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 dot.com 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.
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 dot.com 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.
posted by Steve Aplin at 11:37 AM
6 Comments:
If the next President is a Democrat, especially a female one, I think we can wave goodbye to a nuclear renaissance in the USA.
Thanks Randal. Hilary is anti-Yucca Mountain -- that was a pre-req for her victory in the Nevada caucus -- but not anti-nuclear. See my November 4, 2006 post (http://canadian-energy.blogspot.com/2006/11/heavyweight-candidates-push-carbon-cap.html).
I beg to differ. After the election a Democrat president will have to reward a lot of supporters. That means jobs in Washington for environmentalists. They know which positions they want. They will then act in concert to block new nuclear power using every lobbying and bureaucratic trick imaginable. The wishy-washy beliefs of the President wont matter at all.
Well, the quicker greens get into positions of influence, the quicker they'll be forced to decide what they like less: fission or emission. They can't suck and blow forever. But I doubt Clinton or Obama would appoint radical greens to any meaningful positions in the first place. There are other more deserving supporters who are perfectly reasonable.
Steve,
I like running numbers, and I'm a little baffled by the PUF "uranium spot prices". By my estimate, a pound of yellowcake ultimately results in something like 300 mmbtu, once-through a LWR or CANDU. At $90 a pound, I get fission heat requiring about $0.30 of yellowcake per mmbtu. Are they talking about the final cost of fabricated fuel assemblies, or am I missing something?
And if even if they're talking fabbed fuel, then I get a $0.96 per mmbtu jump corresponding to $400 yellowcake. Please tell me if I'm just off base here.
Thanks for your comment Mike, and you make an interesting point. PUF’s spot price came from Global Energy, i.e. Ventyx. The PUF piece deals only with power markets in the U.S., so it’s safe to assume the per-mbtu price refers to LWR fuel. Offhand, I’d say that the reason Global Energy’s $1.21 spot price is so much higher than your $0.30 (based on $90 for a pound of U308) is that they are indeed talking about final fabbed fuel assembly costs, and that this includes the enrichment to 3 percent.
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