U.S. zigs on climate, Canada zags

The Canadian government’s follow-the-U.S. strategy on climate policy is still paying off, in petro-dollars. As I mentioned back in December, Canada gambled that the U.S. won’t make any environmental moves that hurt Canada’s oil industry. Of course that is a safe bet: America imports most of its oil, and Canada is its biggest foreign supplier. But with electricity, the game is different. And the Canadian government has signalled its first bad strategic move.

The Globe and Mail reports that the federal environment minister told a group of electricity producers to switch from coal to natural gas. This is more public relations than anything else; electricity in Canada is a provincial not federal matter. But the feds can tilt the game in favour of natural gas. How? By not supporting nuclear, gas’s only serious non-coal competitor in the baseload power market.

Why will switching to gas hurt Canada? Canada trades electricity with the U.S. America generates most of its power with coal. Historically coal has been much cheaper, kilowatt-hour for kilowatt-hour, than gas. Though there is a giant lobbying and advertising effort south of the border to spin natural gas as the answer to climate change, the U.S. system will remain coal-fired for a long time to come.

If and when a carbon price comes into effect, either through cap and trade or an outright tax, chances are it will be kept low—just so that it is politically palatable. This gives coal the advantage in carbon-constrained power markets.

Observers—including Canada’s government—shouldn’t confuse the U.S. federal government’s current inaction on climate change as an indicator that no meaningful climate policy will emerge from the U.S. Even though the latest incarnation of a senate climate bill hit a major snag Sunday when it lost the support of a key Republican, there is clearly interest in the senate in putting a bill forward. And if such a bill were to contain provisions for beginning a cap and trade scheme in the powerr generation sector—as the most recent bill apparently did—then there’s your carbon price. Plus, there are plenty of ways the U.S. federal government can act without Congress (see article).

You might wonder how coal could have an advantage over gas, when it emits twice as much CO2 as gas. The answer is found in something called the Dark Green Spread, which is the difference, in fuel cost, between coal- and gas-fired power in a carbon constrained market. Kilowatt-hour for kilowatt-hour, coal has been so much cheaper than gas that it would take a very high carbon cost to overcome this differential.

In the only functioning carbon market, the EU ETS, political collusion has kept the price of carbon low (see article). This has enabled coal-based power generators to underbid their gas-fired competitors in wholesale power markets. Yes, they emit more carbon, but carbon is so cheap that they can both underbid their competitors and still make a profit.  

If the price spread between coal and gas remains as it has been for the past five years, then Canadian gas-based generators will be at a disadvantage when they compete with coal-based American generators. Sure, Canada will have a moral advantage. But try taking that to a bank.

Of course, high carbon prices would overcome the Dark Green Spread. But what’s more likely: a high carbon price, or a high gas price?

The Canadian government needs to support nuclear power.

11 comments for “U.S. zigs on climate, Canada zags

  1. April 27, 2010 at 1:49 pm

    Great post. Bringing this point to light is extremely important. As Ontario moves to rid itself of coal those of us in the province can see the implications already, higher energy prices and a massive ramp up in natural gas plant construction. Beyond this the province is now being accused of unconstitutional taxes hidden conveniently as ‘green’ electricity fees on peoples hydro bills. Indeed the ‘green’ intentions cannot be taken to the bank but hey hidden fees and 25% bill increases certainly make a dent.

    http://envirogy.wordpress.com

  2. crf
    April 27, 2010 at 2:40 pm

    Flaherty did mention the word nuclear as low carbon energy.

    But it is easy for politicians (especially the batch in power now) to mouth words.

    Every action taken by the current government on energy and climate has advanced canada’s gas and oil sands interests, and lessened Canada’s nuclear interests. Canada’s nuclear industry could naturally be energy competitor to gas and oil sands, and advance Ontario’s economy. But this would relatively lessen the power of the western provinces, which are the where the votes are for the current government.

    It isn’t hard to see that it is Harper’s goal to see that the nation’s industrial interests are primarily tied to the advancement of the western provinces gas and oil industries. This is not a small shift in policy: it’s tectonic.

    This is a truth that shall not be spoken of in the press or by politicians. I’m deeply unhappy.

  3. April 27, 2010 at 3:47 pm

    CRF, it does appear that Canada is pursuing an energy policy that is almost exclusively petroleum based. I don’t know what has become of our drive to becoming a uranium enriching nation, but I haven’t heard anything about that in a while.

    Plus, the government’s announcement at the Washington nuclear summit—that of course we’ll ship that terrible HEU at the NRU back to the U.S. ASAP—sounded suspiciously like grovelling to the anti-proliferation (sorry, anti-nuclear) crowd.

    Here’s what annoys me about the shift to the gas strategy. As you mention, it’s all about playing to the western base. So why are Harper-hating papers like the Star so silent? Here’s an advertorial from TransCanada in yesterday’s Star: http://www.thestar.com/opinion/columns/article/800139–why-new-natural-gas-power-plants-are-a-good-fit-for-the-gta. Ten bucks says TransCanada didn’t pay a dime for that.

    But they do pay lots of money for all the outright advertisements that appear in the Star. Make you wonder if the Star, in the age of tight advertising revenue at mainstream broadsheets, just knows what side of the bread the butter is on.

    And the green lobby: they’re not green, they’re gas industry blue.

  4. Tim
    April 27, 2010 at 9:49 pm

    Is there actually any value in the spent HEU at Chalk River? My understanding is that Canada is still keeping a considerable stockpile of new HEU fuel at Chalk River. My understanding is that France is willing to buy spent HEU from countries such as Australia but that the selling country has to still take back a considerable waste product from France. Whereas the US is willing to take all of our spent HEU back but no one seems to what to do with it.

    The Russians actually want the US to reprocess the HEU out and convert to LEU while the Greens want Obama to simply store the HEU at Yucca Mountain???. With South Carolina threatening litigation against the federal government unless it starts reprocessing or ships existing stockpiles of spent fuel at the Savannah River Site to some permanent storage facility the spent HEU Canada has promised to ship from Chalk River might never make it to SRS.

    I will note that Trans Canada is one of the primary owners of Bruce Power so they cannot be considered completely anti nuclear although I wonder how much there enthusiasm differs from the actual management of Bruce. Bruce is really the only entity in Canada that I think would open a new greenfield nuclear site and I suspect they might end up as the future operator of both Point Lupreau and even Gentilly. Supposedly Duncan Hawthorne has offered repeatedly to take Point Lupreau off of NB Power’s hands and Hydro Quebec has already contracted with Trans Canada for a gas fired power station right down the road from Gentilly in Becancour going against their reputation as a 100% vertically integrated company.

    I think over all most of the powers at be in Canada Harper, McGuinty, Prentice, Trans Canada have decided to roll the dice on low natural gas prices with building the Mackenzie Pipeline and offshore production in the Canadian sector of George’s Bank and Newfoundland as the first backup if prices spike. Additionally the announcement of the Site C Dam in BC not far away from where Bruce would like to build in Alberta is probably not helping the nuclear cause either. AECL also seems to be focused more on international sales in the developing world than domestic activity

  5. April 28, 2010 at 7:15 am

    Tim, good question: what is the actual value of the spent HEU at Chalk River. I don’t know, but I do know that a writer of a James Bond or Austin Powers movie script could probably invent a scenario involving terrorists. The promise to ship it back is pure mollycoddling of anti-nuclear scaremongers who want everyone to take those kinds of scenarios seriously.

    Bruce Power certainly is made up of interesting owners, and it is striking to see the contrast in public statements between TransCanada on one hand, and Hawthorne, the PWU, and the Society on the other (Cameco seems to have refrained from commenting on Ontario and coal). I wouldn’t say TransCanada is anti-nuke, but statements from anti-nuke pro-gas front groups like the OCAA and of course Environmental Defence and Greenpeace sure don’t hurt TransCanada.

    You are right, everybody seems to have shorted gas. Is that wise? Gas is cheap today because of (1) the recession and (2) a mild summer, fall, winter, and spring of 2009/2010.

  6. Tim
    April 28, 2010 at 2:33 pm

    Trans Canada does have an odd fleet mix. They of course have the traditional gas pipeline business plus gas fired plants in Ontario, Quebec(despite being brand new essentially mothballed due to low demand. HQ is still paying a tolling fee though), the Northeastern US, and Arizona of all places. There own most of the hydro in New England plus some wind in Quebec and Maine.

    One thing I’ll point out is no one has yet built a new nuclear plant in a market based deregulated environment. This is the problem Bruce is having in Alberta for example or NRG in Texas power consumers don’t want to buy 30 year supply contract but this is what a nuclear operators needs to ensure profitability. In Ontario essentially the OPA and provincial benefit “charge” servers as alternative purchasing mechanism for things as the Bruce rebuild but as the provincial benefit is making up more and more customers bills vs the IESO Hourly Charge(which is highly correlated to gas prices) industrial consumers are already complaining that the benefits or deregulation are being negated.

    In a market based system it has been very lucrative for the likes of Bruce, Exelon, Entergy, FPL etc. to buy up plants of a single design built by various different small utilities and get economies of scale by running them as a single fleet. In the US before power deregulation many nuclear plants were often their owner’s only nuclear facility creating a lot operational risk and inhibiting economies of scale akin to the current problems at Point Lupreau. Exelon actually brought together the plants of two of the largest nuclear operators to begin with Commonwealth Edison in Illinois and Philadelphia Electric creating a giant in nuclear power. However it is unclear as whether any of the aforementioned entities will ever build a new plants in the US or Canada. Southern, TVA, and Duke still operate under tradition regulated regimes so I suppose they could new build under the “old” way of doing things.

    One interesting possibility is perhaps plants builders should work on a design build own operate basis in the future essentially merging the activities of Bruce Power and AECL lets say or GE/Hitachi buying Entergy which operates a lot BWR plants or even Westinghouse buying Exelon, Areva/EDF/Constellation etc. Thus plant builders would have a much greater stake in reliability and efficiency. The example of Bruce Power and AECL having a closer commercial relationship has been something that I have never heard ruled out but perhaps it is because of the short list of entities that want to buy AECL and that some feel Duncan is a person who could bring the leadership to AECL that have never have had(Don’t know if Duncan actually wants to be in the design construction business). One existing example is GE over the years has built some gas fired plants on a design build own operate basis but they don’t talk about them as to not to annoy the merchant plant operators that buy their turbines(One is in Linden, NJ)

  7. Tim
    April 28, 2010 at 4:35 pm

    Just doing a little research on the problem plagued Cernavoda plant in Romania that AECL has gotten a bad rap on over the years I was shocked to see how many heavy hitters in the european electricity industry have taken interest in finally finishing the incomplete units. Enel(Italy), RWE(Germany) GDF Suez(France/Belgium), Iberdola(Spain) have all formed a consortium with AECL to finish the three incomplete units. The aforementioned companies all huge players in European electricity and each are bigger than even the largest US utilities. The reason for all the interest by these heavy hitters is that Cernovoda is seen as one of the only places where new nuclear capacity can be brought fairly quickly onto the European electricity grid. In addition the home countries of all the companies with the exception of France have strong anti nuclear movements that even want to close existing plants something that is not as much of a problem in poorer Romania. While I do get the impression that the consortium is kind of stuck with CANDU technology it is at least minimal vote of confidence in AECL by some heavy hitters.

    It would interesting in the future whether Bruce Power would merge with or take over this consortium. Many the gas merchant plant operators such as Trans Alta and ATCO have literally same spec gas fired plants on both sides of the Atlantic and many of aformentioned European companies in Cernovado already have generating facilities in both the US and Canada. Remember that Bruce Power was originally formed with British Nuclear as its primary owner who wanted a trans atlantic nuclear fleet that’s how Duncan Hawthorne ended up as CEO before British Nuclear had to sell out due to financial issues in its home market(I believe British Nuclear has some ties with Philadelphia Electric too before Exelon was created).

  8. May 3, 2010 at 1:50 pm

    Tim, very interesting comments. There definitely is some heavy strategizing going on in the U.S. utility industry, and every reactor maker is looking at ways to hook up with utilities to achieve standardized plant operational efficiencies and economies of scale.

    Bruce Power seems a natural vehicle to pursue opportunities in the PHWR world, and they obviously want to get into at least part of that, as witness their attempt to get the Lepreau refurb contract. Interesting to speculate on why they’re not on the Cernavoda project. Is it because the EU bigs like GDF et al are already lined up to jump in if Rumania decides to allow more foreign involvement, or is it because of maybe a bit of friction with AECL?

    The leverage in these relationships seems to keep shifting between the reactor-makers and generators/utilities.

    And yes, the EU bigs’ interest in Cernavoda is a huge vote of confidence in AECL, or at least in the CANDU. For some reason this has been downplayed in Canada. I think only the Globe and Mail mentioned it.

  9. Lynne
    May 4, 2010 at 7:54 pm

    http://algorelied.com/?p=4022
    This fellow founded the Apollo Alliance in the US and is deeply involved in the green energy and green jobs revolution theory that Dalton McGuinty is implementing in Ontario. However, in this article, Joel Rogers reveals that the green jobs revolution is not so much about climate as wealth redistribution and government control of the economy. This is a frightening wake-up call for Ontarians and people had better pay attention and speak up. The current policies of the Ontario government are all about chosing winners and losers in the markets and expanding the power and control of government in all sectors. The government is mouthing platitudes while misleading the public as to the consequences of their actions. The only trouble is, by the time the public realizes they’ve been had, it may be difficult and expensive to reverse the damage.

  10. Lynne
    May 5, 2010 at 6:48 pm

    http://tomadamsenergy.com/?p=414

    Tom Adams has a new post up revealing more strange happenings between the Ontario energy agencies and the McGuinty goverment. You have to ask yourself where this is all leading?

  11. May 6, 2010 at 8:01 am

    Lynne, thanks. I like Tom Adams’s take on things, though I don’t agree with his anti-nuke position.

    However, I disagree that there’s no power plan. There is a plan: replace coal with gas, and instead of nuclear capacity upkeep, replace that capacity also with gas. That way, when the renewables are proven to have been a massive waste of time and money and a PR ploy, at least we’ll have enough generation capacity to keep the lights on. Of course it will be based on an expensive fossil fuel, but it’s better than nothing.

    And if/when it comes down to price, we can always import cheap coal-fired American power—begging the obvious question of why we shut down coal in the first place.

    Hilarious Toronto Star editorial today at http://www.thestar.com/opinion/editorials/article/804531–where-s-the-power-plan#article. The Star is now criticizing a plan that it has endorsed all along, without of course mentioning that it endorsed the plan.

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