The Economic Challenges Facing Nuclear Energy

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    Stockholm (NordSIP) – Beyond environmental and safety concerns, the main criticism levied against nuclear energy is the need for state intervention at several levels. In one way shape or form, it appears that the costs and risks of nuclear energy are so onerous that the government has to come in and distort the market in a way that is not as necessary for other sectors. The need for public sector involvement tends to make investors feel as though the sector is just not that viable. The impression often is that for nuclear power, state intervention is not about special interests capturing the public officials and carving out a privileged position for themselves. State intervention is a necessity.

    Using data from the International Energy Agency (IEA) and comparing it with similar estimates from which subsidies have been extracted by Lazard, it becomes apparent that state intervention may be distorting market dynamics, making nuclear appear more cost-competitive than it actually is.

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    In this article, we explore some of the economic issues underlying nuclear power, how they arise and how these challenges have been tackled, including the cost of production, operation and maintenance and insurance for nuclear power plants (NPPs).

    Costs of Construction, Operational and Maintenance Costs (O&M)

    According to the World Nuclear Association (WNA), building a nuclear power plant (NPP) takes over five years to construct, whereas natural gas-fired plants are frequently built in about two years. However, the funding and construction of a new NPP is often accompanied by missed deadlines and post-construction costs, far exceeding the initial announcements, which erodes stakeholders’ and the public’s confidence in nuclear industry’s capability of meeting deadlines, according to the OECD’s Nuclear Energy Agency (NEA).

    The construction of Finland’s Olkiluoto unit, for example, was announced in 2005 with an initial construction time of 5 years and a budget of US$ 2,020/kW, saw its construction time rise to 16 years and the budget increase above US$5,723/kW. On the other hand, wind and solar power plants on average only take 1 to 3 years to build and seldom suffer such delays.

    NPPs beat all other alternative sources of energy in terms of the duration of their life cycle. An NPP has an average lifetime of 69 years, whilst solar and wind last on average for 20 to 25 years. However, during this time NPP’s will incur higher operational and maintenance (O&M) costs. According to estimates from Lazard, NPPs face Fixed O&M costs of US$119 – 133.25/kW year, compared to solar’s US$75 – 80/kW year, onshore wind’s US$27-39.5/kW year and offshore wind’s US$67.25-81.75/kW year. Moreover, while newly built NPPs face variable O& M costs of US$3.75-4.25/kW year, that category of O&M costs is not even a consideration for solar or wind power plants.

    However, the NEA explains that “the cost of new nuclear is essentially dominated by capital costs, which make up 72% of total production costs […]. In addition, the costs of NPP are mostly fixed and can, to a large extent, be considered a sunk cost. This is patent in Lazard’s report, according to which the total capital cost of a newly built NPP ranges between US$7,675/kW and US$12,500/kW. The equivalent metric for solar and wind (onshore and offshore) comes down to between US$6,000/kW and US$9,090/kW, US$1,050/kW and 1,450/kW (onshore), and  US$2,600/kW and 3,675/kW for offshore. This cost seems to more than balance the much greater net facility output of a newly built NPP (2,200MW), compared to solar (100 – 150MW), onshore wind (175MW) and offshore wind (210 – 385MW), even accounting for the life-cycle of the facilities. Indeed, these considerations conspire to give NPPs one of the highest levelised cost of energy (LCOE) – a measure of the average net present cost of electricity generation for a generating plant over its lifetime. Ranging between US$129-198/MWh, LCOE estimates appear to put NPPs at a disadvantage vis-à-vis solar’s US$126-156/MWh, onshore wind’s US$26-54/MWh and offshore wind’s US$69-104/MWh.

    Clearly, one of the main benefits of nuclear power is that it is capable to produce electricity without the interruption and intermittency problems that plague renewable energy sources. However, it is not clear that this necessarily makes it more economically appealing than those alternatives.

    Notwithstanding the fact that these considerations already offer an unfavourable perspective on nuclear energy, it is important to consider that there are important costs facing NPPs that we suspect are not considered in Lazard’s or the IEA’s estimates. Most significantly, it is very likely that the estimates quoted do not incorporate the cost of decommissioning NPPs nor the phenomenally long costs associated with the storage of nuclear waste or the costs associated with geopolitical safety and non-proliferation. However, that is not all. Another factor should be taken into account.

    The Insurance Problem

    Economically speaking, nuclear power also suffers from a problem related to insurance. While there have only really been three nuclear accidents since the atom was first split in the 1940s, the negative effects of such accidents are inevitably hard to contain and profound in the harm they cause. By implication, the legal liability potentially facing NPP operators presents a potential problem to their economic viability. Here too, one of the problems is that the costs of nuclear energy don’t seem to be fully internalised by operators.

    According to Schwartz 2016, the nature of nuclear disasters is such that a consensus emerged that liability for nuclear disasters should be treated as an exception to normal tort law. “The ordinary rules of tort law would on one hand inhibit victims from showing which parties were liable for  their harm and on the other expose nuclear operators,  builders,  and suppliers, etc.,  to uninsurable liability,” Schwartz 2016 explains.

    Although the Paris Convention, the Vienna Convention and the Convention on Supplementary Compensation attempt to introduce some international harmonisation, the foremost problem with funding approaches to nuclear damage liabilities is the vast range of different models available.

    However, despite this heterogeneity, there are some regularities. Liability for nuclear damages is generally governed by five principles: (i) operators of nuclear power plants should be exclusively liable for nuclear damages, (ii)  they should be strictly liable for nuclear damages,  (iii) their liability should be limited in amount, (iv) their liability must be financially secured,  for example through insurance,  and (v) their liability should be limited in time.

    Another common feature is that the insurance is generally conducted through a multi-tiered approach, involving some mix of operator, industry-wide, public funds and international funds. However, the total amounts vary widely. The USA foresees up to US$13.436 billion. Western European countries, which tend to be signatories of the Paris Convention are liable to pay up to €1.5 billion (US$1.7 billion). Signatories to the Vienna Convention are liable to pay up to IMF SDR300 million (US$214 billion). March 2021 estimates from the WNA suggest China is on the hook for CNY800 million (US$128 million) in insurance. Still, other countries, such as Japan, Germany and Finland have unlimited liability schemes, where the operator is only on the hook for US$1.044 billion, €2.5 billion and €700 million, with the rest of the bill being footed by the government.

    As we noted in a previous article of this series, the Fukushima disaster highlighted the danger of the present consensus approach to nuclear damage insurance. The share of the liability insurance payout out of the total cost estimates for dealing with the disaster amounted to JPY5 trillion (approximately US$43.5 billion), the vast majority of which was left on the government’s lap.

    The extent to which the caps established across the world would hold in the presence of catastrophic nuclear failures and political pressure for public disaster relief is also uncertain. Either way, more often than not, even if potential victims face caps on the claims they can bring in case of accidents, operators are not internalising the full cost of insurance, waste management and of nuclear energy and the government ultimately tends to be left with the largest share of the insurance funding.

    A Tricky Proposition, But…

    It is complicated to disentangle all the costs of different energy sources. Between the IEA, different studies and business estimates, the range of choices is far too wide and still yet incomplete.

    Having explored the estimates that most broadly seem to internalise the costs of energy production, doubts remain as to whether nuclear energy is quite as economic as it might have been desirable.

    However, although the aforementioned shed some light on the economic problems of nuclear power, it is also important to note that the intermittency problem also creates issues in the full internalisation of all the costs of renewable energies. Among other things, solar and wind, on their own are not plausible in a system that seeks to minimise the output volatility.

    An analysis that internalises all the costs of renewable energy should also take into account the costs energy storage and batteries. It is very likely that none of the LCOE estimates and comparisons available at the moment take this issue into account. It is not unlikely that such a further internalisation of the costs of output smoothing should tilt the scales in favour of nuclear power. As it is however, the data is not very supportive of NPPs.

    Images courtesy of IEA and Lazard
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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