Why the Renewed Interest in Nuclear Energy?

One of the main drivers behind the passage of the 2005 Energy Policy Act was the inclusion of incentives (investment protection, production tax credits and the like) electric utilities said were necessary to spur the building of new baseload generating capacity like coal and nuclear.

If the activity since the bill was signed into law this past August is any indication, the law is working exactly as intended. Accounting for the announcements made by Duke Energy and Constellation Energy last week, there are now 10 distinct projects underway investigating the possibility of new nuclear build.

But the incentives in EPACT 2005 are only part of the story. Another piece of the puzzle is the incredible volatility we're seeing around the world in natural gas markets. As our President and CEO Skip Bowman put it last week in a speech in Savannah, Georgia:

Even before Hurricanes Katrina and Rita, oil and natural gas prices were increasing and our energy supply and delivery infrastructure already were stressed. The hurricanes pushed that infrastructure beyond the breaking point.

Through the summer of 2005, natural gas prices were in the $6 to $7 per million BTU range—high by any standards. But last week, natural gas at one of the major trading hubs in Texas was over $13 per million BTU, and the 12-month forecast on the New York Mercantile Exchange was above $11.

In the Gulf of Mexico, 50 percent of natural gas production and 60 percent of oil production is still shut down—either because of damage to offshore platforms or to onshore infrastructure. The Gulf of Mexico accounts for approximately one-quarter of U.S. natural gas production and roughly 30 percent of oil production. Most experts believe production will not be restored fully until the end of the first quarter of 2006, at the earliest. There’s little prospect of quick relief from the pressure on natural gas supply and prices.

Louisiana and Mississippi have suffered greatly, to be sure, but our entire nation will suffer economic damage because of higher energy prices.

In those parts of the country that depend heavily on natural gas for electric power generation—Florida, the West Coast, New England—we can expect significant increases in electricity prices. One Florida electric utility reported last week that its fuel costs have increased by about one-third this year. This, in turn, will increase the cost of electricity to commercial and industrial users by 25 to 40 percent.

For many Americans, it looks to be an expensive Winter, as consumers who use natural gas to heat their homes will have to compete for access to a constrained supply with utilities who use natural gas to generate electricity as well as industrial users who use natural gas as a feedstock.

But it isn't only natural gas prices that are roiling markets. We've seen similar price volatility in coal markets since the late 1990s and some coal prices have doubled in the last 24 months. And there are other hidden costs as well. In emission trading markets, allowances for SO2 or sulfur dioxide have quadrupled in just 26 months between December 2003 and October 2005.

If you had to put the reasons for the revival of interest in nuclear energy on the back of an index card, it would read as follows:

1) Nuclear energy produces large amounts of baseload (24x7) power at competitive prices -- unlike many renewable sources of energy that simply can't provide the heavy lift that nuclear provides on the electric grid;

2) Because fuel costs make up such a small share of nuclear production costs, nuclear energy provides tremendous forward price stability -- an attribute with significant value in a volatile commodity market;

3) Because of its emission-free character, nuclear energy has a significant clean air compliance value -- something that will only become more important in what is sure to become a carbon constrained world.

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