Nuclear power programmes throughout the world expanded in an era when the public sector played a major part in electricity supply. Even if generation was not in public ownership, power utilities could recover most of their costs through the electricity rate-setting mechanism without having to worry too much about competition. Nuclear plants are expensive to build and can only recover their costs over a long time period, so clearly benefited from this environment. National energy planning was also in vogue and securing a significant nuclear sector – perhaps to economise on fossil fuel imports and to increase energy security – was followed by major countries such as France and Japan.
The gradual liberalisation of power markets throughout the world has posed many challenges to the supply sector and commentators have suggested that the impact would be strongly adverse for nuclear power. For example, a few years ago it was widely believed that perhaps half of the 100 commercial nuclear reactors in the USA would be victims of liberalisation and could close down within ten years. The burden of stranded costs and operating costs above the expected electricity price would mean that shutting down would be the best option.
In practice, this hasn’t happened and indeed it can be argued that most existing nuclear plants throughout the world have thrived in the era of liberalisation. Stranded costs haven’t really been an issue, as so long as a plant is operating at marginal costs below the market electricity price, the best option is to carry on running. Competition between generating assets was the spur to improve performance that was needed by many nuclear plants and the industry has clearly responded. The evidence is most dramatic in the USA where average capacity factors (load factors) have risen to over 90% and marginal operating costs are now lower than for coal and gas plants. It is now believed that reactors will run for their entire licensed periods and many plants are now applying for 20-year licence extensions. It has been worthwhile to invest in necessary major plant refurbishment, such as new steam generators, while many reactors have also achieved significant power uprates.
Elsewhere, the picture is much the same and it is now generally agreed that existing nuclear plants have little to fear from market liberalisation. Once a nuclear plant is up and running, marginal operating costs should be relatively low and able to beat the market price. Power utilities in Germany and Scandinavia, for example, have found their nuclear plants to be very profitable in the new environment. Pressure to close them has therefore been political, not economic. The situation in the UK has been more complex. In the early days of electricity liberalisation, the nuclear plants were very profitable but the dramatic fall in the power price following the revisions to the market mechanisms changed this. These difficulties were shared by other generation sources, but the age and technology of the British reactors have made it difficult to achieve the improved plant performances achieved elsewhere.
Nevertheless, the economic case for running nuclear plants for a long time within liberalised power markets is a strong one. Possibly 350 of the existing 435 reactors currently in operation throughout the world will still be running in 25 years time. Those that close will be older, smaller units and therefore more difficult to justify spending money on, or those which are victims of politics.
Turning to the prospects for new nuclear plant construction, it is certainly true that market liberalisation poses a significant challenge. Investors require a quick return on their money and the financial profile of a nuclear project does not fit in with this, even if plants can be built in 4-5 years and within cost. The construction costs of a combined cycle gas turbine (CCGT) plant are roughly one third of those of a nuclear plant of similar generating capacity, which is a substantial barrier to overcome. The comparative advantage of nuclear plants is their proven low and stable fuel costs, whereas with a gas plant, an investor is mainly running the risk of escalating fuel prices, which are the most significant cost item over the life of the plant. However, so long as relatively low gas prices can be predicted for the first 5-10 years, a CCGT can pay for itself in this relatively short time period. An investment in nuclear, by contrast, needs a much longer time period to receive the benefit of the low fuel costs.
Investors require a quick return on their money and the financial profile of a nuclear project does not fit in with this
If we look today where new nuclear plants are planned or already under construction, there are two major areas. Firstly Asia, where both China and India have ambitious nuclear programmes, to add to the existing, more mature plans in Japan and South Korea. The plans in China and India are very much directed by state planners but both are confident that reactors can be built on time and at economic cost. The other area where new nuclear is still very much alive is the former Soviet Union. The task in recent years has been to complete those reactors already under construction when the Soviet Union collapsed but attention is now returning to the ambitious plans both Russia and Ukraine had in the past. As the financial situation improves, the strong nuclear expertise in these countries will encourage the completion of further reactors. Again, the electricity supply system is very much under state control, but this allows a long-term perspective to be taken.
The case not fitting in with this pattern is the reactor that has just been ordered in Finland. Here the power market is liberalised and government intervention is very limited. How can a small and environmentally-friendly European country order a new reactor when others, such as Germany and Sweden, are planning to close nuclear plants which operate safely and economically? The answer is essentially in two parts. Firstly, Finland’s experience with its existing four nuclear reactors has been very favourable. They have operated very well and at low marginal costs which have meant good profits for their owners. Secondly, and most importantly, the companies taking the power will own the new reactor. Finnish industry is electricity-intensive and the heavy users require the security of long-term baseload power at low and secure prices.
The question is whether the Finnish experience can spread to other liberalised power markets in Europe and North America. Probably the key country is the USA, where there will be a major requirement for new baseload power plants over the next 25 years, to satisfy rising demand but also to replace old fossil fuelled plants that are nearing the end of their lives. The US government is certainly supportive of nuclear and has developed a ‘Nuclear Power 2010’ programme with the industry, which aims to get a new reactor under construction by 2010. The difficulty, however, is finding the first power company to take the leap and order a new reactor. It is most likely to be consortium of owners, but the past experience of nuclear construction in the USA and the attention a new order will gather is making both plant operators and their financiers very cautious.
In order to achieve a significant number of new nuclear plant orders in those countries with liberalised markets, it is therefore likely that one or more things have got to change. One possibility, frequently discussed, is whether fossil fuel power generation sources will get penalised significantly because of their carbon emissions. Widespread introduction of emissions trading regimes or carbon taxes will clearly benefit the relative economics of new nuclear plants but this is not something the industry should count on. It should only be regarded as ‘icing on the cake’ or a windfall gain, as it is very uncertain whether it will happen.
As an alternative, the nuclear industry must do all it can to improve its own position. The best way to do this would be to find ways to cut the capital costs of new reactors even further and demonstrate that these gains can be achieved. The new Finnish reactor is important in this, as are the new reactors under construction in Asia – if they can be brought online both on schedule and within projected costs, the industry will benefit. But it still needs to find ways to cut costs by achieving full economies of scale, simplifying designs and modularising construction where possible. There are probably too many companies in the reactor design and construction business at present and, like the aircraft manufacturing sector, should move towards producing a limited number of standardised designs in great numbers.
The other area the industry can work on is to identify opportunities in financing new plants. Major industrial power users could have a nearby nuclear plant satisfying their requirements and any surplus may be sold on the open market. This should remove some of the risk of investing in a nuclear plant, as the major part of the revenue will be guaranteed. The alternative approach is to encourage the development of longer-term power markets where companies can buy and sell contracts covering greater time periods. Certainly there is scope for financial innovation as liberalised power markets are still very young. Moreover, there are significant doubts as to whether they can guarantee an appropriate level of investment in new capacity (no matter whether it is coal, gas, nuclear or whatever) in order to create satisfactory safety margins to cover peak demands. The state used to take care of this, but it is now not clear that the market will allow this.
Steve Kidd is Head of Strategy & Research at the World Nuclear Association, where he has worked since 1995 (when it was the Uranium Institute). Any views expressed are not necessarily those of the World Nuclear Association and/or its members.