Welcome back.
The roll-call of oil and gas producers reporting sharp drops in profits continues this week, with Pioneer Natural Resources, Devon Energy and Occidental Petroleum all posting 50 per cent-plus slides in their second-quarter results as commodity prices recede from last year’s highs.
We’ve covered the waning earnings story in recent editions of this newsletter, so that won’t be the focus today.
Under the spotlight instead are two forms of low-carbon energy that have sparked debate in the US lately.
On the week that the first built-from-scratch nuclear reactor in more than three decades opened in the US, I take a look at what it means for the country’s long-heralded nuclear renaissance.
Amanda dives into the debate over tax credits for hydrogen investment as companies intensify a lobbying campaign to expand which projects qualify as “green”.
Thanks for reading. — Myles
US nuclear’s comeback is plagued with problems
It’s a big week for the US nuclear industry.
Three days ago in Georgia, Plant Vogtle unit 3 finally came online. It is the first new nuclear reactor the country has built from scratch since the Three Mile Island partial meltdown in 1979 dented enthusiasm for atomic power. Its twin — Vogtle unit 4 — will come online by early 2024.
Industry boosters celebrated the arrival of an American nuclear renaissance. Critics blasted chunky cost and schedule overruns.
So is the US nuclear sector — much maligned by its detractors — making its long-awaited American comeback?
Vogtle’s problems
While the reactor’s much vaunted arrival is indeed a milestone for US nuclear, the project — driven by utility Georgia Power — was beset by problems from the outset.
It boasts a price tag of more than $30bn — at least $16bn more than initially planned — and has come in seven years late.
The ballooning costs contributed to engineering contractor Westinghouse’s bankruptcy. Yet while other projects hit the wall — for example, VC Summer in South Carolina — Vogtle’s developers pushed ahead despite the cost.
Much of that burden will now fall to Georgia residents, whose bills have already escalated to fund the project. The final impact will depend on how much of the costs regulators ultimately deem “prudent” and allow Georgia Power to pass on.
Consumer groups and some analysts are livid.
“We’re in this mess because of the way Georgia Power and Southern Nuclear failed to adequately manage the project,” said Liz Coyle, executive director at Georgia Watch.
David Schlissel, an analyst at the Institute for Energy Economics and Financial Analysis, is more blunt: “The company screwed it up,” he said.
Much has been written about the problems in getting Vogtle online (there is more information in my Monday article here) and a strong case can be made that the plug should have been pulled years ago. But now that it has crossed the line, where does it leave the future of American nuclear?
A nuclear renaissance?
Sceptics such as Schlissel reckon investors have now been turned off, rendering the prospect of any further megaprojects in the US unlikely any time soon.
But others are more optimistic. Lauren “Bubba” McDonald, a member of the Georgia Public Service Commission since the project was permitted, told ES: “I wouldn’t be surprised if there’s not a unit five and six somewhere down the road.”
(Though he added that he was surprised nobody was fired during the project’s development given the debacle that has surrounded Vogtle.)
Driving optimism in the industry is a belief that now that one new reactor has reached fruition, the knowhow developed in the process will slash costs for the next one, and the one after that — and again after that.
As John Kotek at the Nuclear Energy Institute puts it:
“The fact that we now have thousands of workers who have been trained in nuclear quality welding or electrical work or pipe fitting or concrete and rebar placement — all of those areas and more will benefit from the fact that we’ve got people who’ve now been through a couple of large nuclear projects and can take those skills to other new nuclear builds.”
There are large nuclear projects under way in many other parts of the world. Some of these have faced similar cost and scheduling issues as Vogtle (see Hinkley Point in the UK or Flamanville in France). None is currently under way in the US.
What is receiving more attention in America is advanced nuclear technology, where companies are trying to develop (for the most part) smaller, mass produced, scalable nuclear alternatives such as small modular reactors or micro reactors. Hefty tax breaks have also helped.
And while previous so-called nuclear renaissances have floundered, the battle to tackle climate change has changed the game for nuclear, the industry argues.
“The thing that’s different now is we care about carbon today in ways that we didn’t 15 years ago,” said Kotek.
“There is a revival in the fortunes of nuclear energy driven by what I see as a long overdue recognition of the vital role that nuclear energy plays in a decarbonised economy.”
What do you think about the future of the US nuclear industry? Tell us in our poll.
(Myles McCormick)
Biden faces deadline on green hydrogen definition
The Biden administration is nearing the eleventh hour to announce what types of hydrogen projects will qualify for tax credits under the Inflation Reduction Act, as investors threaten to move projects abroad if rules are too stringent.
With its production tax credit for clean hydrogen, the landmark IRA instantly transformed the US into the most competitive market for the fuel. But that’s only for producers whose hydrogen counts as “clean” under Treasury guidelines, which are due by mid-August.
The looming deadline has sparked a fierce lobbying campaign among developers to ensure the rules will not stymie the industry before it has the chance to take off. Clean hydrogen has been hailed as the Swiss army knife for the energy transition given its potential to decarbonise hard-to-abate sectors such as steel and shipping.
“Everybody waits with bated breath,” said Adam Peters, head of North America at Air Liquide, adding that the guidance will “dictate” whether the $10bn that the company planned to invest in hydrogen development will flow more towards the US or other markets.
At the centre of the tax credit debate is whether green hydrogen — produced by splitting water with electricity — still counts as green if it uses power generated from fossil fuels. Renewables make up less than a quarter of US electricity generation, making it difficult for developers to find project locations where they will have renewable power all day long.
Climate campaigners and supporters of the most stringent rules want every hour of hydrogen production to come from a renewable source that is new and nearby in order to qualify for the tax credit. A Princeton University study found that unless producers abide by this definition, their carbon footprint could be dirtier than hydrogen produced from fossil fuels.
But industry lobbyists say this definition is too restrictive. West Virginia Senator Joe Manchin, a co-sponsor of the IRA, expressed similar views in a Senate bill report last month, urging Treasury not to impose “additional limitations or restrictions” on the tax credit.
There is growing support for a middle ground — one where developers would face looser clean energy rules in the short term before moving to stricter measures towards the end of the decade. The EU adopted this approach earlier this year, and the American Clean Power Association, the Edison Electric Institute — which represents utility companies — and the Clean Hydrogen Future Coalition — which includes BP, Chevron, Exxon, and Shell — have taken a similar stance in recent months.
In the long term, the industry faces a bigger existential challenge: lack of demand. A report released yesterday from BloombergNEF found that despite generous subsidies, the IRA does not lead to a dramatic uptake for green hydrogen due to the lack of demand incentives and cheaper fuel alternatives.
“This is not a market that’s going to be of the scale that people are talking about in the next three to five years. It’s going to take a lot longer than that to evolve to something meaningful,” said David Scaysbrook, co-founder of Quinbrook Infrastructure Partners, an investment manager. “There’s a massive expectation gap.” (Amanda Chu)
Power Points
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UK energy minister says the country is “absolutely committed” to net zero while exploiting North Sea oil and gas reserves.
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Uniper promises to learn from disastrous overreliance on Russian gas with an €8bn green overhaul.
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South America braces for the impact of El Niño, with extreme weather expected to bring $300bn economic hit to growth.
Energy Source is written and edited by the FT’s global energy team. Reach us at [email protected] and follow us on Twitter at @FTEnergy. Catch up on past editions of the newsletter here.
