Friday, May 09, 2008

The CBO Study on Nuclear Energy

Your rainy weekend reading suggestion: the Congressional Budget Office's just released study,"Nuclear Power's Role in Generating Electricity." The pull quote:

In the long run, carbon dioxide charges would increase the competitiveness of nuclear technology and could make it the least expensive source of new base-load capacity. More immediately, EPAct incentives by themselves could make advanced nuclear reactors a competitive technology for limited additions to base-load capacity. However, under some plausible assumptions that differ from those CBO adopted for its reference scenario—in particular, those that project higher future construction costs for nuclear plants or lower natural gas prices—nuclear technology would be a relatively expensive source of capacity, regardless of EPAct incentives. CBO’s analysis yields the following conclusions:
  • In the absence of both carbon dioxide charges and EPAct incentives, conventional fossil-fuel technologies would most likely be the least expensive source of new electricity-generating capacity.
  • Carbon dioxide charges of about $45 per metric ton would probably make nuclear generation competitive with conventional fossil-fuel technologies as a source of new capacity, even without EPAct incentives. At charges below that threshold, conventional gas technology would probably be a more economic source of base-load capacity than coal technology. Below about $5 per metric ton, conventional coal technology would probably be the lowest cost source of new capacity.
  • Also at roughly $45 per metric ton, carbon dioxide charges would probably make nuclear generation competitive with existing coal power plants and could lead utilities in a position to do so to build new nuclear plants that would eventually replace existing coal power plants.
  • EPAct incentives would probably make nuclear generation a competitive technology for limited additions to base-load capacity, even in the absence of carbon dioxide charges. However, because some of those incentives are backed by a fixed amount of funding, they would be diluted as the number of nuclear projects increased; consequently, CBO anticipates that only a few of the 30 plants currently being proposed would be built if utilities did not expect carbon dioxide charges to be imposed.
  • Uncertainties about future construction costs or natural gas prices could deter investment in nuclear power. In particular, if construction costs for new nuclear power plants proved to be as high as the average cost of nuclear plants built in the 1970s and 1980s or if natural gas prices fell back to the levels seen in the 1990s, then new nuclear capacity would not be competitive, regardless of the incentives provided by EPAct. Such variations in construction or fuel costs would be less likely to deter investment in new nuclear capacity if investors anticipated a carbon dioxide charge, but those charges would probably have to exceed $80 per metric ton in order for nuclear technology to remain competitive under either of those circumstances.
The study was written by Justin Falk, an analyst with the CBO's Microeconomic Studies Division, under the supervision of Joseph Kile and David Moore. Hat tip to the CBO Director's blog (?!), for the pointer to the study. You have to believe that when the Director of the CBO is blogging, this medium is here to stay.

4 comments:

Rod Adams said...

One of the real complexities in predicting the future financial returns for new nuclear plants is that a number of key variables are dependent, not independent.

Completing and operating a moderate number of new nuclear power plants will have a measurable effect on the country's demand for natural gas. Since the demand reduction will occur on the margins, it will reduce the price at which gas can be sold into the market.

If gas is the price setter in a market, the revenue generated by selling electricity in a lower gas price environment may not be as high as assumed in the initial models.

In other words, companies that invest in new nuclear power plants will be helping to reduce production costs for their competitors who refuse to invest in higher capital cost, but cleaner nuclear power and instead wait for lower natural gas prices. Either strategy is risky and sort of like playing chicken because if no one buys new nuclear or coal, the price of gas will certainly surge.

I guess this is one reason why the industry is demanding national level guidance and decision making.

Anonymous said...

Interesting point, rod. And it makes you aware of how dependent all energy policy is upon decisions made by the politicians.

Anonymous said...

Assuming a natural gas price of $6/MBTU is bad enough. Assuming that it will remain at $6 even if we use natural gas for all new power generation is outrageous. One would expect a better, more detailed analysis.

Natural gas is over $10/MBTU right now, and futures prices are ~$10 or more all the way out to 2020:

http://futuresource.quote.com/quotes/quotes.jsp?s=NG

Investors know better (or are more truthful) than the EIA, whose projections for future gas and oil prices have been absurdly low for many years now.

If one merely assumes $8 gas, the gas-fired electricity cost curve shifts up so that it becomes more expensive than nuclear at a CO2 cost of ~$20/ton, the same CO2 cost required to make coal more expensive than nuclear. At a CO2 price of $20-25 per ton (as opposed to $45/ton), nuclear will become the primary (and cheapest) choice for new baseload generation.

Jim Hopf

Anonymous said...

Actually, since oil went above $110/b, natgas trades above $11/MBTU. Coal went up 93% last year.

"substitution effect" in economics.

That decrease of natgas prices at futuresource is IMHO a wishful thinking. Fertilizers, plastics, home heating in developing countries, new car/truck/buses running on natgas are all increasing in demand rapidly, not to mention the idiocy of burning natgas for electricity.

-t-