Tuesday, March 27, 2012

The EPA's coal mandate: An opportunity for nuclear, a giveaway for natural gas

Today the EPA issued its first-ever regulation on carbon dioxide emissions from new power plants, limiting emissions to 1000 pounds of CO2 per megawatt-hour of electricity produced. Given the fact that the average coal plant vastly exceeds this limit (weighing in around 1,768 lbs CO2 per megawatt-hour), the implications of the move seem rather obvious - essentially banning new coal plants without carbon capture and sequestration (CCS) technology (and thus greatly increasing the cost of new coal plants), thereby making good on President (then-candidate) Obama's promise to "bankrupt" anyone who still desired to build new power plants fueled by coal.

Naturally, the move is producing howls of protest from the predictable corners - despite the fact that the move only applies to new construction (with an exception for those already permitted and begin construction within one year of the rule change taking effect. And of course, despite the fact that there exists a reliable, baseload alternative for producing energy, one which incidentally has the lowest marginal generating costs and has proven more than capable of delivering electricity safely and reliably. More to the point, given that the chief opposition to the rule is from Republicans, who ostensibly support nuclear energy, why the doom and gloom about an economic catastrophe? If anything, the move should be an opportunity to hammering the case for why nuclear is needed now more than ever. Again though - one wonders if nuclear's support is wide but shallow compared to support for conventional fossil sources among these groups.

Overall however, the EPA mandate has a marginal but positive impact on new nuclear, namely by formalizing the winnowing down of new baseload capacity to a race between nuclear and natural gas, the latter of which has of course been buoyed by low prices from the recent boom in shale gas production.

Meanwhile, if the EPA's mandate is a glimmer of opportunity for the nuclear industry, it's an outright giveaway for natural gas. The average natural gas plant emits roughly half the CO2 of a standard coal plant (about 850 pounds per MWh), and meanwhile the EPA estimates that 95% of current natural gas power capacity would pass muster under the new rules. Thus, the choice of a convenient round number of 1000 pounds per MWh seems all the less arbitrary - in fact it seems almost entirely designed to benefit natural gas at the expense of coal. (I was pleased to see that I am not the only one who noticed this distinction - the fine folks at NEI Nuclear Notes have also taken notice .)

There are perhaps any number of reasons to complain about the EPA rule, even if one does believe (as do I) that tackling carbon emissions is of the utmost importance. For one, a more economically efficient proposal would of course be a carbon tax. Logically, if the rule is designed to minimize the social ill caused by carbon emissions, then natural gas plants (as a function of capacity) all produce half the harm of coal plants, while nuclear produces none. More economically efficient policies - like a carbon tax - would more readily reflect this than the current approach, which almost seems designed to simply promote natural gas.

Indeed, MIT's "Future of Nuclear Power" report found that even a modest carbon tax of $25/tCO2 would raise the price of new coal to 8.3 cents per kWh, comparable to that of new nuclear (8.4 cents/kWh), while that of natural gas would rise to 7.4 cents per kWh - still cheaper, although hardly the clear favorite, especially given scenarios under which the capital costs of nuclear were controlled to the level of other fossil sources (at which point, new nuclear drops to 6.6 cents per kWh - well below coal and slightly cheaper than natural gas.)

One can only guess then as to why EPA choose to ignore the advice of both numerous environmentalists and scores of economists, all of whom have advocated either a carbon tax (or its lesser cousin, a cap-and-trade carbon credit market) as an economically efficient solution in favor of a suspiciously non-arbitrary cap.