First published in the Quoted Cleantech Newsletter - December 2009. Copyright Cleantech Investor Ltd. 2009

by Nigel Hawkins

Over the coming weeks, many eyes in the energy sector will focus on the climate change summit in Copenhagen, where it is widely hoped – if not expected – that major reductions in long term carbon emissions will be agreed. More than 60 world leaders are already booked in to attend this summit. Given the complexity of the issue, notwithstanding the need to guard national interests, a far-reaching deal emulating that at Kyoto is an unlikely outcome.

In fact, most attention will surround the stances adopted by the US and Chinese Governments, which between them account for 40% of global greenhouse gases.

In the case of the US, any agreement to bring about major emissions reductions would need Senate approval. However, a draft bill has now been drawn up, proposing a 20% cut in emissions by 2020. The Chinese situation is also fraught with difficulty given that its economic growth rate still remains formidable. As such, more energy is needed to boost output levels, much of which is likely to be provided by coal-fired generation.
 
India, too, is in the midst of economic expansion – and also of power shortages. Its policy statements at Copenhagen will be studied carefully.

Whilst emissions reduction figures will be widely debated, the issue of nuclear power is bound to be in the background. After all, nuclear power stations emit virtually no carbon dioxide. And, as a general environmental principle, more nuclear investment will reduce the need for renewable generation capacity, the ramp-up of which in most countries remains very challenging.
 
However, recent events have seriously dented the prospects for new nuclear-build projects, which – in any event – are orientated towards the long term.

Most notably, potential investors in new nuclear-build will be very aware of the weakness of world gas prices, and especially those in the US. The recession was a key factor in bringing down oil prices but, more recently, the deferred linkage between oil and gas prices seems to have frayed. In part, new gas recovery systems from shale sands in the US are responsible – as well as for the low use of LNG import facilities.  

On the nuclear front, there has been a raft of bad news, which has seen the share price of EdF, the world’s largest nuclear operator, fall quite sharply as its nuclear output remains below expectations and its net debt exceeds €35 billion. From a share price of €70 in June 2008, EdF’s shares are now below €40: EdF, as a utility, is meant to be reasonably recession-proof.

At Olkiluoto in Finland, the first new EPR plant is experiencing serious overruns, in terms of both time and budget. And at EdF’s Flamanville site in Northern France there is a similar trend, with costs rising well above the projected €3.3 billion (at 2005 prices) of the 1,600MW capacity plant.

More seriously, perhaps, some technical issues have been raised about certain control systems within the EPR design – a disturbing development as Areva seeks to sell the EPR model worldwide.  

Hence, if new nuclear-build for various reasons fails to take off, there will be increased demand either on the renewables sector, if major emissions reductions take priority, or on gas-fired generation, if security of supply becomes paramount.

Of course, coal-fired generation could make a comeback. Despite some progress on carbon capture and storage (CCS) technology, it is many years from becoming commercial on a large scale.
 
The reality is that, given all the uncertainty on general economic issues, on the global financing system, on new nuclear-build and on the future of gas supplies and prices, Copenhagen may well deliver little more than pious hopes and woolly aspirations.

Nigel Hawkins is a Director of Nigel Hawkins Associates, which undertakes investment and policy research, mainly in the utilities sector.