The Economist and the Economics of Nuclear Energy

The Economist, recently ran an article titled "The Shape of Things to Come?" that provided a lengthy examination of the economic case for nuclear energy. They painted a pretty good picture of where nuclear power is and could be in the future. The numbers were quite accurate, and leave the reader to make the case for nuclear.

There are some points that I would like to touch on.

Let's start with the paragraph after "Subsidy, What Subsidy?":

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 in.

The study titled "Projected Costs of Generating Electricity"which the Economist refers to mentions nothing about greenhouse gases or environmental benefits. What the study discusses is the life-cycle COSTS of each fuel. The costs discussed factor in everything such as capital, operations & maintenance, fuel and decommissioning costs for nuclear along with all the costs associated with all other types of fuels. For a more detailed look check out Elizabeth King's post a couple of months ago on the study.

There are no disadvantages or advantages given in the study. The numbers presented account for both nuclear's high capital costs as well as for gas and oil's high fuel costs. Both are disadvantages for each fuel. The number we like is the final number stated at the next paragraph of their article:

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 base load 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.

After all the costs are included, nuclear still pans out over natural gas. But as they state in the article, natural gas life-cycle costs are high because gas prices are high ("a view contradicted by the IEA's official forecast of a medium-term reduction in gas prices").

Nuclear's life-cycle costs, however, do not feel the price swings that gas does. Fuel costs for nuclear only make up about 25% of the production costs and even less than that for the entire life-cycle costs. Natural gas fuel costs, however, makes up 91% of the production costs. Like the next paragraph in the article states:

.... 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 competitive."

I don't know about nuclear being not competitive but high gas prices are a motivator for building more nuclear. However, if you look at the fuel shares of US electricity in 1973 versus 2004, nuclear is clearly competitive. Nuclear would not have quadrupled its fuel share if the economics weren't favorable. But, if you look at gas, their fuel shares really haven't moved despite all the new building. Since 1999, gas prices have doubled.

Let's move on to used fuel:

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 pool -- 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.

Unlike Britain, the disposal of radioactive waste won't mess up the economics. Contributions from consumers who use electricity from nuclear power plants have been accumulating since 1983 specifically for a nuclear waste repository. The balance in the fund is about $16 billion. A nuclear repository is not an economic issue, it's political. Check out last month's post on the nuclear waste fund for more specific numbers.

Now on to building new nuclear plants:

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.

The Economist is right about these numbers, but let's put them into perspective by looking at the capacity factors for each fuel. If you build a 1,000 MW nuke plant it would run about 90% of the time generating about 7.9 million MWh of electricity a year -- enough to power a city the size of Boston or Seattle. But if you were to build a 1,000 MW coal plant it would run about 70% of the time, and a combined cycle natural gas plant would run about 40%.

Sure coal and gas plants are cheaper and faster to build, but nuclear is obviously more efficient and will pay off over the long term. If you look at the life-cycle costs from above, nuclear is overall the better spend for investors in baseload electricity. It's like investing in stocks, the short term may not yield high returns, but the long term benefits and advantages (energy security and diversity) are why you invest.

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