Energy & Power Generation

Electricity Update – France and Texas

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France and Nuclear Power – Losing Its Edge

France has long pioneered a tradition of being reliant on nuclear power. France has 59 nuclear reactors and delivers a very high percentage of their total power needs through nuclear power, as well as being a major exporter of electricity to adjacent nations. France chose nuclear power after WW2 because they lacked local energy resources and had a strong engineering capability.

The company that runs the nuclear industry is called EDF. EDF is 84% owned by the French government, so you could basically say that the French government owns by far the most significant portion of their own electricity industry (and 15 nuclear reactors in the UK, to boot). Currently EDF pays a very high dividend, yielding 7.7%, due to the fact that their market capitalization has declined precipitously while the company has tried to keep the dividend constant.

For many years EDF provided France low cost electricity, which provided a competitive advantage against their industrial neighbors such as Germany. Today, however, Germany has a cost advantage over France in terms of power, since the price of coal has dropped and Germany uses a significant amount of coal to burn their own electricity. One of the main reasons that the price of coal has dropped is the rise of natural gas in the USA, which in turn allows the US to export their surplus coal overseas to Europe. This article from Bloomberg provides a good overview of the competitive situation.

“French energy used to be competitive,” said Emmanuel Rodriguez, head of energy for the French unit of ArcelorMittal, the world’s biggest steelmaker, which also has operations in Germany. “This model is crumbling. Germany is now better than us whereas a decade ago they were much more expensive.” French power prices for big industrial users are projected to average as much as 25 percent higher next year than in Germany, according to Uniden, a lobby whose members consume 70 percent of electricity used by industry in France.

In another sign of the upside-down world we live in, EDF’s dividend at 7.7% is far higher than what they are paying in yield on debt of 4.375%, even debt that looks suspiciously like equity here in the US (a perpetual dated bond is debt without a maturity date).

France is also struggling as they try to build new nuclear reactors. The next generation plant being built for EDF by Areva has had cost overruns and schedule delays:

EDF has previously said France’s first EPR would cost €3.3 billion and start commercial operations in 2012, after construction lasting 54 months. The estimated cost has now increased to €8.5 billion ($11 billion) and the completion of construction is delayed to 2016.

Energy Futures Holdings

Energy Future Holdings took a major Texas utility (TXU) private in a 2007 deal that leveraged up the company with $45 billion in debt in 2007. 2007 was a horrible year for most deals across almost all sectors including real estate as it was the “height” of the bubble before it all came crashing down. TXU, one of their entities, has bonds trading as low as 15 cents on the dollar (for bonds that have an interest rate of 10.25%, to boot) per this Bloomberg article.

The company has struggled to be profitable ever since the LBO, as the shale revolution created a glut of natural gas, pushing U.S. prices to the lowest since 1999 last year

While EFH is not a public company, they do have publicly traded debt and thus they have an active investor relations department. If you read through one of their documents you can see their expectations for natural gas prices and how they have been able to keep the company going for as long as it has due to a strategy of hedging against low priced natural gas, as well as through what seems to be very effective management of costs. However, the large debt load likely has to be restructured since a company that was built to profit from a marginal cost of power based on $14 / unit priced natural gas cannot service that debt load with the cost of natural gas between $2 – $4 / unit.

Cross posted at LITGM

A Winter’s Tale

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“It is so cold in here,” said Gretchen. “The fire is almost out.”

“I will go to our woodpile and bring more wood,” said Hans.

“There is none left, Hans,” replied Gretchen sadly. “We have used all our wood that we saved for the winter.”

“I will go into the great forest,” responded Hans, “and bring more.”

“Hans!” said Gretchen with alarm. “The forest wardens will take you! I have heard that there are more of them, and they are fiercer than ever toward wood thieves!”

“Nonetheless, I must try, dear Gretchen,” replied Hans firmly, “for you and for the little ones.” He put on his thin overcoat, opened the door, and stepped outside into the icy, howling blast.

A folk tale from the Middle Ages?

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Nuclear Plant Delays

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While I am a big supporter of nuclear power, the insane regulatory framework in the US and our broken financial incentive mechanisms for utilities has doomed the promised nuclear “renaissance”. The only places where nuclear plants in the US are even being attempted have “old school” regulation with “cost of service” opportunities that basically mean that the utility will recover whatever they put into service and earn a return on that investment. These include 1) South Carolina, where SCANA (a relatively small utility) is building two 1,100 MW reactors and 2) Georgia, where Southern Company (and a variety of municipal entities) are building two 1,154 MW reactors. The oddest entity, the Tennessee Valley Authority (TVA), is a Federal entity, which allows it to move forward with completion of a unit that is 1,180MW.

No utility in a state with deregulation (partial regulation) can contemplate a nuclear plant, because of the high costs which must be recovered from an open market. The price of electricity is very volatile, driven by demand, weather, and the price of alternative fuels. The low price of natural gas today, not foreseen when these plants were considered back in the late 2000’s, would make high enough energy prices to recapture these costs (and earn a profit) on an open market impossible. The price of natural gas could rise and other factors (such as the impending retirement of much of the US’ coal fleet due to EPA strangulation) could also make them economically viable; but these factors are not present today.

Beyond the enormous (and likely fatal) financial risk that these mega-projects have, (SCANA’s market capitalization is $6B, and the 2 reactors are “planned” to cost $9B), these projects have historically been plagued with immense delays and catastrophic failures such as abandonment. When these projects started, optimistic dates and costs were trotted out, ignoring both the sad history of mega-overruns and the fact that today’s regulatory and legal climate are even MORE unfavorable than those in the 1970’s when the earlier failures occurred. I knew that delays were inevitable, and unfortunately, enough time has passed that the companies are starting to admit their failures (to date).

This article describes how Southern Company has begun to waver from their cost and schedule estimates.

Southern Co. has had a simple message for the past few years: The effort to build the country’s first new nuclear power plant in a generation was on time and on budget. Now, that message is changing. The $14 billion project to build two reactors at Plant Vogtle is trending hundreds of millions of dollars over budget and trailing more than a year behind schedule, according to a report from a state-hired construction watchdog.

TVA recently has begun acknowledging their delays and cost overruns, too, per this article.

Unit 2 at the Watts Bar Nuclear Plant in Spring City, Tenn., is up to $2 billion over budget and three years behind, according to the Tennessee Valley Authority. TVA blames its own management oversight and planning. Instead of basing a plan and estimates on the twin reactor already running at Watts Bar, the utility used as a model the only other reactor work that had ever been deemed on time, close to budget and a success: Unit 1 at Browns Ferry. The trouble was that Browns Ferry and Watts Bar are completely different types of reactors with different work spaces and work needs.

Not only is the TVA admitting the cost and schedule delays, their official in charge of the plant just left the organization.

SCANA too has been acknowledging delays and cost overruns. Per the first article cited above:

In Jenkinsville, S.C., the Scana Corp.’s $9 billion expansion of its Virgil Summer nuclear power station began with work on two new reactors in late March. The Summer reactors already are reported to be at least $300 million over budget because components did not meet shifting safety standards.

Here is a SCANA presentation to EEI from their investor relations web site. Go to page 8, which shows the rising costs and tail of their planned nuclear investment. Frame this page and come back to it 3-4 years out and if it looks anything like this it will be a huge win for SCANA and the US nuclear power industry. Sadly enough, the odds are likelier that the Cubs will win the world series than that the “real” spend will look close to that graph. Note that SCANA is a 55% owner of this plant so it only represents their portion of the spend (other utilities and municipalities foot the rest).

Thus in conclusion:

1. The entities that are embarking on the nuclear construction adventure are either virtually immune to market forces (TVA) or are under “old school” regulation that lets them recover the cost in customer rates regardless of whether or not it makes economic sense

2. While these entities went into the projects with optimism despite the dismal track record of delays and outright abandonment common to nuclear construction, their exhortations and optimism are starting to fade early on in the projects

3. The US has far more to do in the form of favorable “one permit” regulation and removal of potential lawsuits and other barriers, as well as additional financial incentives, before the US nuclear industry really has a chance

Cross posted at LITGM

Energy Update

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In the US, our energy policies have been transformed by fracking, which has led to an abundance of natural gas and re-invigorated our domestic oil industry, to boot. When I first worked in the energy business they still talked about how the natural gas industry was forced to curtail new hookups of houses in the 1970’s because we believed that we were about to run out of the fuel, and the costs in the 1990’s were about $2 / unit. After a spike up to $14 / unit (which contributed to the bankruptcy of California), economic forces and not government intervention led to the innovation and today’s low prices in the $2 – $4 / unit range.

When natural gas first fell into this low price range, industry participants were basically “waiting it out” to see if prices would rise. The price of natural gas plays a huge part of the overall energy pricing market, since natural gas “peaking” plants are turned on during spikes and they set the marginal cost of power during those peak events. During times of peak usage coal, nuclear and hydro plants reap a windfall since their costs are (comparatively) fixed if the price spikes are set by high natural gas prices. These price spikes have been significantly lessened and now natural gas is used not only for peak plants but for base-unit capacity. If the price of natural gas ever rose near those peaks in the $10+ / unit range all those investments would be un-economical, but price spikes in those ranges don’t seem to be coming in the near future.

Last Hurrah For Wind Subsidies

The wind industry is basically a creation of government incentives worldwide. The Spanish market collapsed completely instantly when incentives evaporated. The US turbine market is about to collapse as well as soon as a governmental program providing subsidies in the form of tax credits to all wind installations in service by year end, as described in this Bloomberg article.

Wind-turbine installations are exceeding natural gas plants in the U.S. for the first time this year as developers rush to complete projects before the expiration of a tax credit for renewable energy. New wind capacity reached 6,519 megawatts by Nov. 30, beating the 6,335 megawatts of natural gas additions and more than double those of coal.

It isn’t known whether or not this tax credit will be renewed; if it isn’t the US turbine industry will likely grind to a halt since wind isn’t competitive in the US without large subsidies. Unlike natural gas, which can be found in areas connected to the gas pipeline grid, most of the best wind locations are not connected to the electricity transmission grid and the costs and barriers to installing these transmission lines are insurmountable under the current regulatory regime, dooming wind to a niche tax subsidized role. Our existing wind infrastructure will sit in place, earning the tax credit, with little or nothing added going forward without new incentives.

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Will This Work?

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Peter Thiel put $300K into this company, which seeks to capture waste heat from power generation facilities (and other forms of low-grade heat) by artificially creating very tall vortices. The system works something like a very tall chimney, but without the expense of constructing such a chimney. Simple explanation here.

(When I wonder “will this work?”, I don’t mean at a technical level..sounds like experimentation has demonstrated that it will, at least at a small scale…I mean “work” in a commercial sense)

They cite 35% as a typical efficiency for a thermal power plant (which sounds about right) and estimate that their system could recover 20% of the now-wasted heat, resulting in an overall plant output increase of about 40% with no increase in fuel consumption. However, I’d make the point that new combined-cycle power plants are considerably more efficient–GE is claiming 60% for some of their “H” series machines…which is obviously a good thing but leaves less wasted heat to be recovered. Still, there is a lot of rejected heat even from combined-cycle turbines…and not all power plants are going to be combined-cycle..for one thing, I don’t think CC plants can use coal unless it is first gasified.

Lots of issues between development and large-scale deployment, of course..costs of large-scale systems are hard to estimate until you actually build one and operate it for a while, and I also wonder about public acceptance (and aviation safety/traffic implications, were these plants to be built out densely.) It’s a very creative concept, and I’m glad to see Thiel putting some money behind it…lots more will be needed to reach a commercial level.

I’ll be watching this with interest.