Fuel’s errand

30 January 2012

How can the nuclear power industry rebound from the Fukushima disaster?

David Isenegger, general counsel, Centrica Energy: Fundamentally, the nuclear industry depends on public support and a legal and fiscal regime that provides certainty. Post-Fukushima, public support rests on three pillars: independent regulation, a commitment to a high level of safety from industry and openness and transparency.

After the disaster, European operating nuclear plants and those under construction were evaluated against a variety of extreme ‘beyond design basis’ scenarios. The UK regulator concluded that UK plants are robust and safe to continue operations.

The public appears reassured and ­support has held.

New nuclear reactors will be built in the UK without taxpayer subsidy or public money, but policy intervention is still required. Investors need legal and fiscal certainty to make 60-year investments. Certainty needs to come, in part, from a strong and clear price signal to support low-carbon generation.

Tom Cowling, group legal counsel, Ecotricity Group: Opinion polls show that nuclear power has taken a big hit in popularity almost everywhere around the world since Fukushima, except in a few countries, including the UK. Nuclear ­industry stakeholders in the UK have been engaged in a massive lobbying campaign to persuade people that nuclear is, in fact, a good thing.

When it first came about, nuclear was sold to the public on the basis of being ‘too cheap to meter’. Now the nuclear industry is desperate to ­convince us that it is the key to a low-carbon future. However, the critical issues of what to do with the waste, who pays to clear it up and what ­happens in the event of a safety or ­security breach still do not seem to have been properly addressed. We are now paying the financial and ­environmental price in terms of ­decommissioning for the nuclear ­energy used by previous generations.

Greg Hammond, partner, Akin Gump Strauss Hauer & Feld: ­Inevitably there has been an adverse reaction to the Fukushima Daiichi ­incident. However, the energy industry has to a large extent always been about understanding and addressing risk, based on a risk appetite that is directly driven by energy demand. As with all major energy-related incidents, there will be inquiries and ­reports that will examine the causes, failures, clean-up requirements and aftermath of this incident from which lessons will be learnt.

One of the most obvious questions in the case of Fukushima is why the reactors were positioned close to the seashore in an area prone to ­earthquakes and tidal waves. ­Undoubtedly, there will now be heightened awareness of locations for nuclear reactors in recognition of the risk analysis that will emerge.

Sue Quint, partner, Morgan

Lewis & Bockius: In the immediate ­aftermath of the events at Fukushima the regulators of the leading nuclear programmes around the world ­reaffirmed that they had reasonable assurance in the continued safe operation of the current fleet of nuclear power plants. The UK was no ­exception and the Office of Nuclear ­Regulation (ONR) concluded that there was no need to change the ­present siting strategies for new ­nuclear power stations.

The industry has responded constructively and responsibly to the recommendations made by the ONR, and this commitment to continuous improvement will give both the Government and the public confidence to continue to support the development of nuclear power stations as a carbon-free source of energy.

Do you think the development of renewable energy sources is more of a priority than nuclear as a result of Fukushima?

Isenegger: Wind and solar projects are becoming more economic, but are limited by their dependence on weather. If we want stable, secure and affordable low-carbon power, nuclear has to be part of the mix.

For countries committed to ­phasing out nuclear power, the ­development of renewable energy sources is more of a priority. Their search for a cheap and reliable alternative to nuclear will be extremely challenging and could see them becoming more dependent on natural gas during the transition. They will not reduce their dependence on ­nuclear power – they will simply forego the economic and social ­benefits of domestic generation.

Cowling: Britain’s need for more ­renewables has always been there. North Sea oil and gas has been ­declining for many years, yet we have 40 per cent of all the wind resource in Europe to take advantage of. Now, as fossil fuels become more scarce and bills have really started to rise, people’s minds are rightly more focused on the importance of renewable ­energy as a long-term resource.

We are seeing a major struggle going on behind the scenes between traditional fossil fuel generators and nuclear power on the one hand, and renewables on the other, in a fight for Britain’s energy future, because the old guard stand to make a lot of money by controlling Britain’s power sources for the next generation.

Yet because of the intense lobbying of MPs and the media by nuclear, coal and gas multinationals, there seems to be a constant stream of ­stories about the alleged perils of wind energy and ‘green taxes’. We, however, consider renewable energy, with its generally lower barriers to entry and reliance on free resources, to be far more democratic and a real long-term solution to the UK’s two key energy issues: how to reduce both our carbon emissions and our geopolitical dependence on foreign oil- and gas-producing states.

Hillary Berger, general counsel UK & Europe, International Power: For some governments, such as Germany’s, I think this is the case. However, a strong energy market should feature both technologies.

While they share a key similarity, namely low-carbon emissions, they are not interchangeable. Nuclear energy offers large volumes of baseload generation and is inflexible, while ­renewable energy such as wind and solar produce relatively low volumes of output and only intermittent ­generation. A viable electricity ­system requires flexible plants to ­provide power when renewable ­technologies are unable to generate.

Hammond: The most extreme reaction so far to the Fukushima incident has come from Germany, which has terminated its nuclear power ­programme. This may not be totally surprising, since various political parties in Germany have expressed their concerns over the years about nuclear energy.

Germany intends to use this ­opportunity to exploit, invest in and further extend its leading position in renewable energy technology.

Two interesting outcomes of this policy are likely to be that, first, Germany runs the risk of carrying higher energy costs than its competitors in the short to medium term, and ­second, as it seeks to develop its ­domestic renewable energy supply it will almost certainly be forced to ­import electricity generated by ­nuclear means from France and Poland – both countries that have clear pro-nuclear policies.

Mark Newbery, partner, Herbert Smith: There is no one-size-fits-all answer to this question. Fukushima made governments reassess their ­nuclear plans, but the impact of any such assessment on the priority given to nuclear and renewable ­projects will differ from country to country depending on a variety of factors, including political sensitivities, low-carbon policy goals, ­electricity demand and generation profiles, and the availability or ­otherwise of natural resources.

While renewables will clearly now take priority in countries such as ­Germany, where there are plans to phase out nuclear power, others see nuclear as the solution to a low-­carbon electricity sector, while ­countries such as the UK prefer to back both technologies.

Is there a future for feed-in tariffs (FITs), particularly with regard to solar power?

Isenegger: The FITs scheme has been successful in stimulating the domestic and small-scale commercial solar market, with around 3,000 companies and 25,000 jobs now being supported by the UK solar ­industry.

Recent Government action to control costs and respond to the overly rich returns on solar investments was understandable, if precipitous. Solar can continue to make a significant contribution to security of supply, ­reducing carbon emissions and the green economy. I think government and industry are more likely than not to find a way to realise these benefits.

Cowling: FITs are still there and the principle is sound. What is wrong and unfortunate is the manner in which the UK Government has handled recent budget cuts – imposing caps and changing rates with only six weeks’ notice. This has understandably scared away investors, big and small, who are losing confidence that the Government will stick to what it says.

The solar industry was not disputing the need for cuts, but merely calling for the government to “cut, don’t kill” the solar FIT rate – to lower it steadily and sensibly to give this fledgling industry a chance to adjust.

We think there is still an opportunity for the Government to repair the damage and continue to support and encourage a scheme that works and in which people can have faith.

Berger: Yes, there is a future for FITs. In an ideal world they bring a level of certainty to the revenues an owner can expect to receive from renewable generation. This certainty in turn ­encourages investment by sponsors and lending to the renewable sector from banks at a lower rate than would otherwise be the case.

In practice, however, what we have seen across Europe are regular adjustments to FIT levels. If these adjustments are not handled appropriately they can end up discouraging investment.

Martin Stewart-Smith, partner, Morgan Lewis: The FITs scheme has been extremely successful. In fact the level of take-up has been so high that the Government has had to recently cut back the generation tariff for solar photovoltaic systems. The tariffs had been set at a level so as to generate an expected real rate of ­return of between 5 and 8 per cent, which caused a gold rush atmosphere among investors, suppliers and installers.

Despite the apparent gloom within the industry that this initial frenzy of activity is going to calm down as a ­direct result of the reductions since early December 2011, it is clear that FITs are now a permanent feature of the incentive mechanism to encourage capital investment in low-carbon generation projects.

Newbery: Experts and economists have debated whether price-based incentive regimes such as FITs, or quota-based schemes supported by green certificates, are more effective at stimulating the deployment of ­renewable technologies, fostering ­industry growth and driving down costs.

Economic theory aside, evidence from Europe to date suggests that FITs are more effective. However, their success depends on the tariff being set at an appropriate level that is sufficiently stable for investment and growth to become established.

Solar tariffs have been cut in Spain, Germany and the UK as a result of them being set too high, resulting in a boom-and-bust market. Provided governments can avoid this pitfall there is a future for FITs.

To what extent do environmental concerns risk derailing the shale gas industry?

Isenegger: I believe these environmental concerns can and will be ­appropriately addressed. The scale of shale resources, their economic ­potential and their significance for supply security make it important that they are.

One needs to look at the environmental concerns in context. In the early years of the US shale boom (2006-09), absentee operators using inexperienced and low-cost drilling crews allowed gas and drilling fluids to leak from their wells into groundwater. It was a design and construction problem, not one ­inherent to shale development. Shoddy conventional oil and gas wells can also cause contamination. Recent studies, ­including one by the US Department of Energy, conclude that responsible business practices and improved regulation can address environmental risks.

Cowling: We think that shale gas ­exploration – along with deep-water Arctic drilling and fracking – show just how desperate we have become.

‘Extreme energy’ sources that were once deemed too difficult or costly to extract are now being seen as viable – it is desperate stuff. For every three units of energy that shale gas ­produces, they have to use one to make it. That defies common sense.

Canada pulling out of the Kyoto Agreement was a sad day – a sign that they clearly put profits before the planet.

Hammond: The shale gas industry is a classic example of the energy risk/appetite matrix in evolution. Much of the technology involved in the shale gas industry has been ­developed over the past 10-20 years and is therefore relatively new.

As the technology became more ­sophisticated it became clear that recovery of shale gas could become more ­efficient and, indeed, hugely ­commercial.

The methods used in ‘unconventional’ oil and gas recovery are ­therefore in their infancy and still being assessed for environmental and other purposes. No doubt each country will make its own decision based on its energy risk/appetite ­matrix. However, it would be a brave person who predicts that, as things stand, the shale gas industry will be completely derailed by environmental concerns.

Stewart-Smith: The shale gas ­industry in Europe will develop ­differently from that in the US for a number of reasons, ranging from ­differing legal systems to geological conditions.

Fracking is essentially a continuous industrial process under which formations are fractured and then sand and water are injected to keep the fissures that are created open for long enough for the gas to escape and be collected from the well.

Tighter regulation and control of the chemicals added to the sand should be able to deal with concerns over what happens when they leach into underground aquifers. The concerns about the impact of fracking on geological formations and causal links to earthquakes are still being grappled with, but it would appear that certain areas may be ruled out for exploitation where risks are ­perceived as too high.

What changes are expected within the energy industry during the course of 2012?

Isenegger: 2012 is a big year for ­energy regulation in the UK, with an energy market review bill expected to pass, renewable obligation certificate banding to be finalised and new Ofgem regulations on power auctioning also expected to progress.

It will be interesting to see how the market responds – particularly to see whether investment incentives will be sufficient and sufficiently certain to deliver the renewable investment necessary to meet government targets. The UK and EU stance on shale gas should become clearer, as will commodity prices once underlying economic uncertainty subsides. The issue of Iran’s nuclear programme looks to be coming to a head, creating uncertainty and the potential for market dislocation.

Cowling: Hopefully no more changes to FITs. The new planning regulations regarding localism and the new National Planning Policy Framework – two seemingly contradictory policies – will become clearer and we can help reverse the shocking decline in planning approvals for ­onshore wind, which survey after survey shows that people in Britain like and want more of.

Berger: In my view, during 2012 the energy industry will be driven by four primary factors. First, fluctuations in the global economy will continue to affect energy prices and project ­investment. Second, regulatory developments in renewable incentives and targets and nuclear policy will be highly influential. Third, the continuing growth of the energy industry in emerging markets. Finally, surprises.

If you had asked this question in 2010 no one would have predicted developments such as Fukushima, which had a significant impact on the energy industry.

Hammond: One can expect the ­development and ultimately the ­production of shale gas assets to ­continue to spread beyond the US.

Due to the rise of shale gas, the globalisation of the natural gas ­industry and the emergence of ­specialised gas-focused companies, one can expect there to be a continuing decoupling of oil and gas prices.

It is likely that the gap between West Texas Intermediate (WTI) and Brent prices will continue to widen as WTI prices increase along with growth in the US economy, in ­contrast to a continuing fall in Brent as a result of economic concerns about Europe.

Brazil can be expected to continue its relentless advance in the development of its massive oil and gas assets, while recent major discoveries in Azerbaijan, Israel, Cyprus and Mozambique will further shift the balance of power among hydrocarbon-producing nations. In addition, one might expect that Iraq and Libya will continue their projected increases in production and influence, given their massive ­reserves.

East Africa will almost certainly evolve a stage further as oil and gas companies continue to add ­infrastructure to unlock the wealth potential, particularly in the area of gas.

Quint: During 2012 the nuclear ­industry worldwide will continue to resolve issues raised by regulators in the aftermath of the accident at Fukushima. The regulatory issues should not result in the shutdown of any nuclear plants in 2012, and ­operating plants should be able to implement improvements to deal with the issues without undue ­burden.

In the UK, the impact of the EU’s Large Combustion Plants Directive on power station closures, coupled with some recent major gas ­discoveries in conventional as well as unconventional gas, indicates that the natural gas industry is moving rapidly into a golden era.

It will be important for the energy industry to monitor the Government’s Energy Red Tape Challenge, which covers some 300 regulations in the UK relating to the whole spectrum of energy, from extraction to generation, safety, supply and consumption, to see what proposals are put forward in the coming year to promote the growth of a low-carbon economy.

Newbery: In broad terms, the global trend will be for progress towards the decarbonisation of the sector to ­continue, albeit at different rates in different countries.

Key policy drivers such as growing populations and increasing energy demand will, to some extent, dictate the changes in a given jurisdiction. Some countries, such as Brazil and China, will develop and maximise their fossil fuel resources to fuel their economic growth, while others will focus more on the deployment of low-carbon technologies such as ­nuclear, carbon capture and storage, and renewables.