Why do the costs of building nuclear appear to be rising over time, instead of coming down, as you would expect from other technologies?
One of the biggest challenges we face in making the case for low carbon nuclear energy is “the economics don’t stack up”. Well-regarded analysis on behalf by the Committee for Climate Change, and helpfully aggregated in this graph below, by the UKERC, demonstrates that nuclear is among the most cost-competitive of all low carbon technologies (similar to the best estimates for on-shore wind). Yet the economics of nuclear remain very challenging.
UKERC: Presenting the Future: An assessment of future costs estimation methodologies in the electricity generation sector.
Inspired by Buzzfeed, here’s your guide to why the costs of building nuclear appear to be rising over time, instead of coming down, as we expect from other technologies. Enjoy!
- Commodity prices (meaning steel and concrete, for example) tend to be rising. Not much can be done about this, but it’s worth noting that volatile commodity prices drive up costs for all kinds of infrastructure.
- Design and regulatory approvals not completed before manufacturing and construction starts causes rework and delays. In the UK, the new Generic Design Assessment process is intended to iron out any regulatory wrinkles in the reactor design long before construction starts. The Office for Nuclear Regulation has now given the green light to the EPR reactor for Hinkley Point C, after four years of review, amendments and consultation. The proof will be in the pudding, but it is expected that this will result in far fewer delays or re-work during construction.
- So-called “nth of a kind” (NOAK) – as opposed to “first of a kind” (FOAK) – cost reductions are possible but can be offset by delays between projects. Also, changes in design, regulations, management, personnel, financing etc. that are allowed to happen or are required by regulator or investors can eliminate potential NOAK savings.
- NOAK reductions are achieved where management/government regimes are strong and do not allow changes or effectively incentivise NOAK reductions. China and South Korea are good examples.
- Nuclear energy is vulnerable to “cost shocks” when an accident happens, as with Three Mile Island and most recently Fukushima. For example, UKERC cite the rating agency Moody’s who estimated the Fukushima accident will likely result in a range of higher costs as a result of increased scrutiny, more stringent safety procedures and longer maintenance outages.
- Risk finance can be high and very variable from country to country dependent on finance package and where ultimate risk lies. The Coalition Government’s “no subsidy” commitment means the UK is particularly prone to risk finance because of our private-sector funding policy. Financing any major new infrastructure through the private sector is challenging, but to achieve this for nuclear will be heroic. With such a large project with a long construction lead-time, and 60+ years of operational life, the upfront cost of capital is enormous. Added to this, the political risk associated with nuclear projects (which need a public confidence licence to operate), it is no wonder that financing is expensive. It’s worth saying of course that herein lies the logic of Electricity Market Reform: left to its own devices, the market will build gas, since it’s cheap to build and the risk lies in the fuel price volatility, which can readily be passed on to the consumer. All low carbon electricity generation technology shares the same challenge of high upfront capital costs that presents a risk to the investor, whilst low operating costs offer a benefit to the consumer.
- Building up skills and supply chain to maximise UK content and drive down costs takes time. The Nuclear Industrial Strategy, which the Government published last year, outlines the potential economic, skills and industrial opportunities associated with a new build programme. Around 32,000 new jobs could be created during the current planned 16GW programme. By strengthening the UK industrial base in this sector the global market potential (anticipated to worth up £1trillion over the next 15 years) is hugely promising.
I would be interested to know if others have views on this list, either comments or additions. But before I go, one thing you may have noticed that is NOT on the list: Waste. You may have noticed that the costs of managing and disposing of waste are not included as a significant feature determining the economics of nuclear. This is because decommissioning costs for nuclear power plants, including disposal of associated wastes, are reducing and contribute only a small fraction of the total cost of electricity generation.
In most countries new build operators will be legally required to save an independently verified set amount of money throughout the operation of the plant, which will pay the costs of decommissioning, managing and disposing of the waste. In the UK, this cost will be included in the strike price agreed through the contract for difference, but over the lifetime of the plant, does not represent a significant financial burden. The independent board established to monitor, review and scrutinise this Funded Decommissioning Programme is called the Nuclear Liabilities Finance Assurance Board, chaired by Lady Balfour.
Meanwhile, the lion’s share of the huge budget (from DECC to the Nuclear Decommissioning Authority) associated with nuclear decommissioning in the UK is spent on cleaning up military facilities dating back to the Cold War. These costs are not representative of decommissioning costs for modern civil nuclear plants, which are designed to be cleaned-up after the end of their operating life.
So we know why costs are rising. If we are serious about tackling climate change, the next challenge is how to bring costs down. There are plenty of people puzzling over this. Here’s a great contribution that I would recommend, from the Breakthrough Institute, How to Make Nuclear Cheap.
First published on Business Green.