Preliminary thoughts on the Fukushima accidents

It is too soon to draw definitive conclusions on the exact causes of the Fukushima disaster, but assuming that preliminary findings do not change materially, governments and the energy sectors are in for difficult decisions and fossil fuels have won a reprieve, if they ever needed one.

The primary culprit was a force 9.0 earthquake, the fourth strongest in a century, which in turn caused a huge tsunami which flooded and destroyed crucial portions of the nuclear plants' backup power systems.  Having built these reactors close to the sea looks like a bad mistake, but what should countries like Japan that lack large rivers or lakes do?

The second line of inquiry centers on the age of the plants.  Their “boiling water” design is believed to have contributed to the problem.  Old plants are expensive to maintain, and no matter how much tinkering is done, they won’t be as good as new ones.  This could make it difficult and very expensive for utilities to win life extension permits from their regulators.  Furthermore, the longer a plant is in use, the more spent fuel it generates, and this fuel has to be stored (or reprocessed) somewhere.   

Third, operational practices will come under intense scrutiny.  How many and where spent fuel rods were stored seems to have been a major cause of the explosive chain reactions.  Maintenance procedures, storing of spent fuel rods will be reviewed as will safety systems and their redundancy.

In the immediate future, there is no way to effectively substitute nuclear generation with any other.  In 2009, it accounted for 19% of electricity generation in the US, 29% in Japan, 78% in France and 35% in South Korea.  It is unthinkable to just shut down all nuclear reactors.  Japan alone is likely to need to import an extra 10 billion cubic meters a year of LNG until 2015 just to make up for the damaged Fukushima reactors[1].  That is 4% of global LNG shipments in 2009, a significant number.

Longer term, the picture should be broadly the same.  We expect that there will be the usual calls for green energy, for alternative fuels, but for the next two decades at least, this is unlikely to be of much practical help. 

In 2009, US solar and photovoltaic installed capacity was 640MW.  These 640MW generated 891,000 MWH; this means that capacity utilization was 16%, compared to 90%+ for nuclear plants.  Then there is cost.  As a result of the French government effort to encourage solar power, EDF is on the hook to pay €560 million p.a. for the next 20 years in subsidies to support 973 MW of new solar power.  Even assuming a capacity utilization of 25%, this works out to €266/MWH p.a.!  Direct Energie, a French energy player, is offering to buy electricity wholesale from EDF at €42/MWH… 

The investment cost per MW of installed wind capacity is comparable to that of a nuclear plant, while its capacity utilization is anywhere between 10% and 30%.  To that should be added the cost of backup generation facilities and NIMBY opposition.  So little relief should come from that corner either.

Even under an optimistic scenario, new nuclear plant construction is likely to be delayed, reduced and made more expensive. Which leaves natural gas.  There is lots of it in the US and in Russia.  Combined cycle gas turbines are fast and cheap to build, and not overly polluting. Gas-fired plants are the only large scale and economic alternative to nuclear generation for decades to come.  The recent disaster in Sendai is likely to accelerate the demand for gas, which, combined with the tailwind from recovering and growing global economies will likely cause prices to grow higher and sooner than originally expected. 

Japan is about to compete for new Eastern Siberian and Australian gas with China and South Korea. The traditional and abundant Russian gas deposits are too far to be economically sold in Asia, so that, despite greater capacity in Qatar, LNG prices should rise with demand.  If Germany decides not to extend the life of its existing nuclear plants and not to build new ones, it will have little option but to increase its gas purchases from Western Russia.  Should the UK reduce its nuclear building program, further pressure on gas prices should follow.  As for France, it relies so much on nuclear energy that it will probably maintain an active nuclear program.

Outside Russia and Australia, the largest new gas supplies will come from areas which are prone to unrest and political risk (Middle East, North Africa and Central Asia).  In a sense, and despite current misgivings, this strengthens the case for maintaining diversity of energy sources and keeping a viable nuclear option.

We don’t know what the long term impact of the current nuclear crisis in Japan will be.  For illustration purposes, let us consider two scenarios: (A) nuclear power output remains flat globally over the next 20 years instead of growing at an annual rate of 2.3% as generally predicted.  If this shortfall in energy output is to be made up by greater natural gas production, then the world would need to produce the equivalent of an extra 7.5 million barrels of oil equivalent per day by 2030;  (B), nuclear power output drops by 2% p.a., raising the 2030 call on natural gas to 11.7 mboepd.

To put these numbers in further perspective, under scenario A, the 2030 nuclear energy shortfall would represent 8.4% of global gas production and 43% of the North American gas output.  Under scenario B, it would represent 12.5% of global gas output and 67% of North American output.  Or, natural gas production would need to grow 20% faster through 2030 under scenario A, and 33% faster under scenario B.

Scenario A looks demanding but possible, although a combination of higher gas prices and greater energy efficiencies (in other words lower consumption) would have greater chances of success.  The fact that scenario A could happen does not mean that it will.  In fact, I doubt that it will because the one country most likely to curtail its use of nuclear power is Japan, and its energy consumption growth is expected to be modest over the next 20 years.  Scenario B is not feasible as it would require a 73% increase in natural gas output by 2030.  It would also require a costly buildup in gas infrastructure ( trunk pipelines, LNG carriers, LNG plants, ports, etc.). 

This leads us to conclude that nuclear power might be allowed to drop in relative but not in absolute terms.  Nuclear power producers will likely incur greater costs than today.  How much of these will they be able to pass to consumers is open to question as it will be a regulatory, political and social process.

Under most scenarios, natural gas is likely to see its importance grow as a primary energy source.  It is abundant, present in most continents and relatively clean.  Shale deposits will only boost its desirability.  Unlike wind and solar, it can generate electricity around the clock.  It is safe.  It is the fuel of the 21st century.

Disclosure: We are long US and Russian oil and gas producers and US gas-fired electricity generators.

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[1]  According to Gaz de France.