Where's the real bottleneck for natural gas? Distribution.

As a scientist and an unabashed nerd, I love data. Particularly, I love it when ready access to data reveals things that are surprising in the face of conventional wisdom.

An interesting case comes up with this year's colder winter in New England. (Thankfully, I'm located in damp, icy East Tennessee, where even the threat of ice and snow manages to bring civilization to a grinding halt.) In particular, Meredith Angwin noted an interesting press release by ISO-NE (the grid operator for the northeastern United States), ostensibly pointing to record-low wholesale electricity prices, but containing something more interesting buried beneath - a slow but quite noticeable creep of wholesale natural gas prices upward to the range of $6/MMBtu (1 MMBtu = 1 million British Thermal Units).

At first glance, this seemed a bit surprising to me, given that while spot prices for natural gas have nudged a bit upward, they're still hovering well under the $4/MMBtu mark; in other words, they don't seem to be going anywhere fast. What really began to catch my eye however was the cyclic behavior of gas prices in the chart from ISO-NE, something which doesn't show up in spot prices from Henry Hub (which generally sets the market spot price for natural gas in the U.S.) 

Looking to verify the trend, I dug a little further around EIA's website. While unfortunately their data on "citygate" prices are a few months behind, the regular periodicity in the citygate price was likewise not there - instead, taken as an average across the U.S., spot, wholesale, and electricity costs derived from natural gas tend to have a strong correlation. Yet here we see above in the data from ISO-NE that prices clearly are deviating substantially from spot prices - what gives?

It turns out in fact that the culprit is in distribution. A look around EIA's website brought me to this interesting report, which notes that supply bottlenecks in U.S. northeast for natural gas are expected to produce significant variances in energy prices from the rest of the U.S., and in particular from Henry Hub prices.

In essence, despite a relatively abundant supply of natural gas at the wellhead due to the proliferation of wells seeking to exploit unconventional resources, one thing the laws of physics haven't changed for is the capacity of distribution infrastructure - in other words, pipeline capacity. Natural gas doesn't really care where its end destination is - be it for electricity or home heating. Which means a cold winter can easily drive up demand and stress pipeline capacities - precisely what is occurring, according to the EIA report: utilization rates at the Algonquin compressor station have averaged around 86% for the months of November through December 2012.

Basic economics can predict what happens next. Because natural gas is generally shipped across pipelines as a compressed gas, due to frictional losses across the pipeline, it must be repressurized at terminals across the pipeline network. The higher demand for gas goes, the closer to maximum capacity these terminals reach. And, as EIA data helpfully shows, the closer utilization reaches to 100%, the larger prices begin to "spread" from spot prices at Henry Hub.



In other words, while the commodity price of gas may indeed be cheap, the wholesale cost to utilities can be an entirely regional phenomenon. This is especially true in the blustery cold of New England winter, where demand is especially cyclic.

I compiled together citygate prices for natural gas across the Northeast and compared them to U.S. average citygate prices, and the effect is quite clear - states in the Northeast pay on average an appreciable premium on wholesale prices over the U.S. average wholesale, precisely due to these types of bottlenecks, particularly during times of peak demand (i.e., cold winters). Obviously, pipeline capacity has been steadily increasing in response to demand for gas, however the real issue will inevitably be cyclical "spikes" due to competing uses of gas as a heating source.

Why go to all of this trouble to look at trends in gas consumption (especially when I'm not an energy economist by trade)? Namely because it upends some recent "conventional wisdom" about energy; namely, gas prices are still a regional phenomenon.  While there are some places where supply is not as constrained by distribution capacity (or driven by cyclic consumption) and it thus makes perfect sense to look at natural gas a short-term replacement electricity source (particularly for coal), the Northeast is a shining example where this is definitely not the case. Which in turn makes efforts to shut down stable and relatively low-cost (not to mention carbon-free) baseload sources like Vermont Yankee (and Indian Point) all the more insane - despite the claims of proponents to this end, the balance of electricity from these plants would not be made up from renewables but rather almost certainly come from natural gas. To which again, low spot prices for natural gas are in fact a remarkably poor indicator - especially if one considers what adding an additional consumption driver would look like in terms of utilization "bottlenecks" during times of peak demand (i.e., winter).

I still remain unconvinced of the argument that wholesale natural gas prices are set to explode (and so stand by my bet with Rod Adams) - namely because of the fact that an abundance of known, recoverable supplies makes economics of the raw commodity relatively self-correcting. (In other words, as gas prices go up, so too will the number of wells, pushing prices back down to an equilibrium). However, revolutions in the recovery of gas from novel geology hasn't changed the fundamental physics of pipelines - which in turn may be the real constraint to natural gas growth as an electricity source, at least on a regional scale.

Update: Via Twitter, Rod Adams points to an EIA alert from yesterday about natural gas prices and capacity in the Northeast, given the recent cold snap. Current local spot prices at Algonquin and Transco Z 6 NY (a New York-based distribution hub) are around ~$30/MMBtu - almost 10 times the Henry Hub spot price, with utilization factors reported to be at over 85% capacity. As Rod puts it, "Winter happens."

Does declining gas exploration indicate a price "explosion" or just a new equilibrium?

A few interesting points came out of the follow-up discussion on my prior post, in which I argued that, contra Rod Adams, natural gas prices are not set to "explode" anytime soon.

Meredith Angwin of Yes Vermont Yankee made a keen observation that over the last year, the number of new natural gas exploratory wells is collapsing. Why is this happening? Namely because of the cratering current price of natural gas.

In fact, a very interesting thing appears to be happening right now with shale / unconventional natural gas recovery boom - the industry appears to be a victim of its own success. Or rather, drillers have been sinking new wells without regard to price (again, see the sharp boom in new wells up until about October 2008, where new wells peaked). As a result, proven reserves have fairly substantially increased - and in particular, known reserves of "dry gas" (i.e., nearly pure methane, the most commercially valuable component of natural gas) have in fact "exploded" - nearly doubling over the last decade.

Meanwhile, neglected in these considerations is that shale fracturing wells in particular aren't cheap to drill; as a result, anomalously low natural gas prices means that some drillers have been losing their shirts over the same much-publicized "boom" in natural gas production. 

This is where we get back to the discussion of natural gas prices overall. What appears to be occurring is a basic disequilibrium; a disruptive event in supply (i.e., introduction of large new resources) prompted a rush to invest/explore this resource, which in turn created a significant rise in supply over the short term, rapidly dropping the price to a point where the market price is below the profitable price of recovery.

Thus, as far as exploration goes, we seem to be observing is basic mineral economics: exploration follows price. When price drops (i.e., we had an over-abundance of exploration), exploration drops. As prices rise to the point where new wells achieve a net profit, it's a relatively safe prediction that exploration will again begin to rise. What is essence is developing are two constraints on natural gas price - a "floor" on prices (i.e., below which it is not economically viable to recover gas from new wells) and a "ceiling" (driven by the large increases in known supply). My colleague Alan observed this some time ago when he speculated as to whether we are seeing the end of natural gas price volatility (at least for now).

So, will natural gas prices rise? Probably - but given the very large amounts of known reserves, price acts as a strong signal to start drilling again. Given the large known new reserves, this will inherently push back against any significant rises in price - as it gets more profitable to drill new wells, new producers will inevitably get into the game, particularly because we know the gas is out there. The real question is, "At what price does this happen?" I'm not an expert in gas recovery, so I don't know - but like Meredith, I suspect it will be around $5-6/MMBtu. A columnist at Forbes suggests it may be $8/MMBtu. Either way, I remain deeply suspicious at this point of the idea of prices "exploding" (and hence my bet with Rod) - what instead appears to be happening is the search for a new price equilibrium.

A final addendum - as commenter Robert pointed out, all of this really applies to the U.S. - something worth emphasizing. Other places, where either fossil resources like coal and natural gas are less abundant (i.e., South Korea and Japan) or where there these resources are more valuable as exports (i.e., UAE) have a completely different picture for the relative economics of nuclear versus natural gas. In particular, it is likely far easier to make the economic case for nuclear in these places - meaning even if new builds for nuclear may be slowed or delayed in the U.S. for the time being, the same is not true abroad.

Wishful thinking on natural gas prices

Rod Adams of Atomic Insights has posted a string of arguments in the general thread that natural gas prices are set to explode - or at least, precipitously increase - and that further, the current historic lows in natural gas prices are a mirage, one carefully put into place by gas producers to squeeze out competition, particularly in the electricity sector. In his latest post, "Where is the huge increase in US natural gas supply?" Rod points to EIA data indicating that the "flood" of new natural gas is anything but.

There's just a small problem in this assertion - the data doesn't support Rod's claims. And I say this as someone who obviously would like this to be true. Low natural gas prices have largely put the brakes on new nuclear construction - the latest casualty being Exelon's planned Victoria unit in Texas. Obviously, Exelon has made its position known on whether it will be investing in new nuclear units in an environment where natural gas is currently cheap (it won't), so this comes as a surprise to no one. In fact, the overwhelming majority of new electric generation capacity in the U.S. over the last decade has been natural gas.

Rod makes the claim that the cause of currently low natural gas prices is less due to new supply and more due to slumping demand for energy given the recession. As evidence of this, he points to this chart from the EIA, indicating gross withdrawals of natural gas at U.S. wells.

Rod's argument is that the new supply hitting the market isn't exactly overwhelming - and therefore, when demand picks up, so will prices. The data Rod is using to justify this reasoning is withdrawals at the wellhead - which indicates how much supply is hitting the market. The trend is easier to see on the annual withdrawals basis.

While we don't see an "explosion" in terms of orders of magnitude difference, looking at the data, it's clear that natural gas withdrawals have increased by over 20% since 2005 - hardly insignificant.

But frankly, this is the wrong metric to look at the begin with. If we want to know the real story with natural gas supply, we need to look at proven reserves (i.e., the amount of natural gas we have reasonable certainty of economical recovery from the ground). Again, going to the EIA data, we see the same trend; since 2003, proven U.S. reserves have increased from about 7.5 billion barrels to 9.3 billion in 2011 - a 24% increase. Again, while not mind-blowing, this is not insignificant.

However, we're still missing one last piece of the puzzle - natural gas consumption. This of course is the key to Rod's argument - we've demonstrated that supply has increased, although perhaps not "exploded." But Rod claims that much of what has contributed to temporarily low gas prices has been slumping demand due to a down economy. We can easily evaluate this claim by looking at total consumption data.

On a month-by-month basis, peak consumption (in January) did decline from 2011 to 2012 - by about 5%. This may be partly due to a sluggish economy, but probably more so due to an anomalously warm winter. To get a better feel for total consumption trends however, one should look at the annualized data, "smoothing out" some of these peaks.

On an annual basis, natural gas consumption has been rising - since 2003, net consumption has increased by about 10%. Looking at just the last six years (from a minimum in 2006), gas consumption has grown at a maximum of about 14%.

So now to recap - natural gas supply, in terms of proven reserves, has increased by about 24%, while natural gas consumption has only grown by 14%. Basic economics allows one to predict what happens to price under this circumstance - supply has, in the short-term, outstripped demand. However, while demand has dropped off a little in 2012, supply has been outstripping demand for the last 10 years - this is not a temporary phenomenon.

Now, one can make the argument that eventually demand will catch up with supply - in which case, prices certainly will begin to creep back up. But there is no evidence that proven reserves themselves are declining, which means predictions of the imminent explosion of natural gas prices have, unfortunately for nuclear, little basis in reality.

This gets me back to a recurring point I make many, many times - for nuclear to be viable, reducing capital costs and eliminating the risk premium must be the absolute first priority. (A second, equally important priority would be in establishing a clear price signal on carbon dioxide - very much contrary to the giveaway to natural gas producers which the EPA's current target amounts to.) 

Expecting a deus ex machina spike in natural gas prices to save new nuclear construction simply isn't going to happen in the short-run. It may be true in the long-run - a decade or more away. And certainly any utility looking to hedge against future price volatility in fuels would be smart to invest in nuclear. But there isn't any evidence that a sudden increase in gas prices will come to nuclear's rescue in the near-term, and this is important - not because I don't want to see new nuclear get built, but because nuclear advocates need to be clear-eyed about the reality confronting them. Self-deluding arguments might feel good in the short-run, but they do little to see to it that new nuclear plants actually get built.

Update: In the spirit of Bryan Caplan of Econlog, Rod has made a wager ($50) with me; that there will be at least one month by end of 2014 in which natural gas prices at Henry Hub will exceed $10/MMBtu (Rod is betting that they will exceed this). I have to say, I respect anyone willing to put their money where their mouth is. I hope I'm wrong, but I doubt I will be.


For reference, here's the historical EIA data on natural gas prices. (For clarification: 1 MMBtu = 1000 Btu; 1000 cubic feet of natural gas contains about 1020 Btu, or 1.02 MMBtu)

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.

Energy finance in free markets: an open conundrum

A question which has occurred to me lately revolves around the oft-heard objection that, "Nuclear has always been a state enterprise." In other words, the high up-front capital cost (and attendant front-loaded risk from construction delays and potential intervenors) makes nuclear a tough pill to swallow for liberalized energy markets, despite the extremely low operating costs (and hence, low back-end risk).

This problem seems to extend well beyond nuclear energy itself; rather, it would seem to indict any capital-intensive energy projects where a given rate of return on investment is not guaranteed. It provokes the question - in a completely free market for electricity (as opposed to the admixture we have now), what would energy investment look like?

Some of the imbalance which currently exists now owes to the imbalance of externalities captured by the current regulatory environment. Sources like coal - especially older, "grandfathered" plants, are allowed to treat the atmosphere effectively as an open cesspool; at the other extreme, nuclear is expected to account (and pay for!) each last curie of waste produced, going as far as to return the site to greenfield status once the plant has closed.  Meanwhile, indictment of nuclear as uniquely a "state industry" by its detractors rings somewhat hollow, given that yet more expensive, diffuse, and less reliable sources such as wind and solar would almost certainly be pushed to the margin under the same standard.

Obviously, a balance to the regulatory playing field is called for (although don't hold your breath waiting for that one…). Yet going a step further, assuming this, what would energy investment look like in a completely liberalized energy market?

U.S. natural gas prices, per EIA

Essentially, what such a market would appear to produce, if the current trend is any example, is likely sources in which costs are easily externalized to others (e.g. coal and to a lesser degree natural gas) or the costs are relatively distributed throughout the lifecycle (e.g., natural gas, where costs are largely on the fuel cost). Yet one predictable consequence of this - beyond the environmental impact - would be the impact on retail electricity price volatility. Again - natural gas is far from being historically "stable" in price.

Where does this leave nuclear? Ultimately, nuclear would seem to have the ability to moderate these types of price shocks, namely by providing stable, low-cost baseload power. This ultimately is where I believe technologies such as small modular reactors (SMRs) are so vital to the future of nuclear; they provide at least some means of blunting the capital risk of nuclear in liberalized energy markets. Further, incentives clearly matter - Pigouvian measures such as a carbon tax would go a long way toward leveling the playing field (again, don't hold your breath on this one.)

Yet even beyond this however, the need for innovative mechanisms for financing large, capital-intensive energy projects remains clear. Ultimately, my expertise is in nuclear technology and not finance, and thus I am at a loss for ideas. Given my own personal predilections toward free markets, it is often disappointing to see many market-oriented advocates simply put down nuclear as "socialist" rather than seeking out new vehicles and mechanisms to finance such projects through private investment.  (Unlike many nuclear advocates such as Rod Adams, I do not share their antagonism to Wall Street, recognizing that ultimately private capital will be essential for future energy projects, especially as America's own government contemplates austerity measures in light of a growing entitlement crisis brought about by massive demographic shifts). One notable example of innovative ideas for finance comes from this excellent guest post at Idaho Samizdat, taking a lesson from the Dutch nutmeg trade. But further such ideas for innovative financing models are badly needed.

An alternative proposal is for legislative mandates such as portfolio standards - e.g., a "clean energy standard" similar to renewable energy portfolio standards which currently exist, mandating that utilities generate a certain fraction of their energy from designated sources. Beyond the obvious potential for peril of political manipulations on defining just what qualifies as "clean" (or attempts to game the standard by powerful, entrenched interests), this does nothing to solve the existing problems of financing which have ultimately precipitated the perceived need for such mandates.

Ultimately, this question goes well beyond nuclear; given the fact that liberalization in energy markets is unlikely to reverse course in the forseeable term, how can we develop new mechanisms to provide financing to capital-intensive (but lower long-term financial risk) projects, sans government intervention? This is the true long-term challenge, incumbent advocates of clean energy of all types as well as market advocates themselves. These kinds of questions are the kind whicn should form the basis of free market environmentalism (a term which need not be an oxymoron).

Unfortunately, these are questions I am ill-equipped to answer, yet they are (in my mind) vital to the future of energy markets.

Not all energy is fungible - and it matters

Via the NYT Green blog comes a new survey by the Pew Center indicating that a smaller majority of Americans now prefer further federal funding of research into alternative energy technologies (specifically, wind, solar, and hydrogen) as a priority over additional exploration of oil and gas supplies. If the comparison seems to be a bit of a misnomer, then you've already caught on to the idea that not all energy, as we have it now, is fungible. Generally speaking, unless you are one of the very fortunate Americans who can afford an electric vehicle (with extremely generous taxpayer support at that), what is being posed is a false dichotomy. All the windmills and solar panels in the world do extremely little to curb demand for oil (and to a lesser extent, natural gas, which may also stand in as a transportation fuel).

Being generous to the poll, one can suppose some confusion arises over the fact that natural gas has been largely responsible for electricity capacity additions within the last decade in the U.S. Still then, one wonders why nuclear energy is excluded from the choice provided.

Public support of expanded nuclear energy production (adapted from Pew)

Digging deeper into the survey, nuclear does show up; what it reveals further highlights the dichotomy illustrated above. Despite rising energy prices overall (both at the pump and in the retail electricity sector), public support clearly shows a disconnect when it comes to fossil fuel exploration versus electricity production. In general, nuclear energy is still recovering in terms of public opinion one year later following the Great Tōhoku Earthquake and tsunami and resulting nuclear crisis at Fukushima.

Public support for off-shore oil drilling, from Pew

What is perhaps revealing is to contrast this to the trend in public opinion on offshore oil drilling following the Deepwater Horizon blowout and massive spill in the Gulf of Mexico - something much closer to home. Unlike nuclear energy, public opinion has generally settled back into its prior setting (enjoying broad majority support) within less than two years, with large majorities favoring expanded offshore oil drilling. While favorable opinion on nuclear expansion appears to recovering, it is still unlikely to achieve the broad support that offshore oil exploration has - again, despite the very visible risks of the latter.

Perhaps also noteworthy is the relative "stickiness" of public opinion - one observes that following a high-profile event (e.g., Deep Water Horizon or Fukushima), public opinion eventually gravitates back to its historical average, implying relatively firmly entrenched opinion with a handful of the public being swayed by major events.

Public support for increased federal funding for alternative
energy research, from Pew

For comparison, Pew also evaluated public opinion of increased financing for alternative energy sources, including solar, wind, and hydrogen. Interestingly, public support for such increased financing has been on a slow decline; thus, in spite of the lede in the New York Times blog that this is somehow a newly emerging phenomenon compared to conventional sources, it is a process which appears to have been dragging on for some time. Indeed, the trend appears to have begun well before high-profile events such as the Solyndra bankruptcy and resulting scandal; while public support slowly continues to drop afterwards, the decline began well before this and continues steadily afterwards. It is difficult to speculate what one may take away from this other than the fact that if the Republican nomination fight is any sign, Americans are notoriously fickle, constantly in search of an appealing hypothetical alternative which simply does not exist.

Weekly average retail gasoline prices (all grades), via EIA

Why the quicker"snap back" in public opinion (or faster-acting amnesia, if you prefer) for oil and gas exploration, in particular? A likely culprit is the higher visibility of rising fuel prices (directly connected with the price of oil); particularly strong is the correlation between public support for oil and gas exploration and the price at the pump. 

Average retail electricity prices, from EIA

Retail prices for electricity have also been on the rise, but such a rise has been much more of a slow creep; with the average rising slowly over a matter of months rather than weeks. Plausibly, electricity consumption is perhaps seen as something consumers can exert some degree of influence over, be it through conservation or efficiency improvements, while demand for gasoline is relatively fixed (at least with respect to workplace commuting).

Meanwhile, yet another interesting artifact comes out of the Pew poll: a breakdown of support for various energy policies by self-identified party, with some of the highlights as follows:

	% in favor
	Rep	Dem	Ind
Allowing more oil & gas drilling in U.S. waters	89	50	64
Giving tax cuts for oil & gas exploration	61	38	42
Promoting the increased use of nuclear power	54	37	45
Requiring better fuel efficiency for vehicles	67	88	77
Spending more on mass transit	52	74	67
More federal funding for alt. energy research	52	81	70

What the above data puts to lie is the myth that members of either major political party are interested in an "all-of-the-above" energy strategy, something frequently invoked as a toll to political correctness (by countless nuclear advocates included) but not reflecting anyone's actual opinions. Indeed, among self-identified Republicans, while a much larger number favor nuclear energy expansion compared to Democrats, it is still a far less popular option than most scenarios involving either the development of additional fossil fuel resources or extension of existing supplies (i.e., fuel efficiency mandates). With respect to Democrats, overwhelming majorities seem to place their faith in measures such as conservation (including vehicle efficiency) and alternative energy research, particularly compared to the use of nuclear energy (again, issues of numeracy be damned). Only self-described independents might be considered to favor an "all of the above" strategy, although their support of such is divided at best.

In other words, despite the popularity of declaring favor for an "all-of-the-above" energy strategy, such a mantra is typically invoked simply as a cover-all in order to push forward an individual's energy priorities without having to engage in inconvenient discussions like practicality, cost, or environmental impacts. And again - this is something which occurs across the board - a token statement given which if the above is any indication, few actually believe (at least with any fervor).

What is perhaps most evident from the above is sharp evidence for the hypothesis that in the political conversation over energy, Americans are talking past one another. Again - given the fact that very little oil is burned directly to produce electricity, most of the conversation on fossil fuels comes down to energy for transportation, with natural gas coming along for the ride in the sense that it may conceivably occupy both sectors. Meanwhile, absent dramatic advances in battery technology, renewables show nearly zero intersection with the transportation sector.

Meanwhile, the lesson in this for advocates of nuclear, both looking at the historic trend in public opinion of oil drilling compared to nuclear energy as well as divisions among party lines is that in order for nuclear to command strong majorities of public support, the issue of ever-rising electricity prices (rising in tandem with global demand for overall energy resources, including coal and natural gas) must be continuously hammered, along with nuclear energy's role in providing affordable, base load electricity. The issue of electricity prices can and does motivate groups - and indeed, sometimes in the wrong way. An example would be the AARP's opposition to Iowa's recent legislative action toward allowing construction-in-progress financing of small modular reactors. The reason? Concerns over electricity prices for those living on fixed incomes. Again, despite the fact that the conclusion is logically perverse in this case, the connection is quite clear.

So what does all of this come down to? Ultimately, it reinforces the issue of fungibility in energy. For nuclear to enjoy the same resilience as fossil fuel sources with public opinion, it must also share the same perception of indispensability. Right now, nuclear is viewed as a fungible energy source - again, one can refer back to the way in which both Republicans and Democrats appear to be making a mental substitution (natural gas or renewables, respectively), thus making nuclear expansion appear to be an "optional" energy strategy for a resource (and carbon)-constrained energy future. Until advocates drive home the essential nature of nuclear energy production with respect to both future energy prices and the environment (i.e., demonstrating that nuclear energy is not so easily substituted without unacceptable economic and environmental trade-offs), it is likely support for nuclear will languish at its historic value near 50%, with sharp and persistent divisions among partisan lines.

The end of natural gas price volatility?

We hear it all the time - natural gas prices are volatile. Here are graphs for natural gas prices and crude oil prices over time that I uploaded to Wikipedia a while ago to illustrate this exact point.

Natural Gas

Crude Oil

But firstly, we need to make some distinctions. The matter of daily and monthly volatility is, indeed, different than the longer term volatility. I disadvantaged oil a little in the graphs above by giving a larger time frame. The take-away is pretty clear, the prices just behave differently. NG is much more "spikey". In other words, NG has more short-term volatility. There really isn't a clear case that long-term volatility is greater for either I think, but these are very different animals with oil being a much more global market.

Conoco Phillips recently put up a great video on youtube making the point that NG has been volatile in the past due to reasons mostly having little to do with the nature of production (instead, the nature of the use), and that the volatility will be less in the future given recent developments. Here is the video:



Because these are such important points that get to the core of the issue, I want to list them. I'm going to tackle the 2 arguments I mentioned above.

Why Natural Gas is Volatile in the first place:

• It's a commodity and all commodities have price volatility
  
• It is a margin fuel for power production (because it has the highest variable cost)
  
• Once before, the long-term price of NG made a major move upward after much investment into NG power plants that left decision makers regretting that and leaving them skeptical of NG commitment in the future
  

Why it will be less volatile in the future:

• We have more storage than in the past
  
• We can bring in LNG (liquified natural gas, a way to import the commodity) to up to 25% of our demand
• Shale gas is like a manufacturing process, and it's something you can ramp up very rapidly
• The on-shore production is not subject to weather related disruptions, like hurricanes which have historically been the reasons for major disruptions
• The abundance of resources and diversity of supply makes long-term price much more stable and confident
• (non-reason) States could change the rules to not disadvantage hedging of NG price risk in their utility boards
  

The core argument is that utilities could rely on NG more if the rules would take down some of the barriers that prevent making hedging bets. I agree with most points here, but I agree with some of them less. My main beef doesn't have to do with the business structure of shale gas development, but more so what the current NG market is telling us, and what that implies for the future.

I was happy to see that The Oil Drum (TOD) was quick to comment on the current dip in NG prices, disproving everything they can about the future history of NG production. Most organizations don't share this view. As I've pointed out before, the EIA AEO 2012 paints a picture of continuously increasing NG production. NG is increasing in production second only to non-hydro renewable power sources. I prefer to agree with TOD and the EIA at the same time - believing that the main difference is the price set-point. The EIA projection, however, I think is a little dubious with their price assumption.

With increased production, average annual wellhead prices for natural gas remain below $5 per thousand cubic feet (2010 dollars) through 2023 in the AEO2012 Reference case.

This just doesn't make sense to me. I'll give you the price claim, but not the price claim at the same time as the increasing production claim. Those are mutually exclusive. But to get back to the point of the video - diversity of sources should offer a hedge to prevent the drastic volatility we've seen throughout the last decade. Equilibrium price and volatility are two very different things, and I have no reason to contest the flexibility (as opposed to the economics) of NG supply.

My claims
The market is going to have to figure out what it wants. I believe this is a fairly elastic market on both the production and consumption side. By all means, we should take realistic assumptions when considering the next infrastructure steps to take. Claiming that we need a low price NG market for our chemical industry global competitiveness doesn't make a lot of sense to me when presented at the same time as NG as an alternative to transportation fuels. Commuter vehicles can outbid the chemical industry most of the time.

There's a bit of a larger choice afoot. Nationally, we can embark on pro-export or pro-consumption policies. We can take the pain in a different place in order to make our industries more competitive. We just can't have everything all at the same time.

Other connections

This post was written after reading the THE CRANBERRY EFFECT: GAIN WITHOUT THE PAIN, on the RTI director's blog, which explains why I brought up several parts of the subject matter in the first place.

I should also mention what the NG environment today means for nuclear. Well, I tend to think that less price volatility (even from a competitor) isn't going to hurt anyone. The market for nuclear power depends on the need for bulk power. The better buffer that exists to smooth out the prices on shorter term scales, the easier nuclear, as well as renewables, can market themselves as bulk power providers, and by that I mean baseload and variable with respect to supply. More productive uses of NG in other industries would push utilities to add more nuclear as well as wind in order to displace more of the NG purchases and further specialize NG for peak times.

Also, another related perspective to read is Role of nuclear energy in creating smarter US grid networks.

Rent-seeking and Greenwashing: The Case of Sierra Club and Natural Gas

Recently, the Sierra Club was outed for accepting massive amounts of bribes donations from Chesapeake Energy (a major natural gas producer heavily involved in hydraulic fracturing, or "fracking") along with others to the tune of over $25 million, money used to fund Sierra Club's "Beyond Coal" campaign. As a part of the same campaign, Sierra flogged natural gas as a "bridge fuel" to an renewable energy-powered future (however implausible). In response, current Sierra Club head Micheal Brune posted a hand-wringing essay about just how hard it was to accept piles and piles of cash from the natural gas industry, why it really was all in the service of a higher good, and finally why they have decided to refuse future, yet larger donations from the same industry. To use his words:

It's time to stop thinking of natural gas as a "kinder, gentler" energy source. What's more, we do not have an effective regulatory system in this country to address the risks that gas drilling poses on our health and communities.

In other words, "We got caught with our hands in the cookie jar, so now we need to make good."

To wit: is it wrong for environmental groups to accept funds from competitor energy sources? In itself, no - where Sierra crossed a serious ethical boundary was in their refusal to make their clear conflict-of-interest known. In accepting money from natural gas and then using that money directly in service of the interests of that industry (i.e., campaigning against coal), Sierra had exposed itself to a tremendous conflict of interest in its advocacy - one which they deliberately chose not to disclose. They, along with their patron, had a direct economic interest in their lobbying campaign.

[An aside: Notably, when market-oriented groups like Cato accept money from the petrochemical industry, they are assailed as shills for "secretive oil billionaires" - despite the fact that their pre-existing libertarian agenda does not directly favor - or disfavor - any one specific industry. It will likely be a cold day in Hell before the same standard is ever applied to groups like Sierra.]

But perhaps the bigger issue is how the whole case exposes simply how pervasive the notion of rent-seeking is within the energy market as a whole. In this context, "rent" is not used in the meaning of say, a landlord, but rather in the economist's jargon, where these types of "rents" are wealth created through exploitation of the political system - think locking out competitors and the creation of cartels which drive up prices from their normal equilibrium. (Conservative Washington Post columnist Charles Lane also recently devoted a column exclusively to this topic.)

Captain Renault is shocked, shocked to find that
rent-seeking is going on in energy markets.

What the Sierra Club case shows is just how rife the intersection of environmental politics and energy is with rent-seeking behavior. The only mystifying feature is how shocked anyone seems to be - almost like Captain Renault in Casablanca, who was, "shocked, shocked to find that gambling is going on here." Anyone who has paid attention to these issues (and in particular, I will give the nod to Rod Adams) knows this kind of behavior has been going on for some time.

For Chesapeake, funding Sierra's "Beyond Coal" campaign was a no-brainer in terms of economic self-interest: not only did they have a chance to kneecap a direct energy competitor (coal); equally as important they purchased vital environmental credibility - in essence, "greenwashing" their behavior. As a special bonus, they were able to accomplish all of this via proxy - it wasn't the natural gas industry attacking their logical competitors, it was a disconnected third party with ostensibly pure economic motives.

In a certain sense, such activities can be viewed as the direct parallel of conventional lobbying, along with its corresponding perspectives. Taking Sierra strictly at their word, Chesapeake's activities are simply like those of psychological conditioning through positive reinforcement - rewarding and promoting behaviors which so happen to benefit their interests, the same way individuals and industries might support candidates whose actions and beliefs correspond with their own interests. The other perspective of course is that Sierra and others become beholden to their donors, altering their message and focus to keep the money coming - something which Sierra's Brune takes great pains to attempt to dispel, particularly by refusing future funds from Chesapeake in rather pharisaic fashion.

Yet at the heart of this is what has fundamentally begun to go awry with American capitalism - it has become, in essence, "political capitalism" (aka, "Crony Capitalism") particularly when it comes to energy. Resources otherwise devoted to research and development of more abundant resources are instead poured into games of political influence-peddling, a game in which the winners reap privilege and favor from regulators, all to the detriment of consumers.

Meanwhile, funneling money into environmental lobbying organizations has been fundamentally dual-purpose - for one, "buying off" groups in a mafioso-like protection racket as well as hiring them on as mercenary lobbyists to rig the regulatory regime in their favor. This raises obvious problems across the political spectrum - unlike the way Rod Adams characterizes the issue as market advocates as blithely dismissing the matter as, "This is what you get when you play with fire," political capitalism - particularly in energy markets - should be worrying to anyone with a vested stake in environmental and energy security issues.

And unfortunately, no one's hands are really clean when it comes to this one. The fossil fuel industry continues to profit handsomely from uncaptured externalities in their products - everything from the carbon dioxide they are allowed to freely spew into the air to the pollutants which come out the flue of every coal plant - especially egregious when one examines how existing coal plants have been grandfathered in to more stringent environmental regulations. And indeed, the natural gas industry has proven expert at playing ahead of the curve on this one, when it comes to both paying off environmental organizations to promote natural gas as a "bridge fuel" as well as positioning themselves as the "clean(er)" source of energy. Those with slightly longer attention spans might remember fossil fuel magnate T. Boone Pickens' implausible wind corridor plan - in reality, a plan to reap tremendous benefits by hawking natural gas - something he just so happened to have a large vested interest in.

Nor coal has been a shirking violet, both with their "America's Power" campaign as well as their steadfast opposition to any carbon pricing scheme.

And indeed, it goes without saying that renewable sources have their heads deepest in the trough, both in advocating for political mandates for producers to buy their products (renewable portfolio standards) as well as demanding outrageous subsidies (electricity feed-in tariffs and above-market energy price contracts) in order to keep an otherwise unsustainable business plan afloat.

Finally, an area where I at times am forced to part ways with my nuclear advocacy colleagues - yes, nuclear too is at times guilty of the same behavior (if to a lesser extent), particularly in the face of high-stakes "energy policy" legislation. The counter-argument many nuclear advocates make is that nuclear is uniquely hamstrung as an energy source by federal regulations - which is indeed true. Nuclear plants requires years of licensing approval before construction can even take place and must maintain a record of safety and waste stewardship unheard of in any other energy sector. But in my mind, the answer is not more special pleading with the government to offset these requirements, but to simply level the playing field - let the same standards apply across the board and then we'll see how "cost-competitive" other conventional energy sources are. (Don't hold your breath for Congress to move on that one.)

Much like the Game of Thrones, in the game of political capitalism, you win or you die. (And either way, consumers lose.) But the only surprise in this debacle is in how long it has taken anyone to notice that game has already long been in motion.

What's your alternative?

As I've gotten older, a particular strategy for more illuminating and constructive discussions and debates I have found when someone expresses deeply held hostility or opposition to an idea is, "So what's your alternative?" Not only does this serve as a test of the seriousness of the individual opponent, but it also has the effect of turning the focus of the discussion from being one solely focused upon defending one idea to evaluating the relative merits of multiple ideas in context.

This of course has particular relevance to many aspects (and objections) to the nuclear fuel cycle, especially when it comes to the most serious objections, such as what to do with spent nuclear fuel. For example, a nascent tactic of anti-nuclear activists has been to insist that no solution exists for waste, something which both demonstrably false (e.g., deep geologic disposal - think WIPP or Yucca Mountain, or even deep borehole disposal - is both technically sound and readily achievable, despite being in my opinion wasteful; in addition, strategies such as reprocessing remain immediately viable and advanced reactor concepts and technologies, including thorium-based concepts - think LFTR - are clearly on the horizon) in addition to being entirely myopic.

To wit - if the waste problem is unsolvable, not even shutting down every reactor tomorrow will rectify this, while solving the above problem makes the objection moot. In as much, a good test for the seriousness of the objector's environmental (or other) principles is in whether they are interested in solving the problem or finding a new objection.

The above can be couched as example of the alternative hypothesis strategy in action. If geologic disposal is out of the question, what is your proposed alternative? If reprocessing in unpalatable, what do you propose to do instead? The purpose here is manifold - in addition to testing the seriousness of the objector themselves, the focus is now placed upon the search for a satisfactory solution rather than assuming a defensive posture.

And of course, this applies more broadly as well. Inevitably, there is the objection that nuclear is "too risky." Despite my obvious disagreement, what is your proposed alternative? More natural gas turbines - taking with it both the direct risk to safety as well as the overall increase in greenhouse gasses? A panoply of intermittent energy sources like wind and solar with their attendant infrastructure requirements, high costs, and requirements for backup given their rather limited scale and availability factors? It may well be that no common agreement can be found, given the emphasis different individuals will place upon specific factors (economics, risk, environmental impact, etc.). But putting the problem into the context of evaluating proposals like nuclear energy not in the context of a perfect (and perfectly fictional) alternative but against the very real alternatives available (with all of their attendant limitations) can provide an extremely clarifying aspect to the discussion.

Why does Rep. Markey oppose natural gas exports?

It is often stated that politics makes for strange bedfellows. And energy politics makes for perhaps the strangest.

The Research Triangle Energy Consortium blog recently reported on a letter Representative Ed Markey (D-MA) sent to Energy Secretary Steven Chu urging him to reconsider licensing natural gas export terminals. Markey, a ranking member of the House Natural Resources Committee, is known to be a notorious (and notoriously opportunistic) nuclear opponent.

Markey states in his letter than his concerns are twofold - first, the oft-declared view of natural gas as a "bridge fuel" to solar, wind, and other alternatives (so long as those "alternatives" leave the atom unfissioned as God and nature intended...) as well as a matter of keeping energy prices affordable. Given Markey's track record of outright hostility to one of the cheapest forms of zero-carbon baseload energy around, his sudden concern for energy affordability - particularly in light of the high production cost of wind and solar - is almost laughable.

Opponents of exporting LNG cite a panoply of arguments against allowing U.S. companies to allow exports, the impact on energy prices notwithstanding. One is the possibility of producing higher-value products than the raw gas exported (e.g., ammonia-based products such as fertilizer, of which natural gas is a chief component). The second, cited by Markey and others, is the impact of rising natural gas prices on its direct competitiveness with coal (again, nevermind nuclear...).

Yet both of these arguments are equally specious. For one, given that the asset in question (i.e., LNG) is privately-owned, one should be asking where the government has the right or authority to assert that private producers can no longer sell their products to those who bid at the highest price (i.e., LNG importers), but rather must sell it to businesses deemed "suitable" to the current political agenda. Without going full Galt, it has all the creepy vibes of a stock villain from an Ayn Rand novel.

Second, with regard to concerns over the potential "bid-up" of natural gas prices, it beggars belief that such a similar phenomenon would not also occur as demand rose with increased consumption of natural gas for manufacturing, energy production, and as a transportation fuel. In other words, LNG boosters simply can't have it both ways: cheap natural gas will inspire demand across multiple sectors (energy, manufacturing, and export), and thus the price will not forever remain "cheap." Further, in a market economy, producers will sell their product at the highest margin - be it direct export, manufacturers, or energy companies.

And now, a plot twist

One interesting snag in all of this is something Rod Adams at Atomic Insights pointed out awhile ago as a speculation as to Markey's anti-nuclear fervor: Markey's district represents Everett Marine Terminal, the only operating LNG terminal in the U.S. (note this is a major source of LNG import activity). While I don't share Rod's enthusiasm for pinning down financial interest in the fossil industry as the sole and principle reason for organized opposition to nuclear energy (I find that there is far greater room for ideology in energy politics), it certainly does raise eyebrows. In Rod's thesis, opposition to nuclear naturally drives up demand for natural gas imports - good for Markey's constituency, which makes it good for him.

Yet the shale gas boom throws a wrench into all of this - petroleum companies like ConocoPhillips are already putting in applications to become natural gas exporters. At first glance, one has to wonder then why Markey remains in strident opposition to what would appear to work just as well for his district.

And so we go back to Markey's letter, in which I am forced to wonder perhaps if his intent is to push natural gas prices down, namely by shutting out alternative markets for natural gas consumption. In as much, by keeping the prices low, Markey hopes to outflank competition to alternatives (again, where I part ways with Adams - I truly believe that Markey does want to see an all-solar/wind future, and to hell with the consequences) by undercutting the competition through natural gas. Thus, the "bridge" - natural gas as a vehicle to drive out all future competition to renewables. This line of logic is readily apparent in his letter, where he describes natural gas being used to displace coal (although the term "nuclear" is not present at all in his multi-page letter to Dr. Chu). In as much, Markey's strategy becomes quite clear.

Ultimately, a new abundance of shale natural gas is a boon for energy consumers. While I am a feverent believer that safe and affordable nuclear energy offers the best path toward long-term reductions in carbon emissions and a better environment, the other thing I recognize is the need for affordable energy all-around, of which natural gas clearly does have a role to play. However, Markey's ham-fisted attempts to shunt supply solely to energy production under the guise of "affordability" (and ultimately as a means of manipulating sources of energy production over the long-term) could not be more readily transparent.

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.)

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 Électricité 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.