Navigant Research Blog

Inaction on Energy, Climate Change Risks Global Chaos

— May 16, 2014

The crisis in Ukraine has provided the West with a stark reminder of an inconvenient fact: Many of Europe’s liberal democracies are heavily dependent on Russia for their energy supplies.  The latest move by Vladimir Putin in his campaign to destabilize the fragile elected government of Ukraine came this week, as he announced that supplies of natural gas to the country would be cut off at the end of May unless Ukraine pays for them in advance.

Ukraine owes Russian gas giant Gazprom $3.5 billion, Putin said in a May 15 letter to European leaders.  In April, Gazprom responded to the ouster of former Ukrainian president Viktor Yanukovych with a sharp hike in the price of the gas it sells to Ukraine, going from $268 per 1,000 cubic meters to $385.  Russia has throttled its gas pipelines into Ukraine twice before, in 2006 and 2009.

Russia supplies around 27% of Europe’s natural gas, according to – much more in the case of former Soviet Bloc countries like Bulgaria (85% of its gas comes from Russia) and the Czech Republic (80%).  Nearly half of the gas headed west to European markets flows through Ukraine.

The Law of Possession

Russia’s takeover of the Crimean peninsula has also thrown into turmoil plans for developing offshore oil & gas resources in the Sea of Azov and the northern Black Sea, where Chornomornaftogaz, Ukraine’s state-owned oil & gas producer, controlled rich oil & gas fields and at least a dozen offshore drilling platforms.  Since the annexation of Crimea, Russia has laid claim to those resources.  “If this is a part of Russia,” declared Denis Khramov, Russia’s deputy natural resources and ecology minister, “then it is subject to Russian law.”

Energy chaos on the edge of Eastern Europe has already prompted Fitch Ratings to warn that cutting off Russian gas supplies to Europe could derail the fragile economic recovery on the continent.

All of this points to a further sobering truth, of which Western democracies must be forcefully reminded at least once a decade: There is no national security without energy security.  This fact will be less and less escapable as the effects of climate change accelerate, according to a major new report from CNA Corp., a strategic risk analysis firm in Arlington, Virginia.  Written by the company’s Military Advisory Board, a panel of former high-ranking military officers, the report warns that inaction on climate change is seriously undermining the post-Soviet world order, destabilizing critical regions, fomenting terrorism, and endangering irreplaceable supplies of water and energy.

No Security without Energy Security

“The volatile mixture of population growth, instability due to the growing influence of nonstate actors, and the inevitable competition over scarce resources will be multiplied and exaggerated by climate change,” the report says.

That conclusion was echoed by Helge Lund, CEO of the Norwegian oil & gas major Statoil, in an address at Columbia University’s Center on Global Energy Policy Spring Conference.  “Energy policy is economic policy,” Lund remarked, adding that “Now is the time to support investments that spur carbon reduction.  In that perspective, we at Statoil are strong believers in a high carbon price.”

What a growing chorus of top generals and admirals and senior business executives is saying is this: The proliferation of renewable energy sources, the spread of energy efficiency and conservation measures, and the reduction of reliance on fossil fuel imports from volatile (or hostile) states aren’t just feel-good green policies; they’re critical strategic responses to the harsh realities of climate change and growing resource conflicts.  The world leaders who would resist a price on carbon include Vladimir Putin, whose expansionist tendencies and contempt for the censure of Western democracies is based on his country’s energy might.

If the world fails to act, wrote retired Rear Admiral David Titley, former head of the Navy’s task force on climate change, in the CNA report, “I am afraid we will soon start getting into varsity-level instability.”


In Reinvention, TVA Wrestles with Uncertainty

— May 9, 2014

This week’s release of the Third National Climate Assessment – which demonstrates that the effects of climate change today are much more widespread, pervasive, and destructive than previously understood – and the decision by Stanford University to cleanse its endowment of $18 billion in investments in the coal industry have increased the pressure on U.S. utilities to reform their business models, restructure their fuel mixes toward cleaner fuels and away from coal, and embrace the distributed energy model that is gradually replacing the centralized grid.  Nowhere are those pressures more apparent than at the TVA Towers, the Knoxville, Tennessee headquarters of the Tennessee Valley Authority (TVA).

TVA is being forced to remake itself at a more rapid pace than other utilities, thanks to the settlement of a historic lawsuit filed by the state of North Carolina and the U.S. Environmental Protection Agency in 2011.  The agreement called for a drastic reduction in TVA’s coal-fired power generation capacity and a variety of clean-up measures at the remaining plants.  In essence, TVA – which is one of the nation’s largest operators of both coal and nuclear plants and is attempting to complete and fire up the second nuclear power reactor at its Watts Bar Plant in central Tennessee – is being shoved out of the business of burning coal.

Time to Go

In fact it is time, according to a new report from the conservative Heritage Foundation, for TVA to go the way of the Works Progress Administration and the Rural Electrification Administration – other New Deal federal agencies created to create jobs, spur economic development, and bring light and power to America in the depths of the Depression – and shut its doors.

Unique among U.S. utilities, TVA is a quasi-federal agency that was created with an explicit socioeconomic mission beyond the business of supplying electricity to its customers: to develop the Tennessee River into a navigable waterway, to bring prosperity to some of America’s least developed regions, and to be a steward of the region’s resources.

“The navigation waterway is built, though lightly used,” writes Ken Glozer, author of the Heritage report.  “Electricity is widely available, though rates are among the highest in the Southeast; and the people of Tennessee enjoy a good standard of living.  The most effective way to restore efficiency to the TVA system and to relieve federal taxpayers of a significant liability is to sell the Authority’s assets in a competitive auction.”

End of the Coal Era

Going fully private is hardly what TVA CEO Bill Johnson had in mind when he told shareholders and audience members at the Authority’s May 8 board meeting in Memphis that the 81-year-old organization is cutting expenses and refashioning its power generation business in order to meet the region’s power demands with rates below the U.S. average, while replacing coal with more renewable sources of power generation and instituting far-reaching conservation and efficiency measures.  TVA has already shut down its John Sevier coal plant near Rogersville, replacing it with a state-of-the-art combined cycle natural gas plant, and plans to shut down several more, including the massive Johnsonville plant, the largest coal plant in its fleet.

Johnson also said that TVA’s debt, which in recent years has edged closer to the $30 billion limit imposed by Congress, is coming down.  Debt reduction, he argues, will help the authority in its plans to open new co-generation plants that would use biomass in combination with coal to produce both heat and steam.  The co-generation project “is a perfect example of how our improved financial condition has put us in a condition to take the steps to do this,” said finance chairman Peter Mahurin at the board meeting.

The steps TVA is taking to remake itself for the 21st century are ambitious and could provide a model for other large utilities – unencumbered by TVA’s ties to the federal government, its complicated history, and its high debt load – to follow.  Whether they’ll be enough to enable the Authority to survive and prosper remains to be seen.


Coal Reduction in China a Long Struggle, Not a Great Leap

— May 2, 2014

For years, air pollution in Beijing was considered a minor annoyance by Chinese citizens and foreign residents, something to be put up with and joked about, akin to Hong Kong’s fogs, Bangkok’s traffic jams, and Jakarta’s monsoons.  It was part of the cost of getting in on the China boom.

In the last year, that has changed.  Partly as a result of the airpocalypse in September 2013 that made Beijingers virtual prisoners in their apartments, air pollution is now recognized as a deadly threat and a serious impediment to continued economic growth.  At the Coaltrans conference in Shanghai in early April, more than one executive told me that expatriates have begun to flee the Chinese capital for Hong Kong, Singapore, or their home countries.  “You can’t pay people enough to live in Beijing anymore,” was a common remark.

The Chinese government responded with an ambitious plan to reduce air pollution specifically by curbing coal consumption.  The world’s largest consumer of coal, China burns nearly as much coal every year as the rest of the world combined.  This matters not just to inhabitants of China’s coastal metropolises, but also to the world: “China’s coal consumption has become the single most significant determinant for the future of the world’s climate,” wrote Greenpeace in an April report.  In other words, it doesn’t really matter what the rest of the world does; if China can’t control its rampant coal burning, our chances of  limiting catastrophic global warming are virtually nil.

Hurrah, Maybe

That’s why the government’s plan has been met with cautious applause from climate researchers and environmentalists.  The plan called, for the first time, for specific coal consumption targets in China’s provinces.  So far, 12 of China’s 34 provinces have pledged to implement absolute coal consumption targets, and six have said they will reduce their coal use by 2017, with greater Beijing cutting coal use by 50% in the next 3 years.  If successful, these measures could reduce CO2 emissions by 700 million tons (MT) in 2017, according to the Greenpeace report, The End of China’s Coal Boom, and 1,300 MT in 2020 – an amount equal to total emissions from Canada and Australia combined.

That would be a huge victory.  Unfortunately, it’s unlikely.  For one thing, the provinces pledging to reduce coal use are mostly strung along China’s east coast, and they do not include the major coal-producing regions of Shanxi, Xinjiang, and Inner Mongolia.  The other part of China’s plan for its coal industry is to move power plants closer to the mines of the interior, creating enormous coal clusters where power plants will burn coal to make electricity and send it, via massive ultra high-voltage transmission lines, to the cities of the coast.  The coal clusters will also include coal-to-liquid and coal-to-gas plants, chemical factories, cement plants, and other heavy industry, along with coal cities for workers.  (This report from Inside Climate News provides a detailed look at China’s coal bases.)  This plan will most likely increase the country’s overall coal use, not reduce it.

Not Enough Nukes

What’s more, China’s demand for power is certain to keep growing in the next decade.  That power has to come from somewhere.  According to a new report from consultancy Wood Mackenzie, the majority is still going to come from coal over the next 2 decades.

China’s central government has set a goal of increasing the country’s nuclear power capacity from 14.6 gigawatts (GW) in 2013 to 200 GW by 2030.  While the nuclear industry in China will make significant progress, the 200 GW target is unreachable, says Wood Mackenzie; 175 GW is more plausible.  The pace of nuclear technology development, a lack of skilled personnel, a shortage of uranium fuel fabrication capacity, and public opposition will all slow nuclear progress.

The result?  Power generation from coal will still account for 64% of China’s supply in 2030, close to the current figure.  That view counters the encouraging trends in certain provinces.

“China’s coal story,” says Gavin Thompson, chief of Asia Pacific gas and power research for Wood Mackenzie, “is far from over.”


mPower Pullback Stalls Small Nuclear

— April 25, 2014

Asbestos_webNuclear technology supplier Babcock & Wilcox (B&W) has slashed funding for its Generation mPower program, an effort to develop a small modular reactor (SMR) for power generation and other applications.  The pullback represents a major blow to the development of SMRs, which have been hailed as the next step forward for the nuclear power industry.

B&W, which had a cost-sharing agreement with the U.S. Department of Energy (DOE) and a reactor construction contract with the Tennessee Valley Authority (TVA), has cut funding for the program from $60 million to $80 million per year to less than $15 million, let go the head of the mPower unit, and will lay off up to 200 employees who worked in Tennessee and Virginia on the project.  The TVA mPower reactors were to be built at the Clinch River site in northern Tennessee, once slated to be the home of the similarly ill-fated Clinch River Breeder Reactor, which itself was terminated in the 1980s after around $8 billion in investment.  Clinch River has become the place where nuclear power innovation goes to die.

Smaller, Simpler, Safer

For nuclear power advocates who point out that nuclear is the only generation technology that can supply low-cost, zero-carbon baseload power, the demise of mPower is keenly disappointing.  SMRs offer several advantages over traditional large-scale nuclear power: they could be manufactured in factories, assembled onsite, and arrayed in multiple reactor configurations to scale up capacity incrementally.  Small enough to be deployed in remote locations, they are nominally safer than big reactors because they can be built in sealed underground chambers.

With lower upfront capital costs and an easier path to licensing, SMRs should, in theory, offer a more attractive proposition for investors – which proved not to be the case with mPower.

In our report, Small Modular Reactors, Navigant Research developed two forecast scenarios for worldwide SMR capacity in 2030. Under the base scenario, total capacity would reach 4.6 GW in 2030; the conservative scenario projects 18.2 GW by the same year.  Even the lower forecast seems optimistic now.

Dead End

All told, B&W, the DOE, and partners have spent around $400 million on the mPower program.  Another $600 million was needed just to get the technology ready for application to the Nuclear Regulatory Commission for licensing.

mPower was done in by investor mistrust of nuclear power, low prices for natural gas in North America, the backlash from the Fukushima Daiichi disaster in Japan, and the difficulty of licensing unconventional nuclear technology in the United States.  B&W said last year it would seek a majority investor in the project but was unable to secure a buyer.  The company had also hoped to secure additional utility customers, but power utilities in the United States are focused on low-cost generation from coal and natural gas in an era of flattening demand for electricity.

B&W plans to continue low-level R&D on the mPower technology with a view to commercial deployment in the mid-2020s, said CEO James Ferland.  But without a major shift in the business environment and in investor perceptions of the risks and rewards associated with nuclear power, that seems fanciful.


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