Nuclear: is it a heavily subsidised technology?

19 January 2009

Those opposed to nuclear power frequently make the claim that it has always relied on a significant amount of public subsidies and doesn’t make sound economic sense, even considering any environmental and security of energy supply advantages. The industry counters by accepting that as a developing technology, nuclear received subsidies in the past, but as a mature technology today should be able to attract financial investors without any degree of governmental support.

There are three main areas where, broadly speaking, subsidies or other support for energy may apply: government research and development (R&D) for particular technologies; subsidies for power generation per unit of production (or conceivably per unit of capacity); and the allowance of external costs which are either paid by the community at large or picked up later by governments. Public policy has been driven by worries about energy security, as well as by the need to address environmental problems and social concerns. Reliable and affordable energy supplies are vital to any economy, while energy shortages or the threat of such have political and economic consequences. As concerns have evolved from oil shocks to climate change, each country’s energy provision and infrastructure needs to be restructured accordingly. We can examine each of the three main areas in turn.

Over the last several decades there has been a lot of government-financed energy R&D in most advanced countries. Government R&D expenditure on energy tends to be focused on long-term development of new technologies, with the aim of bringing them to the commercialisation stage, while private R&D is mostly on the further development of existing and operational technologies. While there are notable exceptions both ways, there is a strong disincentive for industry working in a highly competitive market and needing to justify a return on capital to shareholders to undertake long-term, high-risk R&D. This is because after all the investment they have put in, they will still likely be selling kilowatt hours of electricity or another essentially undifferentiated product in a competitive and very price-sensitive marketplace.

The question of support to energy technologies was brought into focus by a recent report commissioned for the Washington-based Nuclear Energy Institute by Management Information Services Inc. It looked at energy more widely than just electricity, and took in all US federal incentives, not simply for R&D, from 1950 to 2006. For those that believe that the USA is the home of free enterprise, untainted by public subsidies and incentives, the results are something of an eye-opener.

Total energy subsidies identified amounted to some $726 billion in 2006 dollars. By far the largest incentive category was found to be tax concessions, especially for oil and gas, but also more recently for wind power. In fact, no tax concessions benefited nuclear power in the whole of this period. Total support for nuclear power over the 56 years was $65 billion, 9% of the total, with R&D support by far the biggest area. This compared with $50 billion (7%) for non-hydro renewables (wind and solar) plus geothermal. The main support was for oil and gas, at some $436 billion (60% of the total), with coal at $93 billion (13%). Indeed, it is pointed out that today nuclear power in the USA pays more out than it receives, due to contributions to the federal nuclear waste fund, which so far exceed disbursements from it by $14 billion. There is no corresponding payment from other energy sources.

Focusing on R&D, it was found to account for 19% of the historical subsidies, and half ($67 billion of $135 billion) was for nuclear, 16% for renewables plus geothermal, and 23% for coal. Of the nuclear-related R&D, about $39 billion was spent before 1975 to explore a range of new reactor concepts. From 1976 to 1988, the developing breeder reactor programme accounted for a high proportion of the nuclear R&D expenditure, but this then ceased. It is interesting that light water reactor technology accounted for only 8% ($5.3 billion) of the nuclear R&D incentives, though it now provides almost 20% of US electricity. Overall, nuclear R&D peaked at $2.8 billion in 1978 and declined sharply to about $550 million in 1987, then fell steadily to a low of $75 million in 2001. Since 1988, spending on nuclear R&D has been less than for coal, and since 1994 it has been less than that for renewables as well.

Looking outside the USA, it appears that government R&D expenditure on nuclear was relatively more significant historically, but the pattern of dramatic decline since the 1980s is similar. International Energy Agency (IEA) data shows R&D on nuclear fission peaking around 1980 and after 1985 declining steadily to less than half that level. Since 1990 Japan alone has been responsible for some two thirds of IEA R&D expenditure on nuclear fission, with France accounting for most of the remainder. Today, apart from Japan and France, there is about twice as much R&D investment in renewables than nuclear, but with arguably rather less to show for it and with less potential for electricity supply, given the diffuse, intermittent and therefore unreliable character of most renewable sources.

In addition to front end R&D expenditure there are ongoing operational subsidies for various forms and sources of energy. With government-controlled utilities, or regulated markets such as in the USA until the mid 1990s, utility costs could simply be passed onto the consumers, who effectively supplied a subsidy relative to cheaper alternatives. With deregulated and competitive markets this had to change. Today, the USA is the only country which has offered any subsidy to nuclear power: a production tax credit of 1.8¢/kWh from the first 6000MWe of new-generation nuclear plants in their first eight years of operation. Nevertheless, government policies to support renewables today involve explicit direct subsidies along with other instruments such as feed-in tariffs, quota obligations and energy tax exemptions.

In the European Union (EU), feed-in tariffs are widespread (in 18 of 25 EU countries as of 2007) and they are also imposed in Canada, China and Israel. A feed-in tariff obliges energy retailers to buy any electricity produced from renewable sources and to do so at a fixed price, usually over a specified period. The rates usually vary for different sources, perhaps being greater for solar or offshore wind. The UK Renewables Obligation is typical and requires retailers to buy a certain amount of electricity from renewable sources at whatever price they can, or pay a penalty by buying certificates on the market (currently about 4 pence/kWh – the price is left to the market). The amount required to be bought can be adjusted annually, as in the UK towards 15% by 2015 and is effectively passed onto the electricity consumer.

In the USA a direct subsidy (now about 1.9¢/kWh) is available to generators of renewable power over the first ten years of a project’s operation so they can sell it at that amount below actual cost. The subsidy is granted as credit on taxes. In the USA a Renewable Portfolio Standard is proposed, mandating a specified amount of renewable power from suppliers and applying already in California and other states.

Germany applies a mixture of incentives for renewables, such as feed-in tariffs. The average feed-in tariff apart from solar PV is 8.5 euro ¢/kWh (and 16.4¢ including solar PV – this being 49¢). The combined subsidy from consumers and government totals some r5 billion ($6.3 billion) per year – for 6% of its electricity. It also provides producer subsidies to its coal industry, but these have been declining as production has declined – today the subsidy is only around r2 billion ($2.5 billion) per year, compared with a total of over r130 billion ($165 billion) over the past four decades.

Corresponding to these, in the other direction, are taxes on particular energy sources, justified by climate change or related policies. For example, the UK has a climate change levy which for non-renewable electricity (including nuclear) is 0.43 pence/kWh for large users.

It is clear that subsidies for renewables are increasing and are arguably an expensive way of curbing carbon emissions. Nevertheless, they can be justified by the need to ‘kick start’ these technologies to a point where they can make a significant contribution to energy supply, just as the R&D funding for nuclear was necessary in the past. A Eurelectric report has projected that by 2010, the average subsidy for renewables in the European Union will be 3.7 euro ¢/kWh and the average cost of carbon avoided r88 ($112) per tonne. This is well in excess of the cost of carbon currently indicated by the European Emission Trading Scheme, suggesting that there may be relatively cheaper ways of tackling climate change, including direct taxes on carbon-emitting technologies.

Finally, it can be argued that the implicit subsidies where the waste products of energy use are allowed to be dumped into the biosphere completely dwarf the public funding of energy-related R&D and the direct subsidies to energy (particularly renewables) outlined above. The largest of them are given to fossil fuel producers, while nuclear energy has always had to cost in its own waste management, disposal and plant decommissioning. Similarly, renewables only give rise to minor wastes in manufacturing.

The report of the European research network ExternE, a major European study of the external costs of various fuel cycles, focusing on coal and nuclear, was released in 2001 and further figures have emerged since. The external costs are defined as those actually incurred in relation to health and the environment and quantifiable but not built into the cost of the electricity to the consumer, and therefore which are borne by society at large. They include particularly the effects of air pollution on human health, crop yields and buildings, as well as occupational disease and accidents.

The report shows that in clear cash terms nuclear energy incurs about one tenth of the costs of coal. Nuclear energy averages under 0.4 euro ¢/kWh (0.2-0.7¢), less than hydro; coal is over 4.0¢ (2-10¢ averages in different countries); gas ranges 1.0-4.0¢; and only wind shows up better than nuclear, at 0.05-0.25¢/kWh average. The EU cost of electricity generation without these external costs averages about 4¢/kWh. If these external costs were in fact included, the EU price of electricity from coal would double and that from gas would increase around 30%.

In conclusion, it can be accepted that nuclear historically received significant public funding, but this was arguably necessary for an ‘infant technology.’ Renewables now receive heavy direct subsidies in the market, while fossil fuels receive significant indirect subsidies in their waste disposal. While public assistance for renewables is arguably justifiable, the costs of doing so must be made explicit and subject to comparisons with alternatives. The adoption of any policies or conventions to take account of external costs of generating electricity will have a very beneficial effect on the prospects for any strong resurgence in the role of nuclear energy.

Author Info:

Steve Kidd is Director 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

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