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Te Economics of

Nuclear EnergyWhile ew people now believe that nuclear power would provide powertoo cheap to meter, there is still a common perception that nuclear poweris a cheap source o electricity. Te act that nuclear power has not cometo dominate electricity generation is seen as being due to a combinationo public opposition and dealing with the saety issues raised byaccidents such as those at Tree Mile Island (1978), Chernobyl (1986)

and Fukushima (2011). Te reality is that nuclear power has seldombeen the cheapest option or new power stations. Worse, the real cost oany normal successul technology goes down over time due to the efecto intuitively sensible actors such as learning-by-doing, economies oscale and general technical progress. For nuclear power, these actorsdo not seem to have worked and or its entire commercial history, thereal cost o nuclear power has only ever gone upwards. Te Fukushimadisaster can only give a urther twist to this upward spiral. Tis paper

examines the determinants o the cost o a kilowatt hour (kWh) onuclear electricity; what the latest designs o nuclear power plant canofer; how new nuclear plants might be nanced; and what issues willdetermine whether South Arica can successully launch a new nuclearprogramme.

What Determines the Cost of Nuclear Power?1

Carrying out a detailed cost estimate or the cost o a kWh o nuclear electricityis a major exercise requiring the estimation o a large number o variables many owhich are not easy to orecast. However, it is relatively easy to get an approximateidea o the cost o nuclear power because the costs are expected to be dominatedby the xed costs associated with the construction o the plant. As a rule othumb, it can be assumed that these xed costs account or about two thirds othe cost o a kWh o nuclear electricity. So, to determine whether nuclear poweris competitive, we can concentrate on the variables that determine these xedcosts. Te variables can be divided into three: the major determinants o the costo a kWh (they set the xed costs); less important determinants; and those thathave little impact.

Major Determinants

Teconstructioncost: As nuclear power plants are supplied by an internationalmarket, this is usually estimated in dollars and to allow air comparison betweendierent size plants the cost is usually quoted in dollars per kilowatt o installedcapacity ($/kW). o avoid distortions because the cost o borrowing will vary

Professor Steve

Thomasis Director oResearch at the Business

School, University o

Greenwich in London.

He has been a research

in the feld o energypolicy or 35 years,

specialising particularly

in economics and policy

or nuclear power and on

liberalisation o electricity

markets.

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according to the specics o the plant, the cost is quoted, where possible as ithe plant was built overnight with no cost o borrowing.

Tecostofcapital: I the company borrows hal the money rom the market at,say, a real rate o interest (net o ination) o 8% and nances the rest rom itsown resources at, say 12%, the average cost o capital is 10%.

Teplantloadfactor: Because the cost o nuclear power is dominated by theupront costs, which have to be paid whether or not the plant is operating, itmakes sense to run a nuclear plant at its maximum level or as long as possibleso that these xed costs can be spread out over as many kWh as possible.

Te annual load actor is calculated as the number o kWh it produces, as apercentage o the power it would have produced, i it had operated at ull poweruninterrupted or the entire year.

A highly skilled site labour orce is requiredand i this is not available locally, extra costswill be incurred. Other actors include: thecost o building the transmission links neededto connect the station to the national grid; thelocal geology and seismology; and the methodo cooling.

Less Important Determinants

Site-speciccosts: A relatively small proportiono the cost o a nuclear power plant is covered bythe major items o actory produced equipment.

Te main costs are incurred at the site andinclude installation, pouring o concrete. Tere isthereore signicant scope or costs o the samedesign o reactor to vary rom site to site. A highlyskilled site labour orce is required and i this isnot available locally, extra costs will be incurred.Other actors include: the cost o building the

transmission links needed to connect the station to the national grid; the localgeology and seismology; and the method o cooling.

Non-fuel operating cost: Te cost o operating the plant, includingmaintenance, repair and stafng is relatively low, typically 20% o the totalcost, but not negligible. Tese costs are not completely xed i the plant ispermanently closed, they are no longer incurred but they are relatively xed

while the plant is in service. Some nuclear plants that have required a largeamount o maintenance and repairs have been closed because these costs wereprohibitive.

Costoffuel: Unlike power plants using coal or gas, the cost o uel is low,typically 5% including the cost o raw uranium, the cost o turning it into ueland the cost o disposal ater it has been used.

Tose with Little Impact

Decommissioningcost: Te cost o decommissioning a nuclear plant, cleaningup the site and disposing o the radioactive materials (excluding the uel) thestructure o the plant will become increasingly radioactive over its lie is othe same order o magnitude as the construction cost, but in a normal projectappraisal, costs and benets arising long into the uture have much less weight

than earlier costs.

Insurance cost: By international treaty or national law, the liability in the evento an accident o a company owning a nuclear plant is capped at a level ar

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We have to assume we can orecast accurately

what the cost o a process will be that has

not been done yet (spent uel disposal)

or not yet done on a commercial scale

(decommissioning) 100 or more years in the

uture.

below the potential damage cost. Te sum varies rom country to country, but,typically, a utility would only be liable or damages up to $200m, with anyother costs borne by the country (taxpayers). Te company selling the nuclearplant cannot be held responsible or any damages resulting rom an accident.

Te Public PerspectiveTe costs described above are as perceived by the company which will own andoperate the plant. However, rom a societal point o view, the perspective is dierentbecause taxpayers ultimately must bear the risks. Some costs, such as insurancecosts, are potentially huge: costs rom Chernobyl and Fukushima are likely to runinto hundreds o billions o dollars. Without the guarantee that accident costswould all on the taxpayer, it is unlikely that many, i any nuclear plants wouldhave been built. Costs ar into the uture are discounted away in conventionalaccounting.1 In typical project appraisal processes, the value o uture liabilitiesis calculated as the sum o money that would be needed i it was invested todayand earned interest till the money was needed-the discounted value. Over a short

period o time, this is intuitively sensible. I you have a liability o $100 to bepaid in a year and you can earn 3% real interest, asum o $97 invested today would grow sufciently topay the required cost. However, over longer periods,this causes some alarming results. I we assumedecommissioning costs $1bn and is expected to becarried out 100 years ater the start-up o the plantand money can be invested to earn 3% interest, a sumo only $50m is needed. I the period is 150 years-the timescale planned or the UKs nuclear powerplants- the sum required today is only $12m. Similarconsiderations apply to the disposal o spent uel.

Tese are not liabilities like repaying a lender. A uture generation will have nooption but to try to decommission the plants and dispose o the spent uel. Oversuch a long period, the assumptions behind the conventional accounting methodare hard to justiy. We have to assume we can orecast accurately what the costo a process will be that has not been done yet (spent uel disposal) or not yetdone on a commercial scale (decommissioning) 100 or more years in the uture.

We then have to assume that we can invest a sum o money in investments withnegligible risk o ailure at an assured rate o interest over 100 years. Te current

nancial crisis should have alerted everyone that such assumptions are implausible.I the unding method ails or delivers much less money than is needed, a uturegeneration will not only have to carry out these hazardous tasks but it will have tound them rom their own resources.

Fuel is also an important issue. It is unlikely that the price o uranium, whichprobably represents less than 1% o the cost o a kWh o nuclear electricity, willgo up to a level at which it would have a signicant impact on overall nucleareconomics. However, i the price o uranium were to go up, say, 5-old, this wouldimply the need to mine poor quality ore. Mining uranium produces large quantitieso hazardous (radioactive) waste, which must be careully dealt with i it is not to

contaminate water sources and cause serious health issues. Te poorer the qualityo ore, the more waste will be produced to get each kilogram o uranium.

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Te Latest Designs of Nuclear PlantsNuclear power plants are usually categorised according to the coolant used-theuid that takes the heat rom the reactor core to the turbine generator wherethe electricity is generated-and by the moderator - the material that is usedto maximise the chances that when an atom splits, the particle emitted causes

another ssion. More than 90% o reactors installed worldwide use water ascoolant and moderator, either as a Pressurised Water Reactor (PWR) or a Boiling

Water Reactor (BWR). Te two reactors at Koeberg are o the PWR type. TePebble Bed Modular Reactor (PBMR) that South Arica tried to develop rom1998-2010 would have used helium gas as coolant and graphite as moderator.

Ater the Chernobyl disaster, a combination opoor economics and public concern meant thatnuclear power plant ordering reached a low ebb. Forexample, in Europe and North America, no nuclearorders were placed in the 1990s. Nuclear designers

attempted to meet this challenge by producing anew generation o nuclear power plant designs, stillusing water as coolant and moderator, which oeredimproved saety and economics. Tese becameknown as Generation III+ designs2 and optimism inthe nuclear industry about their attractiveness was

so high that it claimed a Nuclear Renaissance would occur. Under this, countriessuch as USA, UK, Germany and Italy, which seemed to have turned away romnuclear power, would start ordering large numbers o reactors.3

Te two designs with the best commercial prospects and which are closest todeployment are the French European Pressurised Water Reactor (EPR) suppliedby Areva and the AP1000, a PWR supplied by the oshiba-owned company,

Westinghouse.

Te rst government to be convinced by their merits was the US which, in 2002,launched its Nuclear 2010 programme, under which it was expected that one ormore o these designs would be in service by 2010. It summarised the expectedadvantages o the Generation III+ designs as ollows4:

New Generation III+ designs have the advantage o combining technology

amiliar to operators o current plants with vastly improved saety eatures andsignicant simplication is expected to result in lower and more predictableconstruction and operating costs.

Te nuclear industry predicted that these designs could be built or an overnightcost o $1000/kW so that a typical reactor with a capacity o 1,000,000kW(1000MW) would cost $1bn. Te promises or these designs have proved wellwide o the mark and the latest cost estimates are about 5-6 times this level. Onlyeight reactors using Generation III+ designs have been ordered and six o these arein China and have only started construction in the past couple o years so there islittle to be learnt rom these.

Construction o the two plants in the West, both EPRs, one in Finland and onein France, has gone badly wrong. Both are now orecast to take at least ve years

Nuclear designers attempted to meet thischallenge by producing a new generationo nuclear power plant designs, still

using water as coolant and moderator,which ofered improved saety andeconomics. Tese became known asGeneration III+ designs

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longer to build than the 4-5 years expected and their nal cost is at least doublethe orecast level. Far rom being simpler, these are now seen as more complexthan their predecessors and this has contributed to the problems o controllingconstruction cost and time.5 It seems likely that two orders or AP1000s will goahead in the USA, the rst plants ordered under the US Nuclear 2010 programme.

Tese are unlikely to enter service beore 2017-18, more than seven years laterthan originally envisaged.

FinanceOne o the main hurdles or any nuclear project hasbeen to convince nanciers to lend the money tonuclear projects. Te record o nuclear plants beingbuilt-to time and cost-and operating reliably is poorand recent experience in France and Finland hasreinorced this poor reputation. In the past, theseeconomic risks did not matter to nanciers in most

markets because in a monopoly electricity market,consumers usually pay whatever costs are incurred,so the risk alls on consumers not the nanciers.However, electricity markets have increasingly beenopened to competition and, in a market, expensiveproducers go bankrupt and the banks that lent them money lose it. Even wheremonopoly remains, consumers are increasingly unwilling to sign a blank chequeto power plant developers and when a nuclear project goes wrong, the companythat owns the plant may be orced to take the hit potentially bankrupting it andjeopardising the banks loans to it.

Where nuclear projects are going ahead in the West, invariably there is highcondence that consumers will meet whatever costs are incurred. One alternativeto passing the risk to consumers is or the government o the vendor to oersovereign loan guarantees. Tis means that i the project goes wrong and theutility building the plant cannot repay the loan, taxpayers would repay the banks.However, this option has disadvantages, especially to the utilitys consumers. Ithe utility is bankrupted, taxpayers rom the vendors home country will step into repay the bank, but the consumers o the utility will still have to bail out abankrupt utility.

Prospects for Nuclear Power in South AfricaSince 1998, the South Arican government and Eskom have pursued nuclearpower with enthusiasm, but no success. From 1998-2010, there was a programmeto try to bring the PBMR design to commerciality. Tis attempt ailed, costingaround R10bn, mostly o South Arican public money.6 By 2006, Eskom wasbeginning to look at alternative options to the ailing PBMR programme andin January 2008, it launched a tender calling or 3200-3600MW o new capacityrom Areva NP and oshiba/Westinghouse or 3200-3600MW o capacity. 7 In2007, Eskom was expecting bids o about $2500/kW.8 It was reported that thebids were actually in the order US$6000/kW9 and in November 2008, Areva

was reported to have won the contest.10 However, in December 2008, Eskomcancelled the tender citing the magnitude o the investment.11Engineering Newsreported that the issue was the credit rating o Eskom12:

Even where monopoly remains, consumers

are increasingly unwilling to sign a blank

cheque to power plant developers and when a

nuclear project goes wrong, the company that

owns the plant may be orced to take the hit

potentially bankrupting it and jeopardising

the banks loans to it.

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... ratings agency Standard & Poors said on Tursday that South Aricas National reasury needed toextend unconditional, timely guarantees across all Eskoms debt stock i it hoped to sustain the utilityscurrent BBB+ investment-grade credit rating. Te National reasury was still to announce the details othe package. Te Eskom board had, as a result, decided to terminate the commercial procurement processto select the preerred bidder or the construction o the Nuclear-1 project.

Far rom being deterred by this experience, Eskom has cast its net wider to include earlier generation designs,on the assumption they would be cheaper. Tis is expected to bring in reactors rom China and Korea. Ironically,the design oered by China, the CPR1000, is eectively an updated version o the design built at Koebergin the 1980s. Tis design dates back to the late 1960s. Te Korean design is a little newer and is based on aUS design rom the 1990s. It is expected a ormal call or tenders will be launched in 2012 or 9600MW ocapacity. Te government is expecting bids o about $4000/kW.13 It is hard to understand why the governmentassumes the cost this time will be only two thirds o the level rom our years ago, and how it will be possibleto nance 9600MW when it proved impossible to nance 3600MW then.

Conclusions

Nuclear power is an expensive way to generate electricity and even ater more than 50 years o commercialdevelopment, there is no sign that costs are going to stop increasing. In addition, it is an economically highlyrisky option because o the poor record o plants being built-to time and cost-and operating as reliably asorecast. Te Fukushima disaster serves to underline the problems the nuclear industry was already acing. Anew generation o nuclear designs appears close to ailure because it is ailing to deliver the promises made orit: that they would be saer and because they were simpler, they would be cheaper and easier to build than theirpredecessors. Te Fukushima disaster can only serve to increase their costs and probably their complexity anddelay urther the time they are commercially available to order.

I it is going to be easible or new nuclear plants to be nanced, it will only be i electricity consumers bearthese economic risks, as has always been the case in the past. Tis economic risk is in addition to the nancialrisks that the public has always had to bear. Tese risks arise rom the possibility o a catastrophic nuclearaccident and the need to dispose o the spent uel and other radioactive waste and decommission the reactorreturning the site to a state where it can be released or unrestricted use.

For South Arica, the latest attempt to place orders or new nuclear plants is not likely to be any more successulthan previous attempts. Tis will waste some public money, but the bigger problem is that or several more

years, the government and Eskom will continue to act on the basis that nuclear power can meet its electricityobjectives. Te options that are capable o meeting these objectives will continue to be neglected.

NOTES

1 For a more detailed review o nuclear economics, see S Thomas (2010) The Economics o Nuclear Power: An Update Heinrich-Bll-Stitung, Berlin. Also available inRussian and Chinese http://www.boell.de/downloads/ecology/Thomas_economics.pd

2 There are no clear defnitions o the dierent design generations, but Generation 1 designs include the prototype and demonstration plants o the 1960s, Generation2 designs include the majority o plants in service now and were ordered in the 1970s and early 1980s. Generation III plants, o which there were relatively ew weredesigned ater Three Mile Island and installed rom the late 1980s onwards. All Generation III and III+ designs are PWRs or BWRs. A ourth generation o plants has beenposited which does not use water as coolant and moderator but these are decades rom commercial deployment. It was hoped the PBMR could have been developedinto a Generation IV design.

3 For a review o the latest status o the world nuclear market, see M Schneider, A Froggatt & S Thomas (2011) Nuclear Power in a Post-Fukushima World WorldwatchInstitute, Washington, 85pp.

4 US Department o Energy (2003) DOE Seeks Public-Private Partnerships To Demonstrate One-Step Licensing o New U.S. Nuclear Power Plants Press ReleaseNovember 21, 2003. http://nuclear.gov/home/11-21-03.html

5 For a review o the problems incurred at these two sites, see Franois Roussely, Future o the French Civilian Nuclear Industry (Paris:16 June 2010), translated by theInstitute or Energy and Environmental Research, Takoma Park, Maryland, http://www.psr.org/nuclearbailout/resources/roussely-report-rance-nuclear-epr.pd

6 For a review o the PBMR programme, see S D Thomas (2011) The Pebble Bed Modular Reactor: An obituary Energy Policy, vol 39, 5, 2431-2440.7 Nucleonics Week French consortium to submit bids to build two EPRs in South Arica Jan 24, 2008, p 5.8 Nucleonics W eek, Cabinet Mulls Policy as Eskom Launches Consultation on New Plant, June 7, 2007.

9 Nucleonics Week Big cost hikes make vendors wary o releasing reactor cost estimates Sept 14, 2008.10 Nucleonics Week Eskom to build initial reactors, but long-term plan to be curtailed Nov 20, 2008.11 Nucleonics Week Eskom cancels tender or initial reactors Dec 11, 2008, p 1.12 Engineering News, Eskom Terminates Nuclear 1 Procurement Process, but SA Still Committed to Nuclear, December 5, 200813 Nuclear Intelligence Weekly Back to nuclear with aim o 9.6 GW October 31, 2011, p 6.