Tuesday, May 20, 2008

A most unintended consequence

Understanding the nonlinear nature of the Universe is as important for policymakers as it is for physicists and biologists. In our increasingly complex world cause and effect is seldom straightforward. In Nature's grand scheme unintended (unconscious) consequences are often than not beneficial as when, for instance, the honey bee inadvertently pollinates plants as it searches for nectar.

The reverse is usually the case when it comes to the world of policymaking. Last week the Wall Street Journal reported on how the increase in cigarette taxes -- intended to serve as a deterrent to smoking -- has led to new opportunities for organized crime to profit by flooding the market with stolen and bootlegged cigarettes.

Similarly, the creation of cap-and-trade systems designed to limit CO2 emissions is having the effect of buoying the nation's beleaguered nuclear industry. That surely not what most environmentalists think of as a desired outcomes of this strategy. (GW)

Carbon Caps May Give Nuclear Power a Lift

By Rebecca Smith
Wall Street Journal
May 19, 2008

As Congress debates whether to limit carbon-dioxide emissions, one of the most vocal supporters of such legislation -- the nuclear-power industry -- is poised to reap a multibillion-dollar windfall if restrictions take effect.

Some nuclear operators are already forecasting how much their profits could increase under various versions of greenhouse-gas legislation that are under consideration. Among the nuclear operators that stand to profit most are Exelon Corp., FPL Group Inc., Constellation Energy Group, Entergy Corp., FirstEnergy Corp., NRG Energy Inc. and Public Service Enterprise Group Inc.

Carbon limits could usher in a period of "supernormal profits" for nuclear operators in markets where rates are deregulated and have more ability to rise, says Hugh Wynne, utilities analyst for Sanford C. Bernstein & Co. But he warns that profits, if perceived as excessive, run the risk of inciting a public backlash, perhaps including calls for a windfall-profits tax.

Congress is considering several measures that would impose a so-called cap-and-trade system, which would limit the amount of carbon dioxide companies are allowed to emit. Lawmakers this summer are expected to take up a bill sponsored by Sens. Joseph Lieberman (I., Conn.) and John Warner (R., Va.) that initially gives the power industry about half the allowances it needs and requires generators to purchase the remainder on an open market or cut emissions.

Nuclear operators stand to gain from greenhouse-gas legislation in two ways. For starters, their plants don't spew carbon dioxide, so they would not have to buy emissions allowances, giving them a competitive advantage over competitors that burn fossil fuels.

In addition, a cap-and-trade system would probably push up wholesale electricity prices in deregulated markets, as coal- and natural-gas-burning utilities jack up prices to recover the additional cost of allowance purchases. In deregulated markets, generators with the highest costs set the market price, so lower-cost nuclear operators could enjoy the higher prices charged by coal- and gas-burning utilities without the higher costs. In states that didn't deregulate their electricity markets, nuclear plants mostly are part of regulated utilities and furnish electricity to utility customers at prices tied to their underlying costs, eliminating the opportunity for such profit.

Chicago-based Exelon, the nation's biggest nuclear-plant operator by output, could reap as much as $2 billion a year in added earnings before interest, taxes, depreciation and amortization, says Mr. Wynne. His calculation assumes that the cost of carbon emissions would be $25 per million metric tons of emissions, an allowance price typical in Europe.

Exelon has not released its own profit estimates. Executives agree that carbon legislation would burnish earnings, but they say the benefit would be less than $2 billion. They say higher profits are fair because they recognize a multibillion-dollar investment Exelon has made in nuclear power and could fund new plants.

"We have invested in a low-carbon fleet and our rates reflect that," said Elizabeth "Betsy" Moler, executive vice president at Exelon. "Our rates are higher than rates for coal utilities."

New Orleans-based Entergy -- which is seeking regulatory approvals to spin off six nuclear plants into the nation's first stand-alone nuclear-power company, dubbed Enexus Energy Corp. -- says an allowance price of about $30 could net the new company $600 million a year of added profit.

FPL Group, Juno Beach, Fla., calculates its potential boost in earnings, before certain expenses, at $130 million to $727 million, depending on allowance prices and how much electricity is sold. The money would come from FPL's unregulated generation unit, which has interests in three nuclear plants and renewable-energy installations, such as wind farms, not its regulated Florida utility.

For Baltimore-based Constellation, higher profits from its nuclear plants would be partly offset by higher costs for its coal-fired units. Even so, it estimates gross profit would rise by more than $225 million a year, if carbon emissions cost $25 a ton.

Penalizing carbon emissions would improve the economics of nuclear-power development. A study by the Congressional Budget Office, released this month, concluded that nuclear plants could make electricity more cheaply than any other form of power generation if carbon allowances cost $45 apiece.

Opinions differ about how quickly a cap-and-trade system could cause wholesale electricity prices to rise or what allowances would cost. The intent of the Lieberman-Warner bill is to cut greenhouse-gas emissions to 65% below 1990 levels by 2050.

Nuclear-plant owners aren't the only ones that stand to benefit. Natural-gas-fired generators would benefit if they sell electricity where coal-fired plants set prices. That is because gas plants release only about half as much carbon dioxide as coal plants and would need fewer allowances, so their profit margin would widen.

Utilities are lobbying Congress to influence the allowance-allocation method adopted.

Exelon favors an approach under which government officials would sell or allocate a greater portion of emissions permits to utilities with retail customers, rather than to power generators that sell wholesale power to utilities. That would help customers of Exelon's two retail utilities, Commonwealth Edison in Chicago and PECO in Philadelphia, since the utility could sell the allowances to generators and use the proceeds to offset higher energy costs for their customers. It would allow prices to rise on the wholesale market, financially rewarding Exelon's nuclear unit.

Big coal-burning utilities oppose full auctioning of allowances, saying it could drive up their costs and produce an enormous spike in electricity prices, harming many consumers.

Economists generally favor selling allowances rather than giving them away. That is because selling them sends "price signals" to consumers, encouraging conservation and construction of cleaner forms of power generation, helping society achieve permanent greenhouse-gas reductions.

"It's not a bad thing to give more money to nuclear operators if you're trying to give them incentive to invest in new nuclear generation," says Greg Gordon, a utilities analyst for Citigroup Investment Research in New York.

Under the Lieberman-Warner bill, the Environmental Protection Agency would create 125 billion allowances, enough for all 38 years of the program, commencing in 2012. About 5.2 billion allowances would be available the first year. The number would drop by 96 million each year until only 1.56 billion remained in 2050, the final year of the program. The program is intended to make emissions progressively costlier to drive the market to make permanent reductions.

Exelon Chairman John Rowe says the power sector may have to spend as much as $400 billion by 2030 replacing polluting plants with cleaner ones. The sum is nearly equal to the market capitalization of U.S. utilities.


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