Europe's nuclear fallout
What EDF's woes mean for carbon prices
Record high natural gas prices. Concerns over security of supply. Decarbonisation ambitions never been higher.
Nuclear power should be showcasing its zero carbon credentials right now. But in Europe at least, it’s all gone a bit sour.
Germany's 11-year nuclear phase-out plan entered its penultimate phase at the end of 2021 as the Gundremmingen, Brokdorf, and Grohnde power plants were decommissioned. This leaves three remaining nuclear facilities which are all scheduled to shutdown, by law by the end of 2022.
Also at the end of December, the Belgian government reconfirmed its earlier commitment (enshrined in law since 2003), to phase out its existing nuclear power infrastructure. The country’s seven nuclear plants will close by 2025.
In a sign perhaps that both Germany and Belgium were doing the right thing in phasing out old nuclear plants, neighbour France announced in mid-December that, following a regular ten-year inspection, it’s engineers had discovered faults at one its nuclear reactors. This prompted state backed energy giant EDF to close it and three other similar reactors for unplanned maintenance.
This wasn’t to be the end of the problems. In mid-January EDF announced it had found similar problems at yet another reactor, prompting its closure for repairs, and that it was now extending the maintenance outage period at the earlier four problem reactors. As a result of its maintenance woes, EDF announced that it was lowering its 2022 nuclear power output forecast from 330-360TWh to 300-330 terawatt-hours.
Recall that France relies on nuclear power for some 70% of its power generation. In order to make up the difference it will have to turn to turn to more carbon intensive sources of generation such as coal or gas. According to estimates from Mark Lewis of Andurand Capital Management that could mean an additional 20-25 MMT CO2e of emissions. This equates to 2% more carbon emissions from the EU ETS during 2022 for which power generators will have to purchase carbon allowances to cover.
What’s the likely impact on carbon prices of these nuclear shutdowns? Well, the impact will be different depending on whether nuclear curtailments are scheduled (as they were in Germany) or not (as in France), what the carbon intensity is of the alternative energy source (lignite, coal or gas), and the degree to which the carbon market is in deficit (the scarcity of emission allowances).
Research published by CRU examined the relationship between various energy prices (power, oil and thermal coal), power and industry output (nuclear generation and cement manufacture), and monthly carbon prices between 2008 and 2020. They analysed the relationship before the Market Stability Reserve was announced (2008 to mid-2018), and how things played out thereafter (mid-2018 to end 2020).
Until mid-2018 there was a positive correlation between energy prices, cement manufacture and the price of carbon. These relationships have since broken down as the market has focused on the impending supply constraints that the MSR, and other factors stemming from the EU’s increased decarbonisation ambition, and with less focus on the traditional coal-gas switching dynamics.
Of all the variables considered, nuclear power output showed almost zero correlation with the carbon price, both before the MSR was announced, and in the two and a half years afterwards. On the face if it this suggests that the impact of forecast drop in nuclear output is likely to be limited in terms of its impact on carbon prices.
However, the correlations shown in the charts above show only part of an evolving story to one where the supply / demand for allowances plays a much more significant role in determining carbon prices. After all, market participants have spent the past couple of years reacting to the MSR and have only begun to price in what the short carbon position means for prices.
The planned shutdowns in Germany and those scheduled in Belgium should have already been priced into the carbon futures curve. However, it’s the unplanned maintenance issues that could really have an impact. As the EU carbon market moves to an even more extreme supply constrained future, this will mean that even marginal changes in demand for carbon allowances balloon in importance.
Is that even the end of the troubles for EDF? Past experience in France and Japan suggests that once issues crop up at one plant, problems are quickly identified elsewhere in the nuclear fleet necessitating further shutdowns and extensions to maintenance schedules.
