The implications of the Japanese nuclear disaster on the European power market
Since 1973, global electricity demand has increased fourfold. As rapid economic expansion, urbanisation and electrical penetration of the developing world outpaced efficiency gains made in the West; demand for power and, in particular, electricity exploded. The trend looks set to continue.
Despite the near hysteria towards global warming and climate change, since the early seventies global CO2 emissions have continued to rise at the same rate as global power demand. Contrary to common belief, coal consumption has never stopped increasing since the industrial revolution. Over the last decade, coal has been the fastest growing energy source, meeting 47% of new electricity demand. However, the green noose strangling the hydrocarbons continues to tighten and coal’s position as the world’s leading power solution is thankfully at risk. Perhaps surprisingly, whilst the renewables have received a lot of political and public attention in recent years, penetration (excluding Hydro) remains low (less than 3% global electricity supply) due to uncompetitive costs of production and unpredictable loads. Increases in renewable energy as a share of total global consumption have been negligible. Hydroelectric generation as a share of total global production actually fell 5% over the last 40 years.
The shortfall in generation capacity has largely been filled by nuclear power, which currently accounts for 14% of global electricity production. Following twenty years without a significant nuclear incident, soaring oil and coal prices and the weight of the carbon footprint, sentiment for the industry seemed to be improving, with significant plans for capacity additions from (amongst others) France, Italy, China, UK, and Russia. Nuclear power, arguably cheaper and cleaner than its alternatives, offered a compelling solution to the power dilemma. That was, of course, until 11 March 2011, when the tragic tsunami and subsequent nuclear crisis in Japan sent shockwaves across the world, bringing the safety of nuclear power back into question.
Many countries with a vested interest in a nuclear future professed their continued support for the industry (or, like France and the UK, kept remarkably quiet about it - ignoring of course those radioactive iodine leaks in Oxfordshire). However, some governments were clearly spooked by the incident. Two points must be stressed:
(i)The conclusion that all nuclear power programmes should be abandoned, based on a disaster at an appallingly sited plant (in an earthquake zone), is illogical beyond comprehension. Energy policies must be adapted to suit their environment. It should be blindingly obvious that solar projects are ideal for the Sahara desert and not so ideal for Scotland, and nuclear plants should not be built on fault lines or in city centres.
(ii) Replacing nuclear power is a relative call. The most likely replacement plants would be coal powered and, while nuclear power causes calamity when it goes wrong, coal causes calamity when it goes right. And coal goes right a lot more often than nuclear goes wrong. The only safe coal-fired plant is one which has broken down past the point of repair. Acid rain, heavy metal pollution, mountaintop removal, open pit mining and fly-ash clouds releasing 100 times more radiation than a nuclear plant producing the equivalent energy, are some of the overlooked side effects of the coal industry. In 2006 alone, 4,749 Chinese coal miners were killed in blasts, floods and other accidents and the potential number of deaths as a result of climate change is unfathomable.
Surprisingly, it was in Germany where the repercussions of Fukushima Daiichi were most severe; perhaps imprudently, dependent on one’s view as to the probability of a tsunami in Bavaria. Seldom do we see energy policies as ambitious as Merkel’s (30 March 2011) decision to shut down the entire German nuclear fleet by 2022, a staggering 22% of the nation’s electricity generation capacity. In the short term, (assuming stable German electricity demand) 10GW of new coal/lignite capacity due to come on stream by 2013 will largely offset the deficits from the first phase of nuclear shutdowns. However by 2015 the phase out of additional nuclear plants as well as 10-20gw of older, inefficient coal plants will severely disrupt the supply/demand balance of German power, putting upward pressure on domestic electricity prices and placing more pressure on energy intensive industries to increase production efficiencies.
In conjunction with the nuclear phase out, the country also set an ambitious new set of “green goals” aiming to double the nations renewable energy capacity share to 35% by 2020 and calling for a reduction in electricity consumption of 10%.
However, renewable generation alone will struggle to meet the shortfall. At 16% of total consumed generation, renewables are already overweight in the German power mix. Integration of further renewable projects will be costly due to the unpredictability of renewable power and significant investments will need to be made to the transmission networks, including power storage and smart grid technology upgrades. Light wind conditions this spring arguably had a greater negative impact on the nation’s power generation than the closure of its first nuclear plants. For this reason, renewable operators must install a non-renewable, “backup” power supply, significantly adding to the cost of installations. Gas-fired plants are typically chosen for their cleaner credentials, cheaper development costs and shorter development times than other fuel types. Backup power will typically cover 30% of the targeted gross generation of renewable projects.
Whilst wind represents 18% of installed German capacity, it only generates 6% of the total consumed energy. In effect, you need to install three times as much wind capacity as you hope to consume to compensate for trough wind conditions. The ratios for solar installations in Northern Europe are even more alarming. This puts an effective ceiling on the maximum renewable capacity that a country can install, as any capacity exceeding this ceiling would be wasted in times of good wind/sun or low demand. On this premise, the maximum plausible increase in German renewable capacity could only replace half the required base load deficit, post 2015.
The Germans will inevitably be forced to develop coal and gas fired plants to plug the power shortfall and in the age of the carbon footprint, gas as the cleaner alternative is the preferred solution. Conventional gas is in abundance and new technologies and unconventional resources have dramatically increased supply. As domestic European production declines 1-2% annually, total gas imports will need to increase significantly and Europe will increasingly be forced to look East to Russia to compensate for lost supply. Additionally, we expect robust growth in the European LNG (Liquid Natural Gas) market, offering diversification and security of supply and cost competitive prices relative to oil linked pipeline imports. In 2000, European LNG stood at around 6% of total gas demand, by 2010 this exposure had increased to 15% and by 2020 LNG as a percentage of total gas supply could be as high as 25%.
The consequences of the Japanese Tsunami on the European power market are tangible. In an age where traditional hydrocarbons are too dirty, renewables are too dear and once again, nuclear is too dangerous, it seems probable that we will turn to gas.
The future of the European power market may be more blue than green.
