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Estimating the costs of nuclear power

May 28th, 2013 by François Lévêque, Ecole des mines de Paris

The debate on the costs of nuclear power generation is fairly confusing. Some present electricity production using nuclear power as an affordable solution, others maintain it is too expensive. These widely divergent views prompt fears among consumers and voters that they are being manipulated: each side is just defending its own interests and the true cost of nuclear power is being concealed. Companies and non-government organizations certainly adopt whatever position suits them best. But at the same time, the notion of just one ‘true’ cost is misleading.

There is no such thing as the cost of nuclear power: we must reason in terms of costs and draw a distinction between a private cost and a social cost. The private cost is what an operator examines before deciding whether it is opportune to build a new nuclear power station. This cost varies between different investors, particularly as a function of their attitude to risks. On the other hand the social cost weighs on society, which may take into account the risk of proliferation, or the benefits of avoiding carbon-dioxide emissions, among others. The cost of actually building new plant differs from one country to the next. So deciding whether nuclear power is profitable or not, a benefit for society or not, does not involve determining the real cost, but rather compiling data, developing methods and formulating hypotheses. It is not as easy as inundating the general public with contradictory figures, but it is a more effective way of casting light on economic decisions by industry and government.

Without evaluating the costs it is impossible to establish the cost price, required to compare electricity production using nuclear power and rival technologies. Would it be preferable to build a gas-powered plant, a nuclear reactor or a wind farm? Which technology yields the lowest cost per KWh? Under what conditions – financial terms, regulatory framework, carbon pricing – will private investors see an adequate return on nuclear power? In terms of the general interest, how does taking account of the cost of decommissioning and storing waste affect the competitiveness of nuclear power?

In a recent essay, I answer these questions in three stages. We shall start by taking a close look at the various items of cost associated with nuclear power. We shall look at how sensitive they are to various factors (among others the discount rate and price of fuel) in order to understand the substantial variations they display. We shall then review changes in the cost dynamic. From a historical perspective nuclear technology has been characterized by rising costs and it seems most likely that this trend will continue, being largely related to concerns about safety. Finally we shall analyse the poor cost-competitiveness of nuclear power, which provides critics of this technology with a compelling argument.

Here is the conclusion of my essay:

On reaching the end of this paper, readers may feel slightly bereft, having lost any sense of certainty regarding costs. There is no such thing as a ‘true’ cost for nuclear power, which economists may discover after much trial and error. Nor yet are there any hidden external costs, such as those related to managing waste or the risk of serious accidents, which might completely change the picture if they were taken into account. Far from reducing the cost of nuclear power, technical progress has actually contributed to its increase. It makes no sense to assert that it is currently more or less expensive, in terms of euros per MWh, to build a wind farm or a nuclear power station. There can be no universally valid ranking order for coal, gas and the atom based on the cost of generating electricity.

But the loss of such illusions should not leave readers in a vacuum. The first part has also provided a firm basis for assessing the costs of electricity, which depend on location and various hypotheses on future developments. Consequently such costs can only be properly calculated with a clear understanding of both factors. The construction cost of a nuclear power station is not the same in Finland, China or the United States. Overall expenditure may vary a great deal depending on the influence of the safety regulator, scale effects and the cost of capital. Regarding wagers, the future prices of gas, coal and carbon dioxide will be largely decisive in the ranking of coal, gas and nuclear power. These same prices will also affect the profit margins of nuclear plants, their revenue depending on the number of hours per year during which they operate, and whether the prices per kWh during those hours are decided by a marginal generating plant burning coal or gas, or one powered by sunlight or wind. Confronted by the risky long-term wagers which investors must make to calculate costs and take decisions, even the most laissez-faire public authority will feel obliged to intervene. Concerned by the general interest, it must set a discount rate, yet this is the parameter with the greatest impact on the cost of nuclear power. This particular wager hinges on how prosperous future generations may be: the richer they are, the lower the discount rate will be, making nuclear power that much cheaper. Furthermore there is a political choice to be made, in order to maintain a certain degree of equity between rich and poor, and between generations, a choice which influences the rate set for converting present euros into future euros.

What is more, analysing trends for past costs throws light on their future behaviour. Historically nuclear technology has been characterized by rising costs. Today’s third-generation reactors are no exception to this iron rule. They are safer than earlier counterparts, but also more expensive. The escalation of costs may stop, but only on two conditions: through a massive scale effect – if China chooses one type of reactor and sticks to it, it may achieve this effect – or through a fundamental change in direction of innovation – giving priority to modular design and small reactors, for instance. Failing this, nuclear technology seems doomed to suffer a steady decline in its competitiveness compared with any thermal technologies spared by taxes and renewable energies boosted by high learning effects.

François Lévêque, Mines-ParisTech

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