America’s confused energy politics a boon for Canadian power companies

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This is part of a series exploring climate change regulation and how it affects companies globally

When you want a favour from your neighbour, it is always useful to understand his situation before you ask for help. In other words, it's no good suggesting that the cost of rebuilding a fence be shared if your neighbour has just been told his roof needs replacing. This principle of backyard negotiation goes a long way to explain the trilateral energy and climate agreement struck in Ottawa last month between the leaders of the United States, Mexico and Canada.

All manner of promises, good intentions and smiles with President Obama appearing to endorse the building of a North American electricity grid. Over the next decade, billions more dollars of Canadian hydro power could be lighting up American homes, we are told. And if it looked like the Canadian Prime Minister's boyish charm was winning the cross-border energy deal that his predecessor comprehensively failed to deliver, that was doubleplusgood.

In fact, however, charm or even diplomacy won no megawatt sales for Canada. What made the difference was America's big problem with nuclear power. Only a week prior to the "Three Amigos" summit in Ottawa, Pacific Gas & Electric announced that it would not seek a licence extension for its Diablo Canyon nuclear power plant in San Luis Obispo, Calif. Since it opened in 1985, campaigners have targeted the 2,240 megawatt generator over safety and environmental concerns and decommissioning will now begin in 2024.

America still generates a fifth of the nation's electricity from controlled nuclear fission and you might think its star should be rising, given the mounting concern about the impact of fossil fuel emissions on the climate. Instead, nuclear power is under grave threat, not so much from the continuing campaign by the anti-nuclear lobby but from market forces. Fossil fuels have become so cheap, in particular natural gas from shale, that nuclear power cannot compete; nuclear's zero-carbon benefit doesn't translate into dollars and cents in a competitive electricity market. There are about a hundred nuclear reactors in the U.S. that continue to provide power, but since 2012 U.S. power companies have announced the planned retirement of 14 facilities.

Nuclear plant closures have become a political cause célèbre in New York state where Entergy's Fitzpatrick plant on the shore of Lake Ontario is under threat despite the renewal of its operating licence to 2034. Entergy's problem with Fitzpatrick is its location close to the abundant natural gas in the Marcellus shale which is available to fossil fuel generators. The closure is supported by anti-nuclear campaigners but opposed by Governor Andrew Cuomo who argues that it is a clean energy bridge to the state's objective of cutting 50 per cent of its carbon dioxide emissions by 2030. There are also 600 jobs at risk. At the same time, Governor Cuomo has been fighting Entergy on another front, demanding that it close Indian Point, an elderly nuclear reactor on the Hudson River, arguing that it is too close to the New York metropolis for safety and comfort.

In this ferment of concern over safety, economics, climate change and not-in-my-backyard politics, Canada offers a potential solution, abundant hydro power. It is difficult to imagine that America is even close to accepting the imposition of a regulatory price on carbon. In the absence of a mechanism that skews the electricity market away from fossil fuels, nuclear power will struggle to survive as long as cheap methane continues to bubble up from ancient shales. Moreover, without guaranteed pricing or fiscal incentives, the building of new nukes to replace the retired plant is even more unlikely in a competitive U.S. electricity market. There is an energy deficit looming and the political battle is now open over which supplier can provide the cheapest clean alternative.

Of course, Canadian hydro power is not a perfect solution for America. It will require a massive investment in wires and pylons and, inevitably, New England's leaf peepers will complain that infrastructure is spoiling the view. Nor is the damming of rivers and watersheds an environmentally sensitive solution. But that will be in someone else's backyard and as long as the locals up north don't kick up too much fuss, there is a reasonable chance that Canadian power companies will profit from America's confused energy politics.

Carl Mortished is a Canadian financial journalist based in London.