks ago. If we support easing the NSG sanctions now, some people may note the temporal proximity to the decision to join GNEP and wonder if we bailed on a long-standing international principle for the chance of making a few bucks in India. Worse, they’ll wonder if there’s any connection to the CNSC head’s dismissal.

These are just a few of the reasons why Canada ought to delay deciding on the NSG rules for as long as possible.

Friday, February 01, 2008

Emissions cap-and-trade schemes crisscross North America: which scheme will actually reduce emissions?
Three major state-level emission control initiatives have popped up in the U.S. Several Canadian provinces are involved. British Columbia and Manitoba are part of the Western Climate Initiative (WCI). Manitoba is also part of the Midwestern Greenhouse Gas Reduction Accord. And Ontario and New Brunswick are official observers of the Regional Greenhouse Gas Initiative (RGGI).

Meanwhile, U.S. state governors are looking into merging the three climate pacts.

Unifying these pacts will be a challenge. RGGI focuses only on the electricity generating sector, while the other two cover all sectors.

RGGI’s is the best approach. Focusing on power generation is the most direct and fastest route to massive emissions reductions, as Ontario’s 15 million tonne example has shown. Reducing the emission intensity of power generation, and then shifting more fuel end-use to electricity—for example, plug-in hybrid cars—is the way modern societies will dramatically drop their carbon output.

Will RGGI actually lead to emissions reductions without ruining the economies of the ten states it covers? There are three promising signs that the answer is yes—but only if the proceeds of carbon permit sales go to building new nuclear plants.

The first promising sign is in the form of the Republican front-runner in the U.S. presidential race. John McCain supports cap-and-trade, with auctioning of carbon permits. (His main rival, Mitt Romney, took Massachusetts out of RGGI when he was governor.) McCain thinks the auction proceeds should go, in part, to new nuclear plants, which he views as essential to any credible climate change strategy.

Second, the recently passed Energy Independence and Security act (H.R. 6)
included a provision that grants credits for nuclear-generated electricity when it is used to power electric vehicles. This builds incentives into that fuel-shift I mentioned above.

The third promising sign is a call by Barclays Capital for “the broadest possible participation [in RGGI] by as many players as possible.” Barclays says “it is extremely important that allowance markets are liquid, so that forward markets will develop, so they will be able to lock in their future RGGI allowance costs.”

For forward purchasing of carbon permits to have the intended effect, permits must be available on a scale that interests major investors. This means they must be based on utility scale, zero-emission, dispatchable power. Nuclear is the only generation technology capable of achieving this.

I predicted last year that effective carbon caps could spur a restructuring of utility ownership in the U.S. Some coal-fired utilities operating under serious cap-and-trade rules will end up looking like Ontario Power Generation, which owns 6,400 megawatts of coal-fired capacity and a roughly equivalent amount of operating nuclear capacity.

The question is, who will buy whom.