Pricey Things
Monday 20 March 2023
Nuclear power generation in the United States will finally bump up a little this year, as 2.2 GW of new capacity comes online at Georgia’s Vogtle. The last new nuclear capacity to come online in the US was the second phase of Watts Bar, in 2016; and then twenty years prior with the first phase of Watts Bar, in 1996, and before then the second phase of Comanche Peak in 1993. The US has of course lost a great deal of nuclear capacity as plants like Pilgrim in Massachusetts and San Onofre in California simply got too old, and retired. Accordingly, US power generation from nuclear has been on a treadmill of no-growth for decades. To set the context, compare nuclear’s output since 2010 with combined wind and solar:
Vogtle is currently ramping up, and achieved initial criticality earlier this month. By summer, output will be flowing and will produce about 17-18 new TWh per year. You can visit the interactive version of the above chart and roughly see that these new 17-18 TWh per year will likely push total US output back towards 800 TWh per year, without quite getting there. The question then becomes: is more nuclear power on the way in the US? Probably, and rather unfortunately, no. At least, that’s the conclusion of a well conceived piece by Eric Wesoff at Canary Media, Georgia’s big new nuclear reactors could be the last built in the US. Wesoff correctly turns most of his analysis on the promise of advanced nuclear, as contemporary companies like NuScale and TerraPower pursue new designs and regulatory approval. There’s no question the Department of Energy is a supporter of new nuclear but the path to construction is arduous.
One concept that just about everyone agrees on is the importance of modularity in any new push for new nuclear capacity. That’s a word that bundles a package of qualities intended to finally get control over nuclear’s track record of gargantuan cost overruns. The basic idea: design, build, test, improve, and only then deploy to an actual site. These plants would be smaller, but eventually more replicable. Another way to think about modularity: as an attempt to reverse nuclear’s negative learning rate, in which it’s always becoming more expensive, to a positive learning rate, where costs through production actually fall.
Nuclear power and Direct Air Capture are two decarbonization technologies that are habitually rejected based on complexity and high costs. But perhaps we should adjust our view. Longer term readers of The Gregor Letter know this publication’s basic position on new nuclear: wind, solar, and batteries have clearly won the leadership position in clean power growth based on cost, and fast construction timelines. However, without some new nuclear to pull up the rear, natural gas adoption will continue to flourish.
We can apply this same principle to Direct Air Capture, a technology to remove CO₂ through the deployment of absorption technology arrayed over a large piece of infrastructure. Indeed, Direct Air Capture’s costs are not fully understood yet, because the world only has small, demonstration scale models in current operation. That’s about to change, however, as the first industrial scale installation is currently being constructed in Texas, and is expected to come online late in 2024.
Let’s consider, again, the following proposition: every clean energy technology we deploy today from EV to batteries to wind and solar curbs the future growth of emissions. But, these do not deliver us quickly enough to outright emissions declines. In the power sector, that’s because natural gas growth globally is robust. In transportation, the central figure remains oil. And when it comes to global CO₂ we continue to add 32,000 to 34,000 million tonnes of carbon dioxide each year to the existing inventory. And that’s just from energy combustion. Even if you project that global emissions stop growing, we would still be producing those volumes annually. And even if you project declines, the declines are not likely to be rapid.
Why not have some technologies in your portfolio that are admittedly high cost? That’s the point of a portfolio approach. All too often, the discussion of nuclear power and carbon removal degrades into either/or propositions. The better view is to be rightly enthusiastic that wind, solar, batteries, EV, the broader electrification of transport, and other cleantech are all coming down in cost. Dirt cheap solar, for example, should be regarded not only as the rapid, low-cost leader in new power generation but as a decarbonization strategy that does double duty by creating the savings needed to fund other, more costly parts of the portfolio.
If we pursue nuclear power and carbon removal more aggressively, these technologies will also come down in cost, and they will amplify the progress of decarbonization. They are not fated to ever be as low cost as the current decarbonization leadership, and that’s fine. So let’s stop engaging in the already-settled cost question, and move on to a portfolio framing.
Natural gas is the world’s fast growing fossil fuel, with total consumption increasing 28% from 2010 through the end of 2021. Oil consumption grew by 6.8%, and coal consumption grew by 5.9%, in the same period. In two previous issues this year, The Gregor Letter has explained the natural gas problem largely within the confines of power systems, and how stellar growth in wind and solar is still not enough to counter natural gas’ low cost and competitiveness in new power generation. And additionally, how natural gas is wrecking the nice emissions decline that the US had started to put together after 2010. The success that natural gas is having globally means that both its production and consumption are hitting all time highs, not just in the aggregate, but in many countries and domains. The world loves natural gas. And in part, that’s because the effort to dump coal was almost universally embraced.
If you are a climate activist, you should be concentrating your efforts now in only two areas: getting the existing ICE vehicle fleet under control with taxation, curbs, and other disincentives. And now, trying to head off further embedding of natural gas in global power, industrial, and consumer applications. As you consider the chart below, a good question to ask: how much market share growth lies ahead for natural gas if it’s not meaningfully interrupted, from its current trajectory?
Natural gas held a 22.3% share of total global energy consumption in 2010, and is the only fossil fuel to have gained market share since, as oil’s share and coal’s share fell. Renewables receive high marks for their growth in this period, where the advance has been—and will continue to be—spectacular. But it’s not enough. That’s why The Gregor Letter is increasingly taunting, poking around the problem with increased discussion of nuclear power, and now, direct air capture. We must ask the question a second time: where do you think global natural gas share will be, as coal and oil continue to fall in share? You’ve only got three boxes up there: hydro, renewables, and nuclear that can shoulder the burden, and most experts agree there is not much growth ahead in two of those boxes, hydro and nuclear. Those who continue to maintain that renewables alone will get the job done need to confront the fact they’re relying on just one box. And if you’re not asking for any help from nuclear, well, then you’re refusing any help from nuclear.
Global oil prices peaked nine months ago and have been in a slow downtrend ever since. And now with stress in the banking system, prices have fallen to one year lows. Yet, the IEA is forecasting a banner year for oil demand growth. The Paris-based agency sees demand rising to a new all time high, around 102 mbpd. It really doesn’t make much sense, frankly, but the history of IEA overestimating demand is well established.
The Biden administration sold oil out of the government’s strategic reserve last year at an average price of $96.00 a barrel. And now, the administration’s in a position to start buying that oil back, at a nearly 30% discount. Whether you think this is an example of a good strategy well executed, or, an ill-advised policy that just happened to turn out well, we should probably be aware that calling upon the SPR (strategic petroleum reserve) is going to become a part of the Presidential toolkit, in the future.
The US doesn’t have a state run oil company. But it does have a state run oil reserve. On a shorter timeline, therefore, a reserve is just as good as a state oil company that one can leverage to constrain an upside run in prices. And that’s a discovery, at the federal level, that you can probably never put back in the bottle. | Analysis of the average selling price comes from The Wall Street Journal.
The global rate hike cycle has crashed into a wall. Yes, the ECB raised rates just last week—which looks foolish now in the wake of the national takeover of Credit Suisse. And, the US Fed is still expected to raise rates this week, by a small .25%, if it raises at all.
The bigger picture however is that the hiking cycle greatly reduced the value of mortgages and US treasury bonds on the balance sheet of US regional banks like First Republic and of course Silicon Valley Bank, thus damaging their capital base. As this became known, investors and depositors took action. Bank runs generally begin with math, but are mostly about human reactions, and human behavior. And in the past two weeks, the share prices of US regional banks have crashed on fears that depositors will exit en masse, placing their dollars either in protected money market funds or directly into short-term government bonds.
Future rate hike expectations, understandably, have also crashed and the bellwether Two Year Treasury—which had been precariously following hike expectations ever higher, climbing from 4.00% to over 5.00% in just five weeks—fell dramatically to under 4.00% and now sits there, waiting for the next move from the US Fed.
What to make of it all? The Gregor Letter has expressed grave doubt about the Fed’s aggressive pace of hiking, and has noted that the Two Year Treasury started to balk at the prospect of more hikes at levels above 4.00%. In the chart above, you can see that after September of last year, the Two Year yield kept falling back towards 4.00% even as the Fed hikes continues. The terminal move therefore came in a compressed timeframe, typical in markets, thus the final advance to 5.00% now looks like a mistake: the Fed was clearly wrong about going much further, and interest rates were wrong to follow.
The Fed’s inflation fight is probably over. Banking system problems tend to generate such broad and sustained tightening of credit and financial conditions that even backstops, bailouts, and other guarantees are not able to overcome those pressures in the near term. Inflation is already on a downtrend. But assuming it falls further, and thus yields continue to fall, this will actually have a healing effect on regional bank balance sheets as the value of their US treasuries and mortgage bonds start to recover. What the Fed, the banking system, and the economy needs now is a slowdown that doesn’t go too far. The banking system issues will absolutely help deliver that slowdown. The risk remains the same: that the downshift morphs into something more protracted.
—Gregor Macdonald
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the 2018 single title is newly packaged and now arrives with a final installment: the 2023 update, Electric Candyland. Just hit the picture below to be taken to Dropbox Shop.
