The President's Energy Message

In June 1971, President Nixon transmitted a special message to Congress on U.S. energy problems. This is the first occasion on which a Chief Executive has addressed himself solely to the subject of energy in this public fashion. By adding his own concern to what has become an almost endless national debate, the President's message kept the "energy crisis" a live and continuing national issue.

The message noted that, historically, energy costs have fallen relative to the overall price level, a fact which may have contributed to the rapid growth of energy demand in recent years. Short supplies of environmentally acceptable fuels—such as low-sulfur oil and natural gas—as well as delays in power plant construction have caused continued anxiety about possible supply tightness in the years ahead.

The President's message touched upon each of these matters as well as on the long-run prospects for economical exploitation of the energy resources that most people agree exist in abundance onshore and offshore. However, the message stressed technological options rather than economic forces and policies, which also could contribute toward the solution of energy problems. The President for the most part avoided discussion of oil import policy, regulation of natural gas price, and taxation and leasing terms as devices for affecting the availability of fuels; and he did not deal with such economic measures as price disincentives, which appeal to many as a means of restraining energy demand. The President may well have sensed the vast ignorance and uncertainty that still exist in the latter area.

The message called for a number of measures that should result in more sensible energy-use decisions, e.g., federal power plant siting legislation (under congressional consideration late in the year) designed to rationalize what is presently a time-consuming process diffused among innumerable layers of local and state authorities; legislation providing an incentive charge to reduce sulfur oxide emissions; departmental reorganization, which would unite within a new department of natural resources all import energy resource development programs except possibly some aspects of nuclear power development; and new efforts to economize on energy use through strengthened FHA insulation standards and consumer education programs. The President also called for accelerated leasing of federal onshore and offshore lands to spur exploration for oil and gas, and he ordered the Secretary of the Interior to expedite the development of an oil shale leasing program. In all these proposals, the President's language reflected awareness of the environmental impacts and risks attached.

The major thrust of the message was nonetheless technological, as shown by the following measures:

• Stepped-up federal support for development of the breeder reactor, including an increased share in the government's contribution to construction of a demonstration plant by 1980.
• Some expansion in the modest federal assistance to make the conversion of coal into high-Btu gas commercially feasible.
• A significant jump in funds for sulfur oxide control technology; again, however, the base amount of support has been quite small.
• A pledge of continued government assistance for a variety of R&D efforts, including coal liquefaction, magneto-hydrodynamic power cycles, and controlled thermonuclear fusion.

Since the breeder reactor and coal gasification program were clearly given central emphasis in the President's message, a closer look at the economic and technological problems connected with these important efforts (each of which could become still more important if one or the other did not succeed) seems worthwhile.

BREEDER REACTORS. Breeder reactors are capable of extracting from 30 to 50 times as much energy from a pound of natural uranium as current light-water reactor types. They thus promise substantially lower fuel costs than light-water reactors and a greatly expanded availability of fuel. However, breeder reactors are inherently more complex than light-water reactors, are expected to have higher capital costs, and present new environmental problems.

The technical feasibility of breeder reactors has been established. The primary questions now center around commercialization and environmental impacts. The next step in commercialization involves moving from small-scale prototypes and tests to units of several hundred electrical megawatts, which should be large enough to demonstrate that commercial size units in the 1,000-mw range can be successfully operated and should provide some indication of the probable cost of power from such units. Construction of a demonstration plant will involve numerous engineering problems, including large-scale routine handling of liquid sodium. There seems to be little real doubt that these engineering problems can be solved, but they must be solved in a manner that will not lead to prohibitive costs. It appears that the capital costs of a breeder reactor must not exceed those of light-water reactors by more than about 25 percent in the 1990s if the expected lower fuel costs of the breeder are not to be offset by its higher capital costs. Further development of plutonium fuel technology and management is also necessary in order to assure economic operation.

No current estimates of power costs from breeder reactors can be regarded with much confidence. Breeder cost estimates are generally derived from light-water reactor cost estimates, directly or indirectly. Although the costing methods are crude, they are a necessary justification for breeder research and development, for it makes sense to develop breeders only if their costs can be reduced below those of light-water reactors. The possibility of rising uranium costs, and therefore of light-water reactor fuel costs, is frequently relied on to increase the justification of breeder development. The cost of power from light-water reactors, currently estimated at about 8.6 mills per kilowatt-hour, will increase about 0.06 mills per kilowatt-hour for each $1 per pound the price of uranium oxide increases above the current price of $6 to $7 per pound. Such increases would make scant difference to the cost of power from a breeder reactor.

Enthusiasm for the breeder on the part of electric utilities and major reactor manufacturers has been lagging. This is due in part to sheer preoccupation with getting light-water reactors on the line in time to meet utility loads and also to a growing realization of the major problems involved in the commercial adoption of a new reactor system. Problems of licensing, construction, environment, and safety with light-water reactors all have proved greater than were envisioned a few years ago. Although something may be learned from the light-water reactor experience, some of the same sort of problems seem inevitable in the introduction of breeder reactors.

Another factor lessening the urgency of breeder reactor development has been growing confidence that low-cost uranium supplies are much more abundant than was previously estimated by the Atomic Energy Commission. Moreover, it now appears that high-temperature gas-cooled reactors will capture part of the reactor market. These reactors rely in part on thorium (which is in abundant supply) for their fuel, and thus will reduce demand for natural uranium. High-temperature gas-cooled reactors are expected to achieve heat efficiency levels comparable to those of breeder reactors, thus reducing one environmental incentive for breeder development.

As noted above, the President in his energy message announced an additional commitment of federal funds to the breeder reactor demonstration program. The substantive reason for the additional federal commitment is unclear, although it was evident that the time had come either to move ahead with the breeder demonstration program or to cut it back until the benefits of breeders could be more clearly identified.

A substantial portion of the cost of the first breeder demonstration plant, estimated to cost as much as $600 million, is to be supplied by electric utilities and reactor manufacturers, with the government's share currently set at about $130 million. Fund raising among electric utilities is reportedly going well. The President announced a second demonstration plant recently, but its timing and financing are uncertain. AEC's plans call for having the breeder developed in the mid-1980s to the point where it can be ordered on a commercial basis from reactor manufacturers.

The demonstration program faces serious environmental hurdles. The AEC has not yet agreed to prepare an environmental statement for the breeder program of the type required under the National Environmental Policy Act. The AEC maintains that only an environmental statement on the demonstration plant, not on the program, is required. This position is being challenged in the courts. However, the generally increased environmental concern of AEC, at least partially as a result of the Calvert Cliffs decision (see elsewhere in this issue), could bring a greater willingness to prepare an environmental statement.

COAL GASIFICATION. The idea of producing gas from coal is not new; in fact, so-called producer gas plants were in widespread use in the United States by 1875. However, the development of large supplies of cheap natural gas resulted in the abandonment of coal gasification. The old coal gasification processes will not be adequate for the future; they produced a gas with a low heating value compared to natural gas and one that frequently had a high tar, soot, and sulfur content.

The Lurgi process of gasification has been used in Germany for some years and is commercially available. However, some question arises as to how well the process will work with American coals, which have a much greater caking tendency than European coals. The Lurgi process is felt by many to be economically attractive in the United States only in special circumstances. The El Paso Natural Gas Company has announced plans to build a coal gasification plant based on the Lurgi process in the San Juan Basin of New Mexico. It is designed to produce 250 million cubic feet (equal to about 0.5 percent of current U.S. gas consumption) of gas per day from coal at a cost of about $2 million. The FMC Corporation has also announced plans for a similar plant, but is seeking cooperation from other companies in a process improvement effort before starting construction.

In the belief that more advanced technology is essential if coal gasification is to play a significant role in the nation's gas supply, the department of the Interior and the American Gas Association have announced a joint research and development effort to further develop and demonstrate advanced coal gasification technology. The Nation Academy of Engineering has conducted a review of coal gasification technology at the request of the government. It appears that the National Academy will recommend that four gasification processes carried through at least the pilot plant stage in order better to determine the technical and economic characteristics of the alternate processes.

Although estimates of the cost of pipeline quality gas from large-scale coal gasification plants have ranged from 40 to 60 cents per thousand cubic feet (mcf), it appears that estimates based on current studies of the technology and cost factors will range from 80 cents to $1.20 per mcf. This may be compared with a current U.S. average wellhead price for natural gas of less than 20 cents Per mcf and recently set wellhead prices for new gas in the 25 cents Per mcf range.

It is not clear whether the production of synthetic gas will be subject to Federal Power Commission (FPC) regulation. Whether or not the price of synthetic gas at the plant is controlled by the FPC, state and federal regulatory authorities face a real dilemma: they would be allowing gas priced at around $1.00 per mcf to be supplied to customers whose economic interests they are supposed to protect, while effectively precluding the production of natural gas, which could be produced at prices between 25 cents and $1.00 per mcf. Resource estimates indicate a substantial amount of gas that could be found and produced in this price range.

Production of gas from coal at prices substantially above the field of natural gas also raises questions of energy pricing policies. Gas from coal will apparently be commingled with natural gas by local utilities and sold at average prices. Thus, for moderate amounts of such production the average price will be changed only a small amount and shared by many customers. While this has some merit from an equity viewpoint, it is likely to result in the incremental gas being sold at well below cost, thus distorting the response of demand compared to the situation in which incremental users must pay incremental costs.

If the price of manufactured gas is not regulated, and if such gas is priced to the consumer on an average basis, there could be a tendency for companies, even oil and gas producing companies, to prefer to flake the large investment required in coal gasification facilities in order to earn an unregulated rate of return on it rather than fight with the FPC over natural gas prices.