The economic prospects of a nuclear renaissance


Any opinion one may arrive at on the economic prospects of the civilian nuclear industry today – many observers are so sure that these prospects are bright that they have been speaking of a nuclear renaissance – must be put in the context of the world energy market. So let’s begin by recalling a few basic data.
The bulk (~ 85%) of world primary energy is (in 2009) fossil fuels: Oil (one third), Coal (one fourth)and Natural Gas (one fourth).
What remains (some 15 %) is made up in roughly equal parts by nuclear, hydro and biomass.
Whatever tiny percentage is left is wind, solar, geothermal etc. – that we may also group with hydro and biomass under the label of “renewables”.
Roughly two thirds of world electricity come from fossil fuels, one sixth from nuclear and one sixth from hydro – again, whatever tiny percentage is left is wind, solar, geothermal etc.
Oil and natural gas are the benchmark sources chiefly for the flexibility allowed by their use: they are easily transported and stored (thanks also to the existence of a large infrastructure built over the last century to do precisely these two things); the internal combustion engines and gas turbines that burn them – either for propulsion or electricity production – can be turned on and off at leisure.
Gas turbines – which are basically the same whether you use them on a plane, a ship or in a power station – can be installed and connected to an electrical grid in a matter of few months, as opposed to the years required by the construction process of nuclear and coal plants.
Nuclear and coal plants are instead complex to get started as well as brought to a halt (base load power plants), while wind and solar are discontinuous sources.
Since electricity is not easily stored (batteries have countless limitations for many uses) you cannot significantly exploit that produced by base load power plants for transport – in land vehicles, ships or aircraft. Trains are the exception, of course. But that also means that a substantial chunk of human agitation – moving around – cannot be satisfied by anything else than fossil fuels.
Now, it is the availability (price) of the benchmark sources that determines the economic fate of the residual ones.
If oil and gas are scarce (costly) the others become attractive. If oil and gas are abundant (cheap) the others remain unattractive. Even though oil and gas are finite resources, there is no such a thing as a definitive limit to their availability, or a precise quantitative definition of scarcity.
As a result of the 2008-2009 economic crisis (which depressed gas demand), of the boom in U.S. shale gas production and of a surge in liquefied natural gas (LNG) capacity, there is today an unexpected (5 years ago, say) glut of global gas supply. Gas price is increasingly decoupled from oil price in the U.S. and may eventually do the same in Europe as well.
Also, there is unconventional oil, such as Canadian oil sands and Venezuelan extra heavy – but also coal to liquids, gas to liquids, and oil shales. This stuff costs more to extract and refine than conventional crude oil. But then again: the higher the price of crude oil goes, the more economic sense the marginal stuff makes, which in turn depresses, or moderates the growth of, the price of crude oil.
Also and most importantly, the higher the price of oil goes, the stronger the brake on the economy. Throughout the post-war period, spikes in crude oil price have been regularly followed by recessions. This was the case also with the great depression of 2008-2009 that, although due mainly to financial causes, was also preceded, in July 2008, by a spike in the oil price.
The slow-down in economic activity that is the hallmark of any recession, or worse depression, squeezes oil demand, which in turn reduces its price. Again, this is precisely what happened in 2008-2009.
But that’s not all. Another way of keeping oil and gas relatively abundant (cheap) is precisely to use the residual non-fossil energy sources whenever possible and feasible, even if it does not full economic sense. Paradoxically, since the use of the residual sources lowers the demand for oil and natural gas and hence their price, one may tolerate (to a point) to pay a higher price for a given unit of energy output through the residual sources – normally this is done via government subsidies.
On top of that there are the negative externalities of fossil fuel use: CO2 and global warming. Once a carbon tax is factored in for the use of fossil fuel, the price picture changes in favor of non-CO2 emitting sources, i.e. wind, solar and nuclear.
Governments in rich countries also subsidize renewables or nuclear independently from a carbon tax to cash in the positive externalities of fighting global warming, diversifying energy sources (thus increasing security of supply), and stabilize the price of fossil fuels as recalled above.
In rich countries at least, oil is used nowadays mainly for transport. Gas is widely used for heating and for electricity production.
The more open and competitive a market, the less administered the energy price, the greater the advantage of rapidly adapting to changes in demand (remember: the ability to turn the source on and off by a simple switch) – in another word, of flexibility.
The gradual opening of a European-wide electricity market has put a premium on flexibility and hence on gas. See what happened to Italy.
Italy’s production and import of electricity by source. TWh.

year                                                   1997                                     2009
Coal                                                    20.5                                     39.7
Oil                                                     111.2                                     15.8
Natural Gas                                      60.6                                   147.2
Hydro                                                 41.6                                      49.1
Wind                                                     0.1                                        6.5
Solar                                                  negl.                                       0.6
Geothermal                                         3.9                                        5.3
Biomass and waste                          0.8                                        7.6
Net Import                                         39.0                                       45.0

Source: Autorità per l’energia elettrica e il gas
Let’s now put ourselves in the shoes of a private investor who, for whatever reason, is interested in throwing his or her money into nuclear energy – you may have heard talking of a nuclear renaissance, you are convinced that fossil fuels will not last forever and that global warming must be urgently tackled. But you also want to verify whether you will end up making money with your investment or not.
The first piece of information you’d want to base your investment decision on is, according to all of the above, an educated guess about the future price of oil and natural gas – the benchmark energy sources on whose price will depend the price nuclear-generated electricity can be sold at. How far in the future? Say from the moment your nuclear power plant is connected to the grid and starts generating an inflow of cash to the point in time when the thing becomes too old and has to stop operating.
We are talking about a time span of many decades.
It may take about a decade to build it – if we base our experience on what it is happening to Olkiluoto 3, a French designed EPR reactor under construction in Finland, whose order was placed in December 2003 and is now expected to be commissioned in 2013.
Plus it may have up to 60 years of operation – many reactors around the world are now being granted life extension permits by their respective licensing authorities and there may be a tendency to make at least some reactors operate up to sixty years. However, the average age of the 123 units that have already been closed is about 22 years.
First simple point: can a private investor really be interested in an investment whose payback time may be decades in the future? There is clearly more here that the usual problem of discounting future revenues – for example, I know with certainty that well before seventy years I will be dead.
Second simple point: no one knows what will happen to the price of oil and natural gas over the next several decades. Bear in mind that if you err on the wrong side – those prices, particularly natural gas’, turn out to be lower than expected – your return on investment may be severely undercut by a competition whose main asset is speed and flexibility. I repeat: to have a new gas turbine generating electricity takes only months and it costs only a tiny fraction of a nuclear reactor.
One thing we know for sure, though: demand for energy and thus for fossil fuels is set to grow in the coming decades. The International Energy Agency (IEA) – an arm of the Organization for Cooperation and Economic Development (OECD) – in its last (2010) World Energy Outlook puts forth three scenarios from 2008 to 2035.
Energy demand grows in all three: by 1.4% a year under current policies, by 1.2% a year under the “new policies” announced by the G20 in 2009, and by 0.7% under what it calls a “450 scenario”, i.e. policies consistent with the goal of limiting “the concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2 equivalent”.
As for the future price of oil and gas, though, the IEA is silent – save perhaps for advocating getting rid of fossil-fuel subsidies as a means not only of reducing emissions of greenhouse gases and air pollution but also to relieve pressure on world prices.
On the other hand, there is a long record of spectacular failures in predicting the future scarcity/abundance of oil and its impact on price. The dire predictions made in the 1972 MIT-Club of Rome book The Limits to Growth on the duration of oil reserves were harshly criticized by the whole economic profession precisely because they did not take into account the effect the evolution of price has on the growth rate of demand over the years and its feedback mechanism on the duration of known reserves.
In 1980 the environment scientist Paul Ehrlich of Stanford University and two Berkeley colleagues of his, John Holdren and John Harte, bet as a group against Julian Simon, an economist at the University of Maryland, that the price of five metals – chrome, copper, nickel, tin and tungsten – would be higher ten years later. The losing side would have paid to the winning one the difference in price on this basket of $200 for each metal. Simon ended up cashing a check for $576.07.
I mention this because it set a precedent for another bet, this time specifically on the future of oil price between Simon’s widow, Rita, and John Tierney, a journalist for The New York Times on one side, and Matthew Simmons, a former energy adviser to president George W. Bush and a member of the Council on Foreign Relations on the other. In 2005 Simmons bet $5000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars. Sadly, he died last August, but the colleagues handling his affairs reviewed the numbers in the second half of December and conceded defeat – and the award of $5000 to Ms. Simon and Mr. Tierney. Oil price during 2010 never went above the $92 mark in 2010 dollars.
Naturally, spectacular errors are made also in the other direction. In March 1999, according to a headline on the cover of The Economist, the world was “Drowning in Oil”. In April 2009, another headline, this time on the cover of the European edition of Newsweek, proclaimed “Cheap Oil Forever”.
Let me thus emphasize that the experience of the last 40 years shows that the key element in the decision to invest in nuclear energy is essentially an unknowable. Is mine an isolated opinion? Here is the opening sentence of the executive summary of World Energy Outlook 2010: “The energy world faces unprecedented uncertainty”. Uncertainty yes, unprecedented I don’t know.
What else as far as economics is concerned? In this short paper published in November 2009, Citigroup – a big merchant bank whose main role is precisely to advice investors – analyzed the investment opportunities opened by the newly approved fast-track planning process for new nuclear power stations in the UK.
It argued that there are five risks that have to be weighed in a decision to invest.
First, planning – a problem perhaps solved by the new procedures in the UK, but that in a lot of countries can take five years or more. However, even a failed planned application would not threaten the financial integrity of a utility company, according to the Citi Report.
Second, construction. They noted how the cost of Olkiluoto 3 in Finland almost doubled since construction started. The AP-1000 unit under construction in SanMen, China, is now expected to cost 3.5 times the original estimate. Coupled with construction time slippages of the scale again registered in Finland , cost increases “could seriously damage the finances of even the largest utility companies”.
The capital costs (as opposed to the running costs) associated with the construction phase are higher and more concentrated (scale) for nuclear than for any other type of power plants, thus “the high capital risks associated with new nuclear construction may lead to higher cost of debt than other conventional power plant projects” – notes the Citi Report.
Third, power price. This is the oil price dilemma I referred to above. Citi calculates that a new nuclear station will require € 65/MWh year in/year out to break even – but the UK “has seen prices at that level on a sustained basis for 20 months of the last 115 months”. Significantly, it adds that “no nuclear power station has ever been built to our knowledge where the developer takes the power price risks”.
Fourth, operational. I quote. “Because of their high fixed cost base, nuclear stations are also very vulnerable to shortfalls in output due to operational unreliability. A six-month breakdown can cost £ 100 (€ 130) million in direct costs and lost output, particularly if the output has been pre-sold”.
Fifth, decommissioning/waste. The solution found in the U.S. and the UK is to collect a tax on each MWh produced to pay for the associated costs, thus effectively limiting the risk faced by the developers.
The Citi report, therefore, reached the conclusion that “it is extremely unlikely that private sector developers will be willing or able to take on the construction, power price and operational risks of new nuclear stations. The returns would need to be underpinned by the government and the risks shared with the taxpayer/consumer. Minimum power prices, support for financing, and government-backed off-take agreements may all be needed to make new nuclear viable”.
In the end it is probably safe to conclude that from a purely market economy point of view nuclear energy today makes little sense.
One need not be a die-hard communist, however, to recognize that sometimes markets fail and have to be complemented by government intervention. Government-subsidized nuclear power may make more economic sense if we consider the positive externalities of mitigating global warming, increasing security of supply and containing demand for (and price of) fossil fuels brought by this energy source. If limiting the concentration of greenhouse gases in the atmosphere is a public good, then the energy market, centered as it is around fossil fuels, may not be producing enough of this public good and needs to be supplemented by government action.
The road to public support, however, is all but paved with gold. Public debt is exploding throughout the rich world and it is becoming clear to all – except Paul Krugman – that deficit spending cannot be sustained indefinitively. If credit stops flowing, even governments default. All the more so, since the list of future public liabilities is bound to get longer, not shorter – think only of health care and pensions in our aging societies.
For all of these reasons, it is not surprising that whatever rich countries still manage to offer in terms of public subsidies to energy production tend to go more and more to renewables, particularly wind and solar, rather than to the nuclear sector. They have several advantages over nuclear: they meet far less resistance among the public, especially in rich countries; they have far shorter construction times; and although they are also capital-intensive, you don’t necessarily need to put together at least 1000 MW or nothing, scale being far less important.
I may add, of course, that neither wind, nor solar, raise proliferations problems or produce highly radioactive waste, or are likely to cause accidents as serious as those happened at the nuclear plants in Three Mile Island (U.S. 1979) and Chernobyl (Ukraine, 1986). Finally, the renewable energy industry is now developed enough to compete with the nuclear one even as a special interest group lobbying for government subsidies.
All of this is reflected in current trends and makes doubtful the whole concept of a nuclear renaissance.
Over the last two years, for example, the contribution of nuclear generation to world electricity production has declined from 15% to less than 14%. 2008 was the first year since 1955 without at least one new reactor connected to the grid. According to this study of the International Atomic Energy Agency (IAEA) there were 60 nuclear plants under construction in mid-2010. In 1979 there were 233 reactors being built concurrently, 120 in 1987.
Of the 60, 11 have been under construction since before 1990, and of the 11 possibly only 3 are predicted to be commissioned in the next three years. All 22 of the construction starts in 2008 and 2009 were in just three countries: China, Republic of Korea and the Russian Federation, none of them in fact known to be shy about state intervention in the economy. “Western Europe” – only UN agencies such as the IAEA still use “Western” and “Eastern” Europe – has 2 reactors under construction, North America 1.
There is a serious and increasing shortage of human resources. According to the IAEA, “about three quarters of all reactors in operation today are over 20 years old, and one quarter are over 30 years old. The generation that constructed and operated these plants has either already retired or will soon”. The problem is so acute that the IAEA sponsored in March 2010 in Abu Dhabi an International Conference on Human Resource Development for Introducing and Expanding Nuclear Power Programmes.
Manufacturing bottlenecks are no less acute. There is only one facility in the world, Japan Steel Works, that can cast large forgings for certain reactor pressure vessels.
Let me close by quoting The World Nuclear Industry Status Report 2009 (by Mycle Schneider, Steve Thomas, Antony Froggatt, Doug Koplow) commissioned by the German Federal Ministry of Environment, Nature Conservation and Reactor Safety.
“Even if Finland and France each build a reactor or two, China goes for an additional 20 plants and Japan, Korea or Eastern Europe add a few units, the overall worldwide trend will most likely be downwards over the next two decades. With extremely long lead times of 10 years or more, it will be practically impossible to maintain, let alone increase, the number of operating nuclear power plants over the next 20 years. The one exception to this outcome would be if operating lifetimes could be substantially increased beyond 40 years on average; there is currently no basis for such an assumption”.
It remains, however, the assumption of the IEA, which in its 2010 World Energy Outlook, in the context of the intermediate “New Policies” scenario for 2035, sees “the share of nuclear power in generation increase[s] only marginally, with more than 360 GW of new additions over the period and extended lifetime for several plants”. That means anything between 250 and 300 new nuclear reactors, 10-12 a year or about 1 a month connected to the grid over the next 25 years. A rather optimistic assumption at current rates of orders and constructions.
Since the main reason why we are interested in the nuclear industry’s future prospects here is to gauge its impact on nuclear disarmament, I believe that in the end there is a simple conclusion to draw and is not very reassuring, i.e. that new nuclear reactors will be concentrated precisely where the risks of nuclear proliferation are highest. More than half of the reactors currently under construction are in the Far East, plus ten percent in the Middle East and South Asia – and do whatever you want of the one fourth under construction in “Eastern Europe”, that is mainly in the Russian Federation.
Note: this paper was prepared for, and presented at, the 24th International School On Disarmament and Research on Conflict (ISODARCO), held in Andalo (Trento), Italy, from 09-16 January 2011.

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