How can we build a case for new build?

1 April 2005

The critics of nuclear power frequently assert that it is uneconomic. The industry evolved from post-World War II military nuclear programmes, and that development did not always lead the subsequent civil sector down the optimum technical paths. More recently, governments have moved away from widespread intervention in energy markets. Electricity industry liberalisation comes in many guises, but the general trend is clear: all plants must demonstrate that they are cost effective and that this must be achieved at very high safety standards. Safety and the best economic operation tend, in any case, to go hand-in-hand.

Electrical power generation, including nuclear, was largely developed by public bodies in a regulatory environment that permitted long-term investment but passed on the full cost to customers. In some countries, nuclear plants were primarily built for national security of supply reasons, although the promise of cheap electricity with a stable cost base was clearly very important. Even today, reducing the dependence on imported fossil fuels with uncertain price prospects remains important in countries without substantial domestic oil, gas and coal reserves, notably France, Japan and the South Korea. The expected long-term stability of costs was also an important consideration in favour of nuclear and remains a strong argument today.

As the world has moved to liberalised power markets, an electricity generating station should remain online if its forward (or marginal) costs are competitive with those of alternatives. Previous costs of construction are effectively sunk. These capital costs may or may not be amortised in the accounting books of the plant owner, but this should not affect the decision on whether a plant continues to operate.

Nuclear power plants constructed over the past 30 years have clearly demonstrated that they can meet the economic challenge posed by liberalised power markets. Plant load factors have increased significantly, squeezing more output out of the same amount of capacity. Owners have found it worthwhile to invest in plant refurbishment and in capacity uprates, as marginal costs of nuclear generation have been below those of most other modes and beaten market electricity prices. Marginal costs tend to be low, stable and predictable, in contrast to those of fossil fuel powered plants, where the volatile fuel prices are an essential part of the electricity cost. This has generated good profitability for nuclear plant owners, which has encouraged them also to seek operating licence extensions for many reactors. In the USA, an active market has developed in operating nuclear plants, as ownership is consolidated in a smaller number of companies, each with a significant commitment to its nuclear fleet.

World energy production and consumption have recently been growing at around 2% per annum and most projections see this continuing in the period to 2030. For example, the reference case in the 2004 edition of the International Energy Agency’s (IEA’s) World Energy Outlook projects that global primary energy demand will increase by two-thirds in the three decades to 2030, reaching 16.5 billion tonnes of oil equivalent. This represents a growth rate of 1.7% per annum in the period 2000-2030.

It is also almost certain that the growth rate of electricity demand will exceed this, based on recent trends that favour the delivery of energy in this way. The proliferation of electric home appliances and strong underlying commercial and industrial demand growth underlie this assumption. In addition, it is estimated that there are currently still 1.65 billion people in developing countries who do not have access to electricity. Most (but not all) are living in rural areas; spreading electricity services to these ‘unconnected’ peoples is a prime objective of current development strategies. The IEA therefore projects that world electricity demand will almost double in the period to 2030, an annual growth rate of 2.45%. There is a marked contrast between the expected growth rates in different areas. In the OECD countries, growth of only 1.3% per annum is expected, whereas in both China and India, it should be 4.4% and in Brazil, 3.1%.

Given this background for world electricity demand, a significant amount of new investment in generating capacity is required. In the developed world, much of this will be replacement capacity but in the developing world, nearly all will be incremental. Much of this investment will be directed at satisfying local baseload requirements, even if one assumes an aggressive commercialisation of renewables and of distributed generation. Given this positive background, the nuclear industry sees a real opportunity for new nuclear build, on grounds of both plant economics and environmental sustainability.

As far as new electricity generating plants are concerned, the basic economic question can be presented quite simply: are the low, stable fuel costs of a nuclear plant sufficiently attractive to attract the higher initial capital costs in the face of competition from other generation modes?

The general move to liberalised electricity markets poses challenges to the economic viability of new nuclear plants. It can be assumed that investments in new nuclear generating capacity will only happen if the rate of return to investors is sufficiently high compared with other potential investment options once their appraisal of the risk level is taken into account. The early stages of the shift to competitive electricity market regimes has attracted investors to favour investments where the need for capital is small and the construction times are short. Volatile fuel prices make such investments risky and where major power users seek long term price stability, nuclear power plants offer a good solution. In addition, the uncertainties surrounding the character of power markets are not helpful for securing a rational and secure supply infrastructure built on large slugs of capital.

The key parameters in the economic competitiveness of new nuclear plants are their capital costs (strongly influenced by the construction time and the rate of interest to be paid on financing) and the fuel prices of gas and coal plants, the main alternatives in baseload generation. Various recent studies demonstrate that if new nuclear plants can be built with low capital costs and coal and gas prices are at current levels or higher, they can be cheaper on a levelised cost basis than the alternatives. Initial plants of new designs, however, face substantial first-of-a-kind engineering (FOAKE) costs and may need some public assistance to become economic. Several schemes have been suggested for this. Beyond these, learning by doing and other benefits of building a significant number of plants holds out the realistic promise that plants can be fully economic. This may be true even when the cost of capital is at a high level, perhaps 13-14%.


If fossil fuel use is significantly penalised by carbon taxes or emissions trading regimes, the competitiveness of nuclear clearly improves, particularly against coal, but also gas

This is particularly so now that the outlook for fossil prices is changing. The assumptions made in the reference cases in even very recent studies of generating plant competitiveness may now be regarded as too low, at least in the short term. Certainly the recent experience of oil, gas and coal prices suggests that they will remain volatile in the future, in contrast to key nuclear operating costs.

Everything possible needs to be done to bring the capital costs of new nuclear plants down to the level that the industry believes is possible, namely an overnight (before interest charges during the construction period) cost of $1000-1400 per kWe installed. It is clear, for example, that there are substantial economies of scale with nuclear plants, suggesting that reactor sizes should increase for economic reasons, but there may be some constraints on this imposed by electricity grids.

Another approach would be to build several reactors on one site, which can bring major unit cost reductions. Standardisation of reactors and construction in series will also yield substantial savings. Learning by doing is regarded as potentially a significant way of reducing capital costs, both through replication at the factory for components and at the construction site. Simpler designs, possibly incorporating passive safety systems, can also yield savings, as can improved construction methods

The nuclear industry is working with regulators to develop licensing processes that have rigorous but predictable technical parameters and timescales, from design certification through to construction and operating licences. It is hoped that the industry can eventually move closer to the model set by the aircraft manufacturing industry and their corresponding regulatory authorities, where a limited number of designs once approved in one country are quickly licensed for use in all countries and can be operated by staff with internationally-recognised skills.

If fossil fuel use is significantly penalised by carbon taxes or emissions trading regimes, the competitiveness of nuclear clearly improves particularly against coal, but also gas. The case for nuclear plants to be included in greenhouse gas avoidance schemes is very strong but the industry cannot necessarily rely upon much help from this to make its case in an economic sense. If it comes, it will be regarded as an added bonus but the industry will continue to strive to influence things over which it does have some direct control, namely the costs of building and operating reactors.

The significant FOAKE costs attributable to new reactors must be recovered with early orders, but the lack of recent experience of building nuclear power plants in many countries means that subsequent units may become substantially cheaper through the experience gained. Orders achieved in China, Finland and France are the start of overcoming this. Some creative public assistance with initial units could be justified in a number of ways, related to energy security of supply concerns, diversity of power sources and avoidance of carbon emissions. They could take the form of loan guarantees, accelerated depreciation allowances and investment or production tax credits. Those opposed to nuclear would see these as subsidies, but they are familiar measures taken in favour of certain power generating options (such as wind power today) and other industrial objectives in many countries. It would be expected that these would last for only the first half dozen units with the expectation that following units would have lower capital costs with shorter construction times and be fully economic.

There are clearly substantial challenges in financing investments of $2-3 billion when the only revenue comes from electricity sales in markets that may be unsteady. In liberalised markets where prices are set hourly by marginal cost offers, risks of new investment are substantial, yet longer-term needs of customers have to be covered in some way. However, as markets mature, longer-term commitments may be easier to make.

One approach is for major power customers to take equity stakes in nuclear plants. This is the model adopted in Finland where the industrial owners of the fifth unit, ordered in late 2003, will take most of the power produced. Assuming the reactor is built to schedule and operates as expected, the owners should have long-term power supplied at 2.5 r cents per kWh, including all capital and interest repayments. Similar opportunities with major power users should be explored by the nuclear industry. The need is for a major part of the electricity to be effectively pre-sold, with the remainder sold on the spot market or through shorter term contracts.

Given the ability of the financial sector for innovation, it is likely that other ideas will be introduced to cope with the unpredictable developments of electricity markets. Consortia may be put together which have the confidence to invest in nuclear. Investors such as pension and life assurance funds should find nuclear plants attractive as their returns should be stable and predictable over long periods. It may also be possible to introduce long term forward contracts for power sales, to allow major capacity additions to take place.

New nuclear plants should now be regarded as good, conservative long-term investment prospects. Once the initial significant capital cost burden is overcome, they can offer electricity at predictable low and stable costs for up to 60 years of operating life.

Author Info:

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.

Chris Lambert PPF pq
If nuclear power is to have a future in the UK it will require high level political champions

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