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Japan’s disasters and the outlook for gas

By William Powell in London

March 23, 2011 - The natural disasters that hit Japan on March 11 have served to demonstrate how tight now are the bonds between different sources of energy and between regions that are far apart from each other. The specter of another Chernobyl has forced European policy makers to question their new-found confidence in nuclear energy.

And the earthquake and tsunami coincided with a period of widespread unrest in the Arab world that is raising questions about how high oil prices will go, as well as on a practical level cutting gas sales to the third largest gas market in Europe – Italy. (See related price chart: Dutch TTF Q4 reflects Brent upheavals ($/MMBtu): February 2 - March 16, 2011).

All these events have dramatically redrawn the landscape. First, in the short-term, there will be a scramble to free up LNG cargoes for resale to Japan, where prices have already approached oil parity as Tokyo Electric replaces lost nuclear output with gas-fired generation.

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Selling LNG at a premium to Asia will tighten European supplies, keeping the floor under UK spot prices to the extent that the spot price has reached the long-term border price of imports.

Second, in the longer term, gas looks the likeliest fuel to benefit from a switch from nuclear, because of its environmental benefits, its low cost relative to renewables, and its perceived abundance. But a greater drive towards renewable energy cannot be ruled out.

And third, the prospect of much greater consumption of fossil fuels in the power sector has sent a strong signal to Europe’s carbon market.

December 2011 EUA price (€/mt): January 7 - March 17, 2011

While there is no likelihood of the same fate befalling European reactors as the terrible destruction that hit Fukushima, the radioactive plumes hanging over the units came as a forceful reminder of the danger inherent in nuclear power plants.

Apparently acting in the spirit of “something must be done,” some European governments are already threatening to close down plants that would otherwise have brought their owners a better return thanks to a longer life.

Germany for example has mothballed some 5 GW – its oldest nuclear plants – for a 3-month safety review, although the percentage of gas in the power mix is quite low in that country.

Without consulting parliament, Chancellor Angela Merkel suspended the nuclear extension law for three months on the first working day after the earthquake.

She said an independent commission would be set up to conduct the inquiry, and talks are underway with nuclear operators about the details of the review. Prices skyrocketed that day. (See related price chart: German Q2 base jumps on reactor shutdowns (€/MWh): January 4 - March 17, 2011).

"This is clearly politically motivated, we have important elections and the government has to appear in charge of the situation," a German power trader told Platts.

And popular opposition to nuclear power in Germany is so strong that some traders doubt if the seven reactors will ever reopen after June.

At the best of times, one typically looks in vain for clarity of vision when it comes to democratically-elected governments and their energy policies. Coalitions, public opposition and short-termism too often rule out consistency of purpose.

But generally one can assume that it will be much harder now to build a nuclear power station anywhere in western Europe than it was before the earthquake – even if not in less democratic countries in the east, such as Bulgaria and Belarus where Russia is always glad to offer assistance.

And there is a third consequence of a retreat from nuclear: it will cost more to emit carbon dioxide.

EU Allowances have not only in the past been given away to power generators but the recession-induced destruction of energy demand has done nothing to encourage their behavioral change.

The price for the front year has been between €14/metric ton and €16/mt for the last year.

But now carbon dioxide emissions will rise, as the EU is trying to decarbonize its power sector and more power will have to come from fossil fuels.

And higher gas prices will widen the dark spread for coal-fired generation, allowing operators to spend more on carbon allowances.

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