Snake oil

Step right up, and have your cash in hand.

“Our children will enjoy in their homes electrical energy too cheap to meter,” predicted Lewis Strauss, Chair of the US Atomic Energy Commission in 1954. The fusion power that inspired his comment remains only experimental to this day, and the best guess is that commercial fusion generation facilities will not be online before 2050. An entire industry should not be condemned for the hubris of one person, but this particular industry has a long history of over-promising and under-delivering, whether the technology in question is fission, thermonuclear fusion, or cold fusion. Members of the public, and their elected representatives, would do well to take the claims of nuclear proponents with a grain of salt.

Comparing nuclear power to competing technologies such as fossil fuel-fired thermal generation and renewable generation is nightmarish. The reasons are the fundamentally different characteristics of cost of capital, initial capital outlay, demand risk, design risk, accident risk, externalities, and sheer project scale. Still, each of these factors can be broken down and quantified, and intrepid experts have done so. For simplicity’s sake I’ll stick to a qualitative comparison.

First, nuclear power is now and ever will remain a state-owned enterprise during construction, and will retain a heavy level of state support during operation and final decommissioning. The state has a different cost of capital than the private sector; it is meaningless to make a direct comparison between a project undertaken with public funds and one financed by the private sector.

A new nuclear power plant requires a massive amount of capital for initial construction, and that capital generates zero return until the build is complete. The timeframe of construction is long, and can have significant variances (more on this below). A project requiring a huge investment that sits idle for an unknown period of time before it produces the first dollar of revenue is a project that will send private investors running in the opposite direction. A new plant must be financed using taxpayer dollars, because the private sector won’t touch it.

Then there is the risk that electricity demand will shift dramatically during the course of construction. The longer the construction timeframe, the greater the risk that the facility will turn out to be too much or not enough. Of all energy generation technologies, nuclear has the longest timeframe between committing to the project and producing the first kilowatt. What’s more, the construction process is extremely sensitive to any mid-stream changes. If it becomes clear that demand predictions are off base, it is hugely expensive to change course partway along. The final construction cost of Canada’s Darlington Nuclear Generating Station was nearly double the original estimate, principally because two of the four reactors were postponed. It is almost better just to build according to the original plan come what may.

However, a damn-the-torpedoes approach may well be impossible. In addition to demand risk, there is also design risk. This the possibility that, partway through construction of the new facility, the government may be forced to respond to new public concerns. A major nuclear disaster like Chernobyl or Fukushima can lead to huge outcry, a significant tightening of standards, extensive design changes, and staggering cost increases. It is like trying to change a tire on a car that is still barrelling down the highway.

Once the plant is built and in production, there is the risk of catastrophic accident. No private company can secure the amount of insurance necessary to offset this risk. This means that the state must assume the role of insurer, with taxpayers paying the bill if something terrible happens.

Another consideration during plant operation is fuel. Uranium must be found, mined, processed, and transported. After it is used up, the spent fuel must be stored – more on that below. Like oil, uranium deposits tend to be found in countries with a nasty political climate. These countries have yet to band together to squeeze prices in the way that the OPEC nations have, but you can bet it will happen if industrialized nations make a significant new commitment to nuclear power. This will significantly increase operating costs for nuclear plants, and may necessitate military intervention to secure supplies in the same way that we have seen repeatedly with petroleum.

A final operational factor is responsiveness. Starting up and shutting down nuclear plants is very costly, not to mention potentially dangerous – it was experimentation with emergency shut-down procedures that led to the Chernobyl disaster. Hence, nuclear reactors are best left running even when demand isn’t there. This leads to the perverse situation where the utility actually pays its customers to consume power, to avoid having to dial back output from nuclear generators during off-peak periods.

No plant lasts forever. Once its usable life has ended, a nuclear plant must be decommissioned. The high level waste, such as spent fuel, is relatively small in quantity but astoundingly dangerous and remains so for thousands of years. Low-level waste, such as plant structural components and worker safety equipment, is less dangerous but there is a lot more of it. Plant operating companies are mandated to set aside a reserve fund to pay for storage of this waste for mind-boggling timeframes, but the evidence is that they are failing to do so. Once again, that cost will eventually fall on the taxpayer.

Let’s look at how each of these factors stack up for fossil fuels and renewables.

Fossil fuel-fired thermal plants require a much more modest capital outlay and have far shorter construction timeframes than nuclear, and the private sector finances these projects with enthusiasm. These projects rarely appear on the radar of the public at all, and if they do they can be re-jigged or delayed with comparatively minor costs (as was seen recently in Ontario, where construction of a natural gas plant was halted in response to public outcry).

Geothermal plants have a similar capital profile, so too large wind and solar farms. Wind projects can scale right down to a single turbine owned by a village co-operative and erected in a few weeks, while solar installations are within reach of an individual homeowner and can be built in a day or two. Wind has seen some public opposition in North America, but these issues have nowhere near the financial impact of delays and design changes in the nuclear sector. In any case, the costs are borne by the private developer and not the taxpayer.

Thus, thermal and renewable power do not require the implicit subsidy of long-term state financing. Further, the short construction timeframes and small project scale mean that projects can be initiated and completed in almost direct response to changing electricity demand, and the shifting winds of public opinion are rarely a consideration. Nuclear is a ponderous, clumsy, lumbering beast by comparison.

Fossil fuel plants and renewable generation facilities diverge where fuel, responsiveness, and decommissioning are concerned. The cost of fossil fuels is rising, with the notable but temporary exception of natural gas. The price of these fuels does not reflect their total cost, as the damage caused by respiratory disorders, acid rain, and global climate change is borne by the public at large rather than the consumer of the fuel. Fossil fuels – principally coal – are thought to be responsible for thousands of premature deaths annually, exacting a human toll far higher than anything that can be attributed to nuclear energy, even considering the effects of major nuclear accidents.

Renewable energy, by definition, requires no fuel. It does have a carbon footprint associated with initial construction and operation, but this is orders of magnitude smaller than that of fossil fuels. It will decrease further in a “breeder” scenario where renewable energy is used to power the manufacturing of renewable energy technologies. There is no credible evidence linking renewable energy technologies to human health issues.

Fossil fuel plants have the most attractive characteristics of responsiveness. They can generally be fired up and shut down in real-time to address fluctuations in demand. Wind and solar, by comparison, provide power intermittently – when the wind blows or the sun shines. This means that large-scale integration of renewable energy must go hand-in-hand with deployment of energy storage technologies. Geothermal energy is the notable exception, which provides base load similar to that of nuclear without the exorbitant start-up and shut-down costs.

Finally, decommissioning of a clapped-out thermal power plant has modest costs. Some site remediation of local soil contamination is likely, but the risk is miniscule compared to the millennia-long liability of nuclear waste. Renewable energy systems can be decommissioned at near-zero cost and environmental impact.

To sum up:



Fossil fuel


Initial capital outlay

Very high; public financing only

Moderate; funded by capital markets

Moderate to very low; funded by capital markets, co-ops, individuals

Construction timeframe/demand risk

Very high


Moderate to very low

Design risk

Very high


Moderate to low

Operational accident risk

Very high; taxpayer-insured

Moderate; privately insured

Moderate to low; privately insured

Fuel commodity price risk


Very high




Moderate to high

Non-existent; requires energy storage technology

Public health cost




Decommissioning risk

Very high; waste must be stored for thousands of years


Low to non-existent

From a risk perspective, nuclear is a bad bet. Fossil fuels are better, but my money is on renewable energy. So when the nuclear power industry makes the claim that it can solve the world’s energy problems, we have every right to be sceptical.

Turn this ship around

She don’t corner so good, does she?

On Friday, January 13th, the cruise ship Costa Concordia struck a rock and capsized off the shores of Italy, at the tragic cost of 16 lives. A modern cruise ship is an impressive technological accomplishment. It takes huge numbers of tourists on voyages to beautiful parts of the world and makes a lot of money in doing so. But it doesn’t turn on a dime.

The large oil companies are similar. Since their rise to economic prominence in the late nineteenth century, they have accomplished some amazing feats of engineering. In 1862 the Shaw Gusher of Oil Springs, Ontario produced a flow of 3,000 barrels of oil per day from a reservoir only 60 metres (200 feet) below the surface. Today, oil is extracted in the harsh arctic conditions of the Beaufort Sea and Sakhalin Island, and using offshore structures such as Shell Oil’s Perdido platform which operates in a water depth of 2,438 metres (7999 feet) in the Gulf of Mexico.

But for all its mastery of modern technology, the oil industry cannot escape two facts. The first is that oil supplies are finite and shrinking – we are using up petroleum faster than we can discover more (see peak oil). The second is that the burning of fossil fuels is causing global climate change – an ecological catastrophe which could endanger the survival of most species, including our own.

The writing is on the wall. Sooner or later, the oil will run out. Though their stock may be trading at all-time highs (except for that of BP, which has foundered since the Deepwater Horizon disaster), in the long run, every oil company is doomed.

The various players in the industry have a stark choice: Reinvent or die.

What of the second option? Why not stick to the core business, ride the oil wave into the ground, extract every last drop of petroleum from every last reservoir, and then close up shop?

Companies are made up of people, and people facing oblivion are immune to logic. They are well aware of the proud history of the edifice their forefathers built. The idea that such a legacy could disintegrate on their own watch is unbearable. As the end nears, and the field narrows following a long string of mergers and acquisitions, the surviving players will create an exit strategy rather than letting their respective ships sink. They will not go gentle into that good night.

Reinvention can be done. IBM did it in the 1990s, recognizing that its future as a blue chip, Fortune 500 player depended on letting go of its self-image as a hardware company and embracing a new future as a services company. As of this writing, its stock is trading at a ten-year high.

The trouble with reinvention is that it isn’t always easy to see the next wave. It’s even harder to know whether the next wave is one that you’re equipped to ride. If you don’t have anything to offer, your best course of action is to hand as much cash as possible back to shareholders, and let them invest it as they see fit while you explore retirement options.

In the global market for energy, the next wave is clear. There are only two ways forward in the post-oil era. The first is nuclear energy. The second is renewable energy such as wind, solar, biomass, hydroelectric (including wave and tidal energy), and geothermal. This is not a dichotomy – both forms of energy can and will coexist, it’s just a question of how much of each. My money is not on nuclear, but I’ll save that for a future post.

The oil companies that choose reinvention can pick either nuclear or renewables. Nuclear is a non-starter – the oil business has nothing to offer other than capital, and as I mentioned above, it is more economically efficient to distribute that capital back to shareholders through dividends and share buy-backs. As for renewable energy, oil companies don’t appear to offer any synergy at first glance. BP got it wrong by investing in solar, as I wrote in last month’s post The Law of Conservation of Bad Ideas.  Wind, waves, and biomass look similarly alien to the petroleum business. Does this mean that there are no opportunities left, and that big oil will go the same way as the Costa Concordia?

Perhaps not.

One of the core competencies of the oil sector is drilling deep wells into the Earth’s crust. Another is the use of hydraulic fracturing, or “fracking”, to free natural gas from shale rock. The know-how associated with these technologies happens to be directly applicable to one of the most promising renewable energy options – geothermal.

Geothermal energy, through the technology of ground source heat pumps, has been gaining popularity for heating and cooling of buildings.  These systems simply use the mass of the earth as a heat source or sink. However, geothermal energy can also be extracted directly from the planet’s hot interior to generate electricity, through technologies such as flash steam, dry steam, or binary cycle plants.

Perhaps the most attractive aspect of geothermal plants is that they provide a  constant flow of power. As such, their power generation profile is very much like nuclear plants, and hence they present a credible competitor and alternative to nuclear power. Wind, solar, and even to some extent hydroelectric cannot provide so-called “base load” power without development of energy storage technologies. Geothermal is free of this limitation. The Geysers, a complex of 22 geothermal power plants in California, has provided the state with base load power since 1960.

Geothermal energy is most readily harvested along the fault lines where tectonic plates rub together and produce such geological features as geysers, hot springs, and volcanoes (not to mention earthquakes).  People living in these areas can console themselves that their dangerous environment also offers a plentiful source of energy. Geothermal plants provide over 10,000 MW of electricity worldwide.

Not everyone lives near a fault line. However, even far from tectonically active areas, the Earth’s crust still gets 1°C warmer for every 45 metres of depth (1°F per 70 feet). Deep drilling and fracking can be used to extend the regions that can be served by geothermal energy.

Fracking has its critics. It has been blamed for groundwater contamination, release of greenhouse gases, and even tremors. However, the most serious of these issues only occur when fracking in a fossil fuel reservoir. Take oil and natural gas out of the equation, and you remove most of the environmental issues associated with the technology. You also, as it happens, remove one of the primary motivations of environmentalists for resisting the technology – that it extends and expands the available reserves of fossil fuels, prolonging their impact on global climate. Fracking for geothermal energy production will never provoke the same ire as fracking for oil and natural gas extraction.

The petroleum industry has produced many impressive accomplishments over the last 150 years. Long after the oil is gone, that technology and expertise will still be needed. The sooner the oil companies start taking advantage of that, the sooner they can move beyond their past, turn their ship around, and chart a future for all of us.