Sunday, November 13, 2011

Fun with energy generation statistics

The prior post made me want to verify trends in energy generation and prices, so I took a a glance at the resources available over at the Energy Information Administration. Two interesting pieces of data they have available are average consumer electricity costs and total installed capacity by source. I graphed these trends for 1990-2009 (the range data was available for).

Two trends are apparent - first, nearly all the new capacity installed in the last decade has been natural gas. Likewise, one notices a precipitous rise in electricity costs nearly around the same time (e.g., around 2003). Obviously, this would seem to indicate two things - first, supply and demand is alive and well in energy production markets (i.e., utilities have rushed to capture rising energy prices by quickly installing natural gas capacity, which can be rolled out relatively fast and with low up-front cost). Second, claims of "cheap natural gas" have yet to reflect themselves in retail electricity prices. Perhaps this trend will only bear out in more recent years (2009-2011), however the idea that electricity prices will dramatically lower seems to strain belief, particularly given global trends. In this sense, the business case for nuclear seems it will only become easier to make, cheap natural gas or no.

A second piece of data is an overall analysis of historical electricity prices, courtesy of the Edison Electric Institute (thanks to Alan for locating this for me). This data, going back to 1930, analyzes retail electric prices normalized to the consumer price index (CPI), a common measure of inflation; the historical numbers in this case were normalized to 2005 prices.

Notice what happens with electricity prices in real dollars - they slowly declined until around 1970 (i.e., the oil crisis), where they continued to climb, although more slowly in the 80's (even declining slightly in the 90's). One problem with this data of course is that it stops around 2005 - right around when electricity prices began to rise precipitously once more.

Finally, let's look at the last piece of the puzzle, which ultimately has determined decisions on whether to expand capacity: electricity demand. I plotted out EIA data for residential electricity sales versus electric price:

Demand is relatively flat from 1990-1992 and begins to take off afterwards (i.e., corresponding to economic growth) and then plateaus again around 2004 (recession). Unfortunately, data was not available prior to 1990, but a similar trend in flat-lining demand is what occurred during the 1980's, which is ultimately (in addition to the changing regulatory environment) which brought nuclear expansion (along with most other electric capacity expansion) to a grinding halt. As demand began to pick back up during the 1990's, the gap was filled almost entirely by new natural gas (and, incidentally, electricity prices came along for the ride.)

Saturday, November 12, 2011

Is deregulation really the problem for new nuclear?

John Rowe, CEO of Exelon Energy (operator of one of the largest nuclear fleets in the U.S.), is not exactly shy with his thoughts on the economics of new nuclear.

In an August meeting of the American Nuclear Society Utility Working Conference, Rowe gave a hard-edged presentation titled, "My Last Nuclear Speech" in which he laid out his position that nuclear "is a business, not a religion," and predicted that lower natural gas prices would persist for the next 10-20 years, making investment in new nuclear energy uneconomic. To be clear, Rowe is not an anti-nuke (at least not by ideology); it would be an awfully hard fence to straddle were he, given that Exelon's portfolio consists of 93% nuclear.

Rowe, like Vizzini, believes new nuclear plants in merchant
utility markets are "inconceivable."
Depending on your point of view (and perhaps, your political leanings), Rowe is either a hard-nosed energy economics realist or simply a rent-seeking opportunist hoping to cash in on the rush to natural gas. (In truth, there's probably merit to both cases, given Rowe's penchant for lobbying both the government and industry for outcomes such as a carbon tax and increased natural gas consumption which would increase the value of his current fleet.)

Recently, Rowe raised new hackles in criticizing the Calvert Cliffs expansion project in Maryland, describing the move to build a third nuclear unit in a deregulated electricity market as "almost inconceivable." The basis of his incredulity? Low natural gas prices coupled with a competitive market for electricity. (Unlike states with regulated utilities, where a public utilities board sets electricity prices, prices deregulated markets are controlled by the lowest-bidding providers on the spot market.) Rowe remarked,
"At today's [natural] gas prices, a new nuclear power plant is out of the money by a factor of two," Rowe said, echoing one of the main points of his speech. "It's not 20%, it's not something where you can go sharpen the pencil and play. It's economically wrong. Gas trumps it," he said
Fellow nuclear blogger Rod Adams took this as an indication of Rowe's hypocrisy, asking why he isn't immediately "selling off its existing nuclear plants and investing the proceeds in additional gas-fired generation." But this is a facile understanding of the situation - Rowe's position is not that the existing fleet is uneconomic - quite the opposite. A nuclear plant whose capital costs are already paid for can outbid natural gas - even "cheap" natural gas - every time, namely because the fuel costs of an established nuclear plant are incredibly low. For example, the EIA predicts the operation costs of a new nuclear plant entering service in 2016 to comprise roughly 10% of total electricity cost, compared to around 70% for natural gas. (All of this is roughly consistent with current estimates for electricity costs).

So where is the problem? Capital costs - especially the cost of money (i.e., the premium paid to investors to borrow money to finance new nuclear builds). These costs, by the above estimate, make up 80% of nuclear electricity costs. In other words, most of the cost for nuclear is up-front. Hence, the paradox of nuclear: expensive to build but incredibly cheap to operate, especially once the unit is paid for. Thus the reason CEOs like Rowe are loathe to part with their existing nuclear fleet to gamble on new gas capacity - established nuclear is a sure economic winner, even in deregulated ("merchant") utility markets.

Given this, why does Rowe seem to think nuclear is so "inconceivable" in a deregulated market compared to gas? Namely because of the same reasons it's hard to build nuclear in the first place - costs are front-loaded, and in a merchant market there's no guarantee of the rate of return. (Regulated markets, on the other hand, can both generally guarantee a price for electricity as well as allow for construction work in progress [CWIP] financing, allowing the utility to collect some of the financing costs up-front, thus saving ratepayers millions of dollars in the future by lowering the total amount financed). Natural gas doesn't face this handicap, although it faces a different gamble, in that future energy prices are heavily tied to the future costs of gas. (Given the low fuel cost of nuclear, on the other hand, even a doubling in the price of uranium would only produce a small uptick in the price of power - about 7%, less than a penny per kWh).

Thus, even though once the cost of the facility is paid-off nuclear can under-bid even historically low natural gas prices, the difficulty lies in recovering the cost of the investment. As a result, some nuclear advocates (such as Adams) point to this as a fundamental flaw in energy market liberalization, pointing out that deregulated markets drive a race for short-term profits over long-term planning. (Rod even goes so far as to characterize Rowe as a ruthless energy market villain counterpart to Mister Potter from It's a Wonderful Life).

[Note: My colleague Alan reminds me that the capital cost itself is irrelevant to the bidding itself; i.e., the bid is controlled by the marginal cost of production (e.g., fuel cost). Hence, even new nuclear can under-bid low-priced natural gas in the spot market. The issue is not the capacity for new nuclear to under-bid then, per se, but rather to do so while garnering a return capable of also paying back the existing capital costs.]

But is it really deregulated energy markets that are the problem for nuclear? Rod points to √Člectricit√© de France (who owns a 49% stake in the Calvert Cliffs project) as evidence of Rowe's shortsightedness. Yet there is a fundamental difference overlooked in this analysis between the two companies - the total market equity of Exelon is $13.16 billion, while that of EDF is €36.9 billion ($50.1 billion USD). In other words, EDF is over three times the size of Exelon; while the cost of one new nuclear unit (at around $4 billion) might very well be a case of "betting the farm" for Exelon (despite being one of the larger U.S. utilities), it is a much more easily handled investment for a giant like EDF.

There is often a caveat made to investors wishing to bet against obvious irrationality in the market - "Markets can stay irrational longer than you can stay solvent." Here it would seem the same caveat applies to perhaps resolve our seeming contradiction. The problem is not necessarily that deregulated electricity markets hinder long-term planning, but that lack of sufficient capitalization (i.e., access to capital) makes it much more difficult for smaller utilities to engage in long-term economic planning than much larger firms like EDF.

Further, this again seems like a place where small modular reactors may yet tip the balance. Given that the business case for nuclear is driven by long-term stability in costs but hampered by high up-front investment costs, SMRs may well be able to provide for an opportunity for forward-looking utilities to compete even in deregulated markets. Given that the up-front investment is smaller for SMRs while the overall economics are largely unchanged, SMRs may offer the capacity for such utilities to incrementally enter merchant markets to compete with gas even at record-low prices, namely by allowing a smaller up-front investment to be recovered over the same time period.

Likewise, given the "modular" part of SMRs, utilities can more easily scale up their energy investments with nuclear, avoiding the economic catastrophe that befell many nuclear unit investors in the 1980's when energy demand unexpectedly plateaued. (Such a recent slowdown in growth of energy demand has likewise been a chief element in slower investment in new nuclear units domestically.)

Thus, a Chinese proverb seems appropriate here: "It is better to light a candle than to curse the darkness." Deregulated energy markets and historically low natural gas prices may by their nature provide a challenge to new nuclear - but certainly not an insurmountable one. The key to success for new nuclear will be in its ability to adapt, both through new technologies like SMRs which allow for more scaleable development in competitive energy markets and perhaps through innovative partnerships between utilities which allow for more efficient financing of large builds without the "bet the farm" risk presented to less capitalized firms.

Thus the new rule for new nuclear: adapt or die. The alternative is to simply curse the darkness.

Tuesday, November 8, 2011

Nuclear and the moral case for energy development

Recently, the Dalai Lama spoke out in favor of the peaceful use of nuclear energy to help bridge the gap between the developed world and the world's poorest, causing quite a stir, particularly among nuclear supporters. In his own words, he said
There is still many developing countries with a huge gap between rich and poor…millions of people’s lives remain under the poverty level and we have to think about these people
I'm arriving somewhat late to the party on this one, coming off the heels of giving five talks at the recent American Nuclear Society conference (incidentally, several of which pertained to nonproliferation education and research). However, there was a point that particularly resonated, similar to what Rod Adams recently touched on and in the theme of the Dalai Lama's comments: specifically, the moral case to be made for energy development. In this respect, I am reminded of the The Obligation of the Engineer, specifically:
Since the stone age, human progress has been spurred by the engineering genius.
Engineers have made usable nature's vast resources of material and energy for humanity's benefit.
As an engineer, I pledge to practice integrity and fair dealing, tolerance, and respect, and to uphold devotion to the standards and the dignity of my profession, conscious always that my skill carries with it the obligation to serve humanity by making the best use of Earth's precious wealth. 
When needed, my skill and knowledge shall be given without reservation for the public good.
Many of us who came into the nuclear profession did so out of awareness of the enormous potential nuclear energy holds, particularly in creating a world of energy abundance. In particular, balancing the dual concern of how to continue our current standard of living against pressing environmental concerns (despite my otherwise lack of granola / hippie cache) is part of what drove me into the field of nuclear engineering. Fundamentally, what motivates many in this regard is thus nuclear's capacity to help bridge the gap in what the late resource economist Julian Simon described as the greatest scourge: energy poverty.

Consider for a moment all of the conveniences that afford those of us in the developed world to call ourselves prosperous: homes which are kept comfortable and lit at night, sophisticated medical technology, the capacity to grow, transport, and maintain fresh food over long distances - each of these critically depends upon abundant access to energy. Take away the energy wealth of the developed world and suddenly much of this capacity is lost.

In this vein, nuclear energy is unique in several respects, but most remarkable in the sheer energy density. Fossil fuels (like coal and natural gas) exploit the breaking of chemical carbon bonds to produce energy, which until the discovery of nuclear fission was the most energy-dense process known around. Indeed, this density along with portability is still what makes fossil sources some of the most economical and attractive forms of energy. Nuclear fission takes this to a new dimension, exploiting the fundamental forces of nature (e.g., the strong force which binds the nucleus itself) to harness orders of magnitude greater amounts of energy, without the harmful byproducts of combustion of organic materials, some from combustion itself (carbon dioxide) and some which are inherent to the source (lead, mercury, and sulfur dioxide - i.e., the precursor to acid rain).

Underlying the Dalai Lama's endorsement of nuclear energy development is something nuclear professionals and advocates are keenly aware of: despite the attractiveness of renewable energy sources such as wind and solar, they are by nature diffuse and subject to the whims of nature. While there are other professionals (as adamantly  feverant about the idea of energy abundance as any nuclear advocate) who strive to soften the issue of the inherent instability of these sources through technologies such as energy storage, none of this gets around the fact that the density of renewable sources is critically constrained by nature, inherently limiting their ability to provide the level of power of sources such as nuclear without taking enormous amounts of land and resources out of other productive uses.

Relative abundance of elements of earth (Source: Wikipedia)
Nuclear, in particular with the development of new technologies such as grid-appropriate small modular reactors (SMRs) as well as alternative fuel cycles like throrium (yet more abundant in nature than uranium, itself more abundant on earth than silver, and both more abundant than the "rare earth" metals essential for components of wind and solar energy systems) thus has the capacity to provide for energy abundance in the developing world without the rather painful environmental trade-offs developing nations such as China have been forced to make, with their heavy reliance on coal.

Does this mean nuclear is a free lunch? Of course not - something which both the Dalai Lama and I freely acknowledge. Spent fuel is still an issue - although as we have seen, a political challenge rather than a technical one. (Looking beyond, the waste problem is one hardly exclusive to nuclear, either.) And indeed, the Dalai Lama is right to emphasize the need to minimize risks to public safety, something which nuclear professionals are acutely aware of (although, as is historically the case with technology, something technical managers are sometimes still catching up to). But what makes the case for nuclear is its capacity to balance these risks against the real and ever-present harms of other sources (especially those from coal, which is responsible for far more deaths per unit energy) against other factors like availability and economics.

Finally, there is of course the issue of the proliferation of nuclear weapons, something the Dalai Lama has long campaigned against (likewise an area I myself specialized in during my graduate studies). Yet as I have pointed out before, nuclear development need not come with the capacity for weapons (and in fact, the broader use of peaceful uses may yet prove to be antagonistic to weapons, both in consuming the feedstock as well as cementing economic benefits not readily yielded for a decision to proliferate).

Ultimately, there is fundamentally a humanist case to be made for expanded energy development in the developed world, in order to enable all of humanity to enjoy the benefits of energy abundance. Nuclear is and will continue to play a fundamental part in this.