Diablo Canyon Resurrected?
For many years, nuclear power met a sceptical pushback in the US and in Europe. Keeping aging reactors online no longer made economic sense in an energy climate increasingly dominated by solar and other renewable sources. In the aftermath of the Fukushima nuclear disaster in Japan in 2011, many governments in Europe sought to bring forward closures. Energy security concerns were something to worry about tomorrow, not today.
As the global energy crisis has intensified over the past few months, and especially in the aftermath of Russia’s invasion of Ukraine and more frequent power blackouts, all options are now back on the table. For many countries that includes the nuclear option.
Earlier this month, Pacific Gas & Electric (PG&E), the operator of the Diablo Canyon nuclear facility in California, announced that it would apply for a share in the $6 billion Civil Nuclear Credit (CNC) program. The program was launched on 19th April 2022 and aims to keep financially strapped nuclear facilities across the US open (see California's carbon market: The 6 factors to pay attention to right now).1
Diablo Canyon’s two reactors are currently scheduled to close completely in November 2025 and August 2025 when the plants federal 40 year license expires. The facility accounts for almost 9% of in-state electricity generation, but crucially 15% of California’s zero carbon power generation.
PG&E had been one of the voices eager to shutdown the facility, concerned that it no longer made economic sense to keep it open. But now with fears over power blackouts in the state becoming ever more acute and under pressure from California’s governor, PG&E’s management have changed their tune.
If the plant does close on schedule then campaigners warn that California’s energy security will be under threat as renewable energy is insufficient to meet base load capacity (see Parched: How California's drought impacts the carbon market). To compensate the state would have to import more power from outside the state. This is likely to have been generated through the burning of thermal coal and natural gas, thereby pumping even more carbon into the atmosphere.
More fossil fuel generation means more demand for California’s carbon allowances (CCAs). However, if PG&E’s application is successful and the facility remains in operation beyond 2025 then there would be less demand for emission allowances, a headwind for the longer term CCA price outlook.
The CCN news initially proved bearish for CCA prices, but with an initial end date for applications of 5th July, it looked increasingly unlikely that California would submit in time. Note that I’ve used data from the KCCA carbon ETF as a proxy for CCA price developments (see How to invest in North America's carbon markets).
CCA prices subsequently rebounded, only for the application deadline to be extended until 6th September. Coupled with PG&E’s stated intention to apply for funding, CCA prices then retreated as the likelihood of Diablo Canyon being resurrected from imminent closure appears to have increased.2
According to the Office of Nuclear Energy, the body which runs the CCN scheme, preliminary credit award decisions are likely to be made “as soon as 30 days following the deadline for submission of certification applications and sealed bids”.3
In the program’s first phase, grants are restricted to plants that had publicly announced they would close down prior to end September 2026. Of the 93 operating nuclear reactors in the US, just three meet that qualification. The Palisades reactor in Michigan, which is scheduled to close in May 2022, and the Diablo Canyon reactors 1 and 2 in California, with planned closing dates of November 2024 and August 2025, respectively.
https://www.energy.gov/sites/default/files/2022-06/US%20DOE%20CNC%20Guidance-Revision%201-June%202022.pdf
https://www.energy.gov/ne/frequently-asked-questions-civil-nuclear-credit-program