Natural gas price puts damper on nuclear power

Low natural gas prices could ultimately have a bigger effect than the reactor crisis in Japan in terms of putting a damper on investments in new nuclear power plants, experts say.

Unlike past nuclear disasters at Three Mile Island in 1979 and Chernobyl in 1986, market-watchers don't expect Fukushima to freeze support for nuclear power. But the industry could feel a chill nonetheless, they say, because economics guide development decisions and the price of gas is just too good to ignore.

"It is certainly hard to see in this post-Japanese tragedy how natural gas doesn't have a more positive view," said Carl Kirst, senior research analyst with BMO Capital Markets.

Kirst follows TransCanada, which has extensive gas holdings. It also owns a 40 per cent net stake in Bruce Power, Canada's only private nuclear generating company, which is completing work on repowering the Bruce A reactor.

Natural gas is the only fuel source that did not increase in price over the past year, partly due to the fact that new extraction methods have caused estimates of natural gas reserves to skyrocket.

That will have a significant impact on plans for the construction of new nuclear reactors. Energy analysts predict demand for natural gas will increase in the wake of the Fukushima nuclear accident as countries, including Japan, seek to expand their energy mix and reduce risk.

Carbon question

The case for natural gas isn't clear-cut, though. Nuclear supporters point out that another factor in the debate over the future of Canada's energy mix is the issue of carbon costs: add it to the bill for oil, gas and coal-fueled electricity generation and nuclear power becomes a more affordable option.

The reason can be found in the decommissioning and disposal costs associated with nuclear power, which unlike other energy sources, is included in the base energy costs. Carbon costs, however, aren't factored in.

A 2007 MIT study concluded the cost of nuclear power was about 2 cents per kilowatt hour higher than natural gas and coal. However, add carbon charges to the equation and nuclear becomes a more cost-effective option.

"Without a carbon cost, nuclear cannot compete with gas and coal for a new build," Duane Bratt, an energy policy expert at Calgary's Mount Royal University, says.

Until that happens, the nuclear industry will face challenges pushing new projects forward if gas prices and interest rates maintain their current trajectory, says Bratt, who expects loan guarantees to increase.

The outlook is a bit better for nuclear restarts, because it's a different calculation. Sunk costs - the billions already spent building the plant - combined with replacement costs to build new electricity generation, make retrofitting existing plants more palatable to investors and policy makers.

Uranium demand

This isn't to say that the nuclear industry will be untouched by the Japanese disaster itself.

Stock analysts for Saskatchewan-based Cameco, the world's largest uranium producer, have already downgraded forecasts in the wake of the Fukushima accident.

'We do not believe the nuclear renaissance will come to a complete halt following the events in Japan, but there is certainly potential that some reactor construction gets delayed, particularly in earthquake prone areas.' —Greg Barnes, TD Securities

"We do not believe the nuclear renaissance will come to a complete halt following the events in Japan, but there is certainly potential that some reactor construction gets delayed, particularly in earthquake prone areas," wrote Greg Barnes, base metals analyst for TD Securities.

Japan accounts for approximately 12 per cent of global uranium demand, and a drop in sales will not be easily replaced by other customers.

Other countries are also scaling back demand for uranium. Following the Fukushima disaster the German government announced a three-month closure of seven reactors constructed before 1980, and China halted its nuclear expansion program. Both decisions were made in the interest of reviewing safety standards, according to officials.

Development costs

Despite these decisions by countries that rely on nuclear power, RBC Capital Markets analyst Adam Schatzker believes uranium prices will rebound in the long-term.

"The vast majority of governments that are licensing new nuclear reactors will slow the process, review the outcomes from the Japanese disaster, and then proceed with the new reactor construction utilizing improved safety regimens," he says.

But these additional safety requirements could add to the already substantial up-front costs of nuclear power projects. Approximately 65 per cent of nuclear plant costs are spent during the construction phase, which increases the financial risk for an industry that, in Canada, is controlled by Crown corporations.

That is why it's difficult to separate politics from the business of nuclear power, says Mount Royal University's Bratt. "Investors won't be as swayed by media stories as politicians are."

And in Canada, another rising cost will be liability insurance.  Countries with nuclear reactors require operators to carry insurance, but Canada's legislation is outdated. It caps company payouts at $75 million, with government covering other claims.

MPs were poised to approve a new nuclear liability act that would increase liability to $650 million. but the order paper died, along with other bills, with the dissolution of Parliament and the March 26 election call.

Even with that increase, government will continue to be responsible for the bulk of the costs of a nuclear disaster in Canada, says Tim Weis, director of renewable energy and efficiency policy at the Pembina Institute.

That's further proof, he says, that nuclear energy isn't a good investment for governments - or taxpayers.

"Nuclear has all sorts of government subsidies, and it has from day one," says Weis. "When it comes to energy we have to decide where are we going to put our eggs, and right now the cost trends on renewables are going down, whereas with nuclear it is trending up."