Sunday, August 21, 2005

Nuclear Power - The Economist

Jul 7th 2005

Climate change is helping a revival of the nuclear industry, though its
economics still look dodgy

THINGS have not gone well for the nuclear industry over the past quarter
century or so. First came the Three Mile Island accident in America in
1979, then the disaster at the Chernobyl plant in Ukraine in 1986. In
Japan, Tokyo Electric Power, the world's largest private electricity
company, shut its 17 nuclear reactors after it was caught falsifying
safety records to hide cracks at some of its plants in 2002. And the
attacks on September 11th 2001 were a sharp reminder that the risks of
nuclear power generation were not only those inherent in the technology.

Nor was safety the only worry: there were financial problems too.
British Energy, Britain's nuclear-energy operator, required successive
government bail-outs. Britain also recently finalised a GBP50 billion
($90 billion) scheme to deal with the nuclear-waste liabilities of
British Nuclear Fuels (BNFL), an inept re-processor of nuclear waste
that is itself bust.

But lately, things have brightened for the nuclear industry. In Asia,
which never turned against it in the way the West did, the prospects are
excellent. China already has nine nuclear reactors, and is planning to
commission a further 30. New capacity is being built or considered in
India, Japan, Taiwan and South Korea. Russia has several plants under

Now western governments are increasingly looking anew at nuclear energy.
A few weeks ago TVO, a Finnish consortium, started work on the first new
nuclear plant to be built on either side of the Atlantic in a decade.
Pertti Simola, TVO's chief executive, proclaims that, "Finland has
opened the door to a new nuclear era! Many western countries will come
behind us."

France's parliament has recently given its approval for a new nuclear
plant. Guillaume Dureau of Areva, the world's largest nuclear supplier,
captures the dizzy mood that has overtaken vendors: "We are pretty
convinced of a nuclear revival and [we] need to prepare for it. We need
to hire 1,000 engineers."

Despite its earlier doldrums, the nuclear industry is still a sizeable
business. In 2004 Areva had sales of EURO6.6 billion ($8.2 billion).
That figure includes mining uranium, designing power plants and
reprocessing waste fuel. General Electric's nuclear division, which
designs and builds plants but does not handle fuel or waste, turned over
about $1.1 billion last year (its turnover was double that figure if
sales of non-nuclear bits of nuclear plants, such as generators and
turbines, are included). Westinghouse, an American brand currently owned
by BNFL, which recently put it up for sale, had sales of around GBP1.1
billion ($2 billion).

The main reason for the shift is climate change. As it has risen up the
political agenda, so the impetus for a nuclear revival has grown.

More, and more respected, voices have been making the case that nuclear
energy is essential if the rate of change is to be slowed. As a result,
there is an unlikely alliance between the nuclear industry and many
environmentalists, as a growing number of greens have come to believe
that nuclear energy is the best way to reduce carbon emissions. Industry
lobbyists are finding support from unexpected areas. Keith Parker of the
Nuclear Industry Association, a British trade group, points to a recent
quote from James Lovelock, a founder of Greenpeace: "Only nuclear power
can halt global warming."

Scientists are also lending their support. Sir David King, Tony Blair's
chief scientist, recently argued that one further generation of nuclear
power stations is needed (in Britain at least) to buy time, in order to
keep down emissions of carbon dioxide, the chief greenhouse gas, while
new carbon-free non-nuclear technologies are developed. He thinks that
renewable sources of energy are not currently up to the task: "We need
another generation of nuclear-fission stations." Others agree. The World
Nuclear Association, an industry body, dismisses its green rivals in a
recent report: "the potential scope for renewables contributing to the
electricity supply is very much less because the sources, particularly
solar and wind, are diffuse, intermittent and unreliable."

Such opinions have caused consternation among nuclear energy's
long-standing opponents, notably Europe's green movement. Anti-nuclear
sentiment was so strong in Germany at the end of the 1990s that the
ruling socialist-green alliance banned new plants. Sweden was the first
country to turn against nuclear plants, in a referendum back in 1980; at
the end of May it shut down its second nuclear plant. Yet in both
countries opinion polls suggest waning public opposition to the nuclear
option. Indeed, Germany's Christian Democrats now say they may overturn
the ban if they win the forthcoming national election. In Finland, says
TVO's Mr Simola, concern about climate change was the chief reason why
his country pushed ahead with the new power plant.

In America, although the Bush administration remains hostile to any
mandatory action on slowing global warming, it is keen to boost nuclear
power. That has led some greens to take the view that a nuclear revival
is better than doing nothing much about climate change. Leaders of
respected environmental outfits such as Environmental Defence and the
World Resources Institute have recently made positive noises about
nuclear power as part of a response to global warming.

Of course, nuclear power is not the only carbon emission-free option.
Making existing energy production more efficient, and reducing waste in
the use of energy by consumers, would have a big economic and
environmental impact. Renewable energy sources such as wind and waves
have plenty of backers.

There are also direct rivals to new nuclear plants, such as fossil-fuel
plants with carbon sequestration that can provide baseload power. A
flurry of investment and experimentation, from Algeria to China to
America, is already under way in this area.

Vattenfall, a Swedish nuclear utility, is investing in technology to
remove carbon from its newish coal plants in eastern Germany and Poland.
Cinergy, an American utility just bought by Duke, is looking into coal
gasification and carbon sequestration in Indiana. A Scottish consortium
led by BP recently announced the first commercial-scale project to
produce carbon-free power from natural gas, re-injecting the waste
carbon dioxide into fields in the North Sea--thus not only storing the
gas underground, but also enhancing hydrocarbon recovery from the field.
And combined heat and power, which allows companies and householders to
use the heat created by power generation as well as the electricity it
produces, is booming. But the nuclear industry has the momentum right
now. That's partly because its economics have improved markedly.

Better management allows companies to make existing plants much more
efficient. In America, for instance, the country's 103 nuclear plants
are no longer owned by individual municipalities. "Nuclear consolidators
are the key," argues Michael Wallace of Constellation Energy, a utility
that owns several plants and hence can retain good managers, share best
practices, gain economies in maintaining parts and inventories and so
on. The top ten nuclear firms now own 61% of the sector. Exelon, the
largest firm, has a 15% share. American nuclear power plants' capacity
utilisation has risen from 56% in 1984 to more than 90% today.

This is a lesson that France had already learned, says Bernard Dupraz of
Electricite de France. EDF is responsible for all the country's nuclear
plants. Unlike America, where no two nuclear plants are exactly alike,
France stuck with a few standard designs. "We standardised nuclear
plants like Ford did the Model T." The results: 20% lower operating
costs and 30-40% lower capital costs than those of one-off designs used
elsewhere, notably in Britain.

CERA, a consultancy, calculates that 31 countries have commercial
nuclear-power reactors today. Taken together, these 439 reactors produce
about 16% of the world's electricity, worth annually $100 billion-125
billion. And the pot is growing.

Expansion in China alone is likely to involve some $50 billion or more
of capital spending. That's quite a prize--though it is important to put
China's nuclear interest into perspective. Even if it really builds all
30 mooted plants, nuclear power will still make up only about 5% of its
electricity mix in 2030. Meanwhile, natural gas is expected to grow from
a 1% share today to over 6%, according to the International Energy
Agency (IEA).

In many power markets today, nuclear electricity is the cheapest you can
buy. Entergy's deregulated nuclear plants produced 13% of its revenues
but a quarter of its profits last year. It costs German utilities
perhaps 1.5 (American) cents per kW-hour to make nuclear electricity,
estimates Vincent Gilles of UBS, an investment bank, but they can sell
it for three times that amount once credits from Europe's carbon-trading
scheme are included. In contrast, it costs 3.1-3.8 cents to produce
power from natural gas in Germany and 3.8-4.4 cents to produce it from
coal. In America, where there is no mandatory carbon regulation (and
hence no penalty on fossil fuels), nuclear power has less of an edge:
coal power costs about 2 cents per kW-hour on average today, gas-fired
power costs about 5.7 cents, while nuclear cranks out electricity at 1.7
cents or so.

But the economic case is not as clear-cut as it seems. The costs of
nuclear power produced by existing plants are likely to be far lower
than the costs of newly built plants, because the capital costs of
nuclear plants--typically reflecting half to two-thirds the value of the
project in present-value terms--are long forgotten. Most of today's
plants were built in an era when central planners or state utility
boards had no idea of the true cost of capital. Today's low interest
rates are good for big capital projects like nuclear, but those rates
may change sharply in the future. At the same time, gas and oil
prices--whose current astronomical levels enhance nuclear's charms--may
well fall.

Critics also argue that the best designs the nuclear industry can come
up with are not competitive with rival energy technologies in the open
market. The nuclear industry points to some studies that seem to suggest
that nuclear plants might be economic if only their "life cycle"
benefits (such as lack of greenhouse gases) and their rivals'
disadvantages (such as fuel costs for natural gas plants) are factored

For example, the Nuclear Energy Agency, an arm of the OECD, has just
released a study done jointly with the International Energy Agency
(IEA). After reviewing the economics, it seems to conclude that there is
indeed a bright future for nuclear: "on a global scale, there is room
and need for all baseload technologies." Assuming a discount rate of 5%,
it argues that the cost of generating power from new nuclear plants
would cost between $21/MW-hour and $31/MW-hour; costs for gas-fired
power, it reckons, would range from $37/MW-hour to $60/MW-hour. (The
report also assumes high gas prices, which favour nuclear, a view
contradicted by the IEA's official forecast of a medium-term reduction
in gas prices.)

But there's plenty of scope for argument about the economics of nuclear
power generation, because they are so sensitive to assumptions about the
cost of power from other sources. As Ed Cummins of Westinghouse insists,
"The biggest motivator for nuclear today is $6 [the price per MBtu]
natural gas. If gas goes back to $3.50, then nuclear plants aren't

The other source of uncertainty is the disposal of radioactive waste.
That's what messed up the economics of Britain's nuclear programme:
Britain decided to reprocess its waste, which proved hugely expensive.
America, by contrast, just stuck it in swimming pools--literally--at the
power plants. The current consensus is that the best solution is
geological storage--that is, to bury the waste very deep. The bad news
is that nobody is making much progress getting there, or knows how much
it will all cost in the end.

Taking into account the uncertainties, most studies done on nuclear
economics (including the most authoritative ones, done by the
Massachusetts Institute of Technology and by Britain's Royal Institute
of International Affairs) conclude that new plants built by the private
sector, with investors bearing the full brunt of risks, are not economic
without subsidy.

Though nuclear vendors are promising that their new designs will cost
only $1,500 per kW of installed capacity, that assumes ideal conditions
and no delays. A more realistic assessment (indeed, the consensus view
among experts not aligned with the nuclear industry) is that new plants
will probably cost close to $2,000 per kW. That may be less in real
terms than the capital cost of previous generations of nuclear plants,
but it is still about double the capital cost of a conventional coal
plant today. The upshot of all this is that even today's cheaper, safer
nuclear designs are still more expensive than coal or gas.

The money men are not very enthusiastic. Standard & Poor's, a rating
agency, recently declared, "The industry's legacy of cost growth,
technological problems, cumbersome political and regulatory oversight,
and the newer risks brought about by competition and terrorism may keep
credit risk too high for even (federal legislation that provides loan
guarantees) to overcome."

Part of the problem is that nuclear plants are seen as too "lumpy" and
uncertain as investments. A 1,000MW nuclear plant would cost $2 billion
and take at least five years to build. A coal plant of that size would
cost perhaps $1.2 billion and take three to four years, while a
combined-cycle gas plant that size costs about $500m and takes less than
two years to get up and running. The bigger the project, the more
susceptible it is to delays--and UBS's Mr Gilles estimates that a
two-year delay in nuclear projects wipes out 20-25% of the project's
value to investors.

Political risk is a problem, too. The links between nuclear power and
weapons hurt the business--as was sharply illustrated last week.
Westinghouse was in the bidding against French and Russian companies for
a Chinese contract. But the House of Representatives, fearful of giving
China access to American nuclear know-how, voted down a $5 billion loan
from America's Export-Import Bank.

So, if the economics are so unpromising, why is so much nuclear capacity
being built? Some of it--in China, for instance--may be the result of
mixed motives. China could be after the technology that America wants to
deny it. Security might also be a factor: energy importers may want a
proportion of their needs met by sources over which they have control.

Nuclear fans point to Finland where a private consortium seems to have
managed to finance a new power plant without government subsidy. But was
it done without subsidies or unfair state aid? Absolutely, insists TVO's
Mr Simola. "You must be joking," retorts UBS's Mr Gilles.

In fact, the answer is unclear. TVO is a consortium involving six
shareholders--but one of them is a state-owned utility, Fortum. TVO's
owners are also its only customers. Some of those customers are big
paper and pulp companies, who use a lot of power; others are
municipalities, which may not be sensitive to market economics. Indeed,
the EURO3 billion deal is not a conventional commercial transaction. Mr
Simola explains that there is a lifetime power-purchase contract agreed
at zero profit: "We pay dividends in the form of competitive power," he

The plant is to be built by France's Areva on a fixed-price bid. If
there are delays or massive cost overruns, Areva must cover them.
Areva's Mr Dureau vigorously denies that French government ownership
means that that country's taxpayers will be subsidising Finnish power:
his firm will yield all its assets and go bust before the French
taxpayer will pay a penny, he insists. But if it does go bust, the
French taxpayer must write that cheque to TVO.

Even if the Finnish experiment is not explicitly subsidised, the model
may nevertheless be tricky to replicate elsewhere. If it can be--and
there is some interest in France and America among heavy energy
users--then the nuclear industry may yet be justified in claiming that
new nuclear plants can be built without state aid.

Yet most studies reckon that even a moderate carbon tax would not make
nuclear power generation competitive in a free energy market. Europe's
emissions-trading system (ETS) is, in effect, that sort of a tax. And
according to Oxera, a British consultancy, even with that implicit tax
on carbon-based power generation, new nuclear plants would not be
economic without government help.

But if the implicit tax rose, that might change. The point of a carbon
tax is to reflect the cost to society of damage that using carbon does.
Setting a price on those social costs is difficult. Europe's ETS implies
that the social costs of carbon dioxide are EURO20 per tonne; but a
British government study in 2002 estimated them at GBP70 (EURO112). Such
estimates are necessarily vague; but if that higher figure is fed into
Oxera's model, new nuclear plants begin to look economically viable.

However, politics make it unlikely that carbon is going to pay its full
social costs--for some time to come. That's why some
governments--including America's--are thinking of subsidising nuclear

President Bush is trying to shoehorn a provision into his energy bill
that would give the nuclear industry about $500m in insurance against
the risk of regulatory delays, and a further $6 billion or so in
subsidies now being considered for new nuclear plants. American
utilities want several billion dollars for the engineering and
construction costs associated with building the first three or four such
plants. They are also hoping for over $500m in subsidies to go through
the licensing process, and an extension of the government's blanket
insurance policy against catastrophic accidents.

They may get them. There's a powerful business lobby in America that's
hostile to the idea of importing emissions trading from Europe.
Subsidising nuclear is one of the only ways of squaring that lobby's
interests with the electorate's rising awareness of the need to do
something about climate change. With President Bush and the tree-huggers
both on its side, the nuclear industry is back in the game.

See this article with graphics and related items at


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