Elsevier

Energy Policy

Volume 96, September 2016, Pages 740-750
Energy Policy

Economics of nuclear and renewables

https://doi.org/10.1016/j.enpol.2016.04.013Get rights and content

Highlights

  • Renewables are increasing their energy share.

  • Renewables system cost is higher than their production cost.

  • Nuclear share is not increasing and their costs are not reduced.

  • Discount rate and subsidies are important in economics of renewables and nuclear.

Abstract

This paper provides an assessment of the economic challenges faced by both nuclear power and “new” renewable electricity technologies. The assessment reflects the need to incorporate new renewables into power grids and issues faced in dispatching power and their effect on traditional electricity technologies as well as the need for transmission extension and/or grid reinforcement.

Wider introduction of smart grids and the likely demise of nuclear in some OECD countries are bound to enhance the future prospects for new renewables. However, their immediate future expansion will depend on continued subsidies, which are becoming difficult to sustain in present economic circumstances. Development of large energy storage facilities and carbon pricing could significantly enhance future renewable energy prospects. Correspondingly, expanding renewable energy, in spite of their popularity with some governments and sections of the public, is likely to face challenges which will slow their present rapid progress.

Nuclear is now shied away from in many industrialized countries and having mixed prospects in developing economies. In many instances, it suffers from high initial costs, long lead times and often excessive construction delays. Nuclear power also faces challenging risks – investment as well as regulatory. In contrast to renewables, its share of global energy consumption is declining.

Introduction

New renewables (NR: wind; solar; modern biomass and biofuels; tidal, wave and ocean energy) are widely claimed to be clean, indigenous and sustainable sources of energy. Therefore, they are favoured by many governments and the public as a whole. However, their present contribution to global energy consumption is still limited, about 3% in 2013 (IEA, 2015), since their economics are not yet favourable. In most instances, they need to be supported by state subsidies and regulations. They suffer from high investment costs and, as a result of the intermittent and diffused nature of wind, solar, and tidal, relatively low-utilisation factors. Incorporating new renewables into power grids poses challenges due to dispatching problems and potential needs for transmission extensions, grid reinforcements or investments in energy storage.

Wider introduction of smart grids and the likely demise of nuclear in some OECD countries (in the short and medium term, at least) will enhance the future prospects for new renewables. However, their immediate future expansion will depend on continued subsidies, which are becoming difficult to sustain in present economic circumstances. Development of large energy storage facilities and carbon pricing could significantly enhance future NRs prospects as indicated earlier. Correspondingly, NRs, in spite of their popularity with some governments and sections of the public, are likely to face challenges which will slow their present rapid progress.

Nuclear power plants face different challenges and prospects, being now shied away from in many industrialized countries and having mixed prospects in developing economies. In many instances, they suffer from high initial costs, long lead times and often excessive construction delays. Nuclear power also faces challenging risks, investment as well as regulatory. As will be discussed below, the investment risks in competitive power markets essentially rule out nuclear power unless there are government guarantees, or, in the future, the experience in building current generation light water reactors provides assurances that nuclear power plants can be built on schedule and under budget. Regardless of the technical progress in building current generation reactors, regulatory changes and legal challenges are likely to continue to make this an unlikely prospect except in countries where the state essentially controls its power industry.

In future years, the development and diffusion of small modular reactors (SMRs) could substantially change this picture. Under the SMR scenario, power investors would be able to purchase a turnkey nuclear plant that would essentially “plug in” to a power station campus. The SMR manufacturer would bear the technical risk and, if successful, be able to deliver a relatively small nuclear reactor (relative to typical light water designs) at a known cost with minimal lead time before the SMR would be generating power. As discussed in Budnitz (2015), there could well be non-proliferation and waste disposal features that would make SMRs attractive relative to current options.

The challenges are compounded by safety and proliferation considerations and a lack of technical skills in many countries as discussed in an earlier section. In contrast to renewables, their share of global energy consumption is declining, though nuclear electricity generation will continue to grow in absolute terms. Whereas NRs significantly increased their contribution to global electricity generation to over 6% by 2013, nuclear power's share of electricity generation has declined from as high as 18% in 1990 to only 12% in 2013, – a percentage that is not likely to improve significantly in the near future.

Section snippets

The economic and financial evaluation of renewables and nuclear

The levelised cost of electricity (LCOE) (DECC, 2013), is the traditional method for assessing and listing dispatchable generating facilities according to their annual production costs, and it applies to assessment of the cost of nuclear. However, it does not directly apply to non-dispatchable technologies, like renewable, due to their intermittency. Developing the necessary algorithms for such a purpose, particularly in the case of wind energy, is not easy because of the difficulty in

Assessing the returns on investment in renewables

To assess the viability and economics of NRs (particularly solar and wind), it is necessary to compute the future stream of the electrical system cost with NRs and compare it with the system cost without the incorporation of NRs. This calculation yields the estimated system cost of NRs.

Of course, a higher system cost of NRs can be fully or partially offset by the value of reduced carbon emissions and other beneficial externalities. The increase in system cost over levelised cost is not only

The economics of nuclear power

Nuclear's global share as primary energy has been on a slow decline and is not expected to recover in the short to medium term despite a massive construction boom in China and other centrally-planned economies. This is in contrast to NRs. Hydro's global share will remain flat while NRs show greater promise, albeit starting from a small base, (See Fig. 5.3). Both NRs and nuclear remain small compared to contributions from fossil fuel sources.

With increasing privatisation and liberalisation of

LCOE comparisons

Both the U.S. Energy Information Administration and the UK publish estimates for cost of generation of nuclear and NRs. The competiveness with fossil fuel plants depends on carbon pricing. If this is not included, as is the case in most centrally-planned power systems, there will be a significant gap between cheap generation utilizing cheap coal in modern coal firing plants and CCGT firing locally available natural gas on the one hand, and the more expensive nuclear and NRs on the other.

The

Cost of nuclear generation

The feasibility and life-cycle costs of a project depend on three factors: (i) the investment cost, (ii) the operational costs and (iii) the discount rate utilised. Many planners think that the discount rate is the most important of these three factors. It greatly affects the whole economics of the project and the decision making, particularly in capital-intensive projects like those of the nuclear industry. In spite of its crucial importance in project evaluation, it is surprising how little

Technology learning

Predictions of future energy technology costs usually employ the concept of technology learning. The general principal is: for each doubling of capacity of a new energy technology, cost goes down by a fixed percentage (IEA, 2000). Since the nuclear industry is well established, additions to capacity would fall well short of any opportunity for further technology learning unless the Generation III and III+ designs were judged to be sufficiently different than Generation II reactors to be new

Capital cost escalation and other risks in liberalized power markets

Risks of cost over-runs are less likely to deter nuclear power plant investments in uncompetitive power markets or state-owned enterprises. A costly power plant in these markets will not necessarily have adverse consequences on investors as the higher cost can be averaged into the existing fleet of power plants. A private investor in an uncompetitive State-regulated power market could still receive the normal rate of return. A state-owned company likewise passes on the incremental costs to

Load-following: an operational cost issue

Because a power reactor's capital cost is such a large component of the total cost of electricity, it has seldom made economic sense to use such a reactor in a “load-following” mode – that is, in a mode in which its output would vary from hour to hour as the demand on the grid changes. However, deployment of large amounts of renewable electricity sources on a grid may make the desire for reactor load-following more important in the future. Besides the high capital cost relative to fuel cost,

Countervailing factors supporting nuclear economics

The analysis suggests that nuclear power plants will be difficult to finance in liberalized power markets without government intervention to help mitigate the financial risks. If nuclear power plants built with government support or those built by state-owned power industries prove that nuclear power plants can be reliably built at a competitive cost, power plant economics will be a significant positive factor for the nuclear industry, especially taking into consideration national commitments

Small modular reactors

The myriad financial challenges associated with nuclear projects that can exceed $10 billion have increased interest in the idea of deploying the proposed new smaller (modular) designs. If these were available, capital investments could be made in smaller-sized investment packages – capacity would be added as needed by building additional small reactors one-by-one on a given site. At the risk of over-simplifying, turnkey nuclear reactors would be purchased in relatively small, self-contained

Subsidies

Subsidies are an integral feature of the economics and costing of both NRs and nuclear. These subsidies are usually driven by two considerations: the first, for the desire to avoid carbon emissions during production; and the other, that they provide a measure of local energy security being not dependent on imported fossil fuels or depletable resources.

Subsidies to NRs, mostly in OECD countries, take many forms both direct and regulatory. They are mainly in:

  • Capital subsidies and loan guarantees

Subsidies to nuclear power

Nuclear power benefits from various forms of government support and subsidies involving liability limitations, preferential financing rates and export credit agency subsidies. However, the most important subsidies to the nuclear industry have not necessarily involved cash payments. Rather, very often, under traditionally regulated power regimes, construction costs and operating risks were shifted from investors to ratepayers, burdening them with an array of risks including cost overruns. This

Estimated system costs

Many countries have enacted official targets for renewable power share for their grids, and others are considering them. US states are doing so as well. This is leading to increasing shares in a number of jurisdictions. Consequently the challenges for grid operation caused by the intrinsic character of the intermittent nature of wind and solar are being faced by real world grid operators. Further, since these targets are typically still higher for future years, various planners have been

Conclusions and policy implications

Both renewables and nuclear face significant economic challenges. The costs associated with both renewable and nuclear technologies have consistently been higher than those for building fossil-fuelled power plants, although renewables costs are decreasing. However this decrease in renewables costs is slowing down due to the non-decreasing cost of the infrastructure and labour. Furthermore, renewables cost estimates typically do not reflect systems integration costs. For nuclear, the capital

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    The analysis, data and views expressed in this paper are those of the author and are not endorsed by the U.S. Department of Energy or the United States government.

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