2. THE NEW CONTEXT — ECONOMY, NEED AND MARKET
2.1. The status of nuclear power plant competitiveness
reduction of number of components and materials requiring nuclear grade standards;
application of passive safety systems; and
a move to more risk-informed safety regulation.
This TECDOC examines economic factors influencing the competitiveness of nuclear energy, and outlines viable approaches for achieving more cost effective designs of future plants while maintaining high levels of safety.
2. THE NEW CONTEXT — ECONOMY, NEED AND MARKET
2.1. THE STATUS OF NUCLEAR POWER PLANT COMPETITIVENESS 2.1.1. Existing plants
While support for nuclear energy has waxed and waned over the past several decades, many operating nuclear power plants are proving to be valuable assets in competitive markets.
These plants reliably generate electricity at competitive costs, with minimal environmental impact, and without creating undue risks to the general public. Nuclear plants are also recognized as making important contributions to security of energy supply, especially for countries that import significant quantities of coal and oil.
Growing competition in electricity markets is leading to major changes in the structure of the electric power industry. The most significant change is that electric power is no longer seen as a "natural monopoly" in which a single supplier provides electricity to a regulated but protected market with essentially guaranteed revenues, and where cost and financial risk management are not vital concerns. Private sector participation and market liberalization are fostering a competitive marketplace for power generation, even if transmission and distribution are often left as regulated functions. Prices will increasingly be set by the market rather than by regulation, and suppliers are increasingly forced to focus on efficient and profitable operations.
Some industry experts feared that more competition would lead to the demise of the current fleet of nuclear plants. To the contrary, however, it has produced a nuclear industry that is more competitive than it has been in decades. Preparing for the transition to a competitive environment has forced all parties — including regulators, plant owners, and suppliers — to look closely at the economics of nuclear power relative to alternative technologies for electricity generation.
Existing nuclear plants have, in recent years, achieved substantial improvements in performance (e.g., plant availability) and reduced operating costs (e.g., reduced staffing levels), and nuclear fuel costs have remained low. As a result, many older and largely amortised nuclear units are operating in cost ranges that are very competitive with the electricity production costs of natural gas and coal plants. In 1999 US nuclear power production costs (fuel plus operation and maintenance costs) dropped to an average of 1.83 US cents/kW·h, compared to 2.07 cents/kW·h for coal-fired plants, 3.18 cents/kW·h for
oil-3 fired plants, and 3.52 cents/kW·h for natural gas-fired plants [1]. In 1999 the most efficient nuclear plants in the USA achieved production costs of 1.1 cents per kilowatt-hour.
Decreasing costs are also reported in France where the cost of a kilowatt-hour (including amortization, fuel and operation and maintenance costs) generated with nuclear power by Electricite de France in 2000 was between 15 and 18 French centimes depending on site. This is a decrease of 7% since 1998 [2]. Comparisons of generation costs in France in 1997 (before the recent price increases in fossil fuels), reported by Framatome at the 9th International Conference on Nuclear Engineering, show nuclear generation costs as being the lowest1. Information provided by the European Commission based on experience of Bayernwerk AG (Germany) shows that in 1998 production costs from largely depreciated nuclear and hard coal plants were 1.57 to 1.88 €cents/kW·h for nuclear and 2.08 to 2.38 €cents/kW·h for coal; and representative costs for new gas-fired plants were 2.49 to 2.69 €cents/kW·h. Moreover, the marginal costs for nuclear power are usually less, and are certainly less volatile, than marginal costs for gas- or coal-fired plants because of the relatively lower share of fuel costs in the overall cost of nuclear generation. In a competitive market environment a grid operator would buy power from the lowest marginal cost supplier; hence nuclear power may often have a dispatching advantage.
These improvements in production costs are being helped by the stabilization of the safety regulatory environment in the last few years. After more than a decade of changes mandated by the safety regulators because of accidents at Three Mile Island and Chernobyl, the regulatory environment has improved significantly. For example, recognizing that regulatory stability is a critical component in assuring economic competitiveness of the existing nuclear plants, the U.S. Nuclear Regulatory Commission is adopting a risk-informed, performance-based regulatory structure that is proving to be highly effective and efficient. On top of this, the plant owners are obtaining regulatory approval for extending the lifetimes of their operating units. As a result, there is a sense of optimism that the nuclear industry can be viable for decades to come.
Moreover, there is a growing concern about the effects that greenhouse gases will have on the earth’s environment. While acceptance of nuclear power within the environmental community is still uncertain, it is indisputable that nuclear power contributes a major share of achieved greenhouse gas reductions. With more than a quarter century of safe operation, coupled with its clean air benefits and cost stability, nuclear power has the potential to make an increasing contribution to the world’s energy needs while contributing to greenhouse gas reductions.
In Europe, the extensive challenge of ensuring security of energy supply while being confronted by increasing external dependence and the urgency of fighting against climate change, is the basis for the recent decision of the European Commission to launch a debate on future European energy strategy with its “Green Paper” on energy supply security.
1 The specific values reported by Framatome, based on information from the French Ministry of Industry, for a base production of 6000 hr/year, and a discount rate of 8%, were:
nuclear: 20.8 French centimes (fuel: 4.5; O&M: 3.37; investment: 12.7) coal: 3.5 French centimes (fuel: 10.1; O&M: 4.5; investment: 8.9) gas: 22.6 French centimes (fuel: 15.5; O&M: 2.2; investment: 4.9) wind: 30 - 50 French centimes (investment: 25-40; O&M: 5-10) solar: 200 - 300 French centimes.
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As a result of all of these factors, there is support for extending the lifetimes of the existing nuclear units in some countries. There are several reasons why lifetime extension of successful nuclear plants can be profitable. Their debt is largely amortised, they have a revenue stream, operating costs are already low, and decommissioning fund obligations are nearly satisfied. Compared with the cost of building new plants, investment costs for lifetime extension, while not trivial, are likely to be lower because costs such as civil works, land acquisition and site preparation are not incurred, and significantly less equipment must be purchased. Life extension can also be attractive for environmental reasons where compliance with air pollution standards or commitments to greenhouse gas emissions reductions argue against increased fossil fuel fired generation.
Plant up rating is also an economically attractive option that has already been accomplished at many existing plants. Plant up rating, even without lifetime extension, effectively adds new capacity and therefore reduces unit costs. Up ratings of 10–20% have been achieved at many plants. Modern turbines for water cooled reactors are now more efficient than those installed in the 1970s and 80s (34% vs 30% efficiency) and upgrading a turbine can result in 3 to 5% more power being delivered to the grid.
For plants that would require extensive upgrades to qualify for license extension, the economics of the decision should be carefully evaluated. If the operating organization cannot afford the required upgrades, or if these entail investment costs that cannot be recovered profitably over the projected remaining life of the plant, then life extension is not an option and the plant should close. It is worth noting, however, that shutting down a plant or cancelling a construction project is also potentially expensive, as most contracts have cancellation costs or penalties for early termination. Again the economics of the case must be carefully weighed. Even where closure is politically motivated or the result of policy decisions, transparency in government would require an assessment of the economic consequences of the decision.
Appendix 1 provides further discussion of technologies for extending plant lifetime, improving plant availability and reducing operation and maintenance costs based on information provided at some recent IAEA technical meetings.
2.1.2. Projecting costs of generating electricity for new plants
During the 1980s and 1990s, considerable development efforts were conducted for new water cooled reactors of advanced designs [3] and [4]. A large part of this effort was on evolutionary LWRs and HWRs incorporating the large base of design, construction, licensing and operating experience of existing plants together with several technological developments for improving performance and safety [5]. Regulatory requirements and industry standards that had continually evolved since the introduction of nuclear power were adopted in the design bases.
Since these efforts began, the cost target for commercial success has been decreasing, as electricity prices have tumbled. In 1995, a generation cost of US$ 0.043 per kW·h was considered the goal for new nuclear power plants to be competitive in the USA. By 1998, the target had dropped to US$ 0.03 per kW·h [6]. The Electric Power Research Institute included projections for future generating costs in its “Electricity Technology Roadmap”. Those projections showed the base estimates for electricity generated from coal or natural gas to be less than US$ 0.03 per kW·h, by the year 2020 (in 1998 dollars). In July 2000, the U.S.
Department of Energy included the 3-cent generation cost target as a tentative economic goal
5 for development of new reactors in its report “Discussion on Goals for Generation IV Nuclear Power Systems”.
The competition has not been standing still. Significant improvements have been made in the thermal efficiency of coal and especially gas-fired electricity generating plants, setting new economic standards that nuclear power has to meet. The thermal efficiency of gas-fired plants has risen to well over fifty percent and is expected to reach sixty percent before the end of this decade, even without the further efficiencies that may be gained through co-generation. This compares with a thermal efficiency for water cooled nuclear power plants that is in the mid-thirty percent range. Moreover, these gas-fired power plants have relatively short (less than 2 years) construction times. It is not surprising that natural gas technologies can dominate the new power generation market, particularly in times of low gas prices, driving out not only nuclear but in many instances coal as well.
By contrast, the nuclear industry is struggling to maintain its market share. Since the mid-1990s, there have been construction starts and / or grid connections in the Middle East (India, Islamic Republic of Iran, and Pakistan), the Far East (China, Japan, and the Republic of Korea), in Latin America (Brazil, and Mexico), and in Eastern Europe (the Czech Republic, Romania, and the Slovak Republic). However no new2 nuclear power plant construction has started in the United States, Canada, and Western Europe since 1977, 1985 and 1991 respectively.
To capture economies of scale, nuclear plants tend to be of larger capacity than coal and gas plants. They also have a higher capital cost per kW(e), and can historically take up to 10 years from project initiation to commercial operation. This results in the need for considerably larger amounts of capital to be provided for financing new nuclear projects relative to new fossil projects. In developing countries the financing problem is compounded by OECD investment rules that add a 1% risk premium to lending rates on all OECD export credits where nuclear power plants are concerned. The financing difficulties associated with high capital cost certainly played a key role in the postponement in July 2000 of the Akkuyu project for a first nuclear power plant in Turkey, although Turkey is not subject to the 1% risk premium.
Postponement of the project is attributed to the fact that the Government of Turkey could not afford the estimated 3 to 4 billion US dollars needed to finance the project (see Annex 1). The long construction times of new nuclear plants also poses the risk that during construction the costs, regulations, policies and markets may all change, jeopardising both completion and a return on investment. Can such risks and costs be reduced or secured sufficiently for nuclear power plants to successfully compete for financing in capital markets?
Studies on projected costs of generating electricity provide results that depend strongly on the assumptions used. However, what such studies do underline is that cost management and flexibility will always be required to meet market uncertainties. Moreover, given the range of market conditions and generating costs, and the wide variety of assumptions used to forecast such costs, no single technology can be declared optimal in all markets or countries.
As noted in the beginning of this section, cost targets change with market conditions, and the nuclear industry needs to be responsive to changing market conditions in order to be competitive. Assuming that new nuclear plants can achieve electricity production costs of US$ 0.01 per kW·h (consistent with the best of current experience of existing plants — see
2 There are possibilities to re-open a closed unit and to resume construction of some partially completed units.
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Section 2.1.1), meeting the generating cost target of US$ 0.03 per kW·h mentioned above requires that new plants achieve overnight capital costs3 of US$ 900–1000/kW(e) for an example privately financed project (i.e. a discount rate of 11 percent, operating life of 20 years), or US $ 1300–1500/kW(e) for an example publicly financed project (i.e. a discount rate of 8 percent, operating life of 40 years)4.
Other insights can be obtained by examining results of the study [7] that was carried out by the OECD/IEA-NEA, in co-operation with the IAEA. This study provides one set of estimates of capital cost and power generation costs for nuclear, coal and gas fired plants in several countries, assuming a commissioning date of 2005, an economic lifetime of 40 years, a load factor of 75% for all plant types. As shown in Table I, the base overnight capital cost for new nuclear power plants around the world, including some evolutionary water cooled reactor designs under development at that time, were projected in that report to range from US $1,440 to 2,260 per kW(e) installed for 80 percent of the cases. Since the cost values shown in Table I depend on a series of assumptions specific to the study, they should be considered as indicative only. It should be noted that the costs projected by the study do not include the cost of risks that affect a project's credit rating, such as non-completion, exchange rate fluctuations and cost over-runs.
TABLE I. CAPITAL COSTS AND CONSTRUCTION TIMES FOR DIFFERENT ELECTRICITY GENERATING OPTIONS(1) (SOURCE: OECD, 1998)
3 “overnight capital cost” is the capital cost without including interest during construction, contingency and costs of major refurbishments.
4 These examples assume a plant capacity factor of 85%, a construction time of 60 months, and a capital amortisation period of 20 years.
Total capital cost per
1 Costs were transmitted by the participating countries to the OECD expressed in national currencies of 1 July 1996 and were converted to US dollars at the exchange rates of that date.
2 including interest during construction (IDC), contingency and cost of major refurbishment for an assumed 10%
discount rate.
3 “overnight cost” without IDC, contingency and cost of major refurbishment.
7 Important assumed parameters affecting power generation cost comparisons include the nuclear plant capacity factor and plant lifetime. As was mentioned above, the OECD/IEA-NEA study assumed a nuclear plant capacity factor of 75% and a plant lifetime of 40 years. A higher value for the nuclear plant capacity factor would be more favourable for nuclear power.
A plant lifetime of 60 years would also be somewhat more favourable for nuclear power.
However, the nuclear option would appear less viable for an assumed 20-year amortization period, more typical of private market conditions in which investors want a rapid return on investment. The assumed price of gas is also very important — being both volatile and country and geographically specific, its value does not everywhere put the same pressure on nuclear generating cost. In the OECD-NEA report, no single technology (coal, gas or nuclear) is projected to provide the lowest generation costs in all countries analyzed. In cases where the power generation costs with gas were projected to be as low as US $ 0.03 /kW·h, the report showed that drastic reductions of nuclear plant capital costs would be required in order to restore the competitiveness of nuclear power.
Thus the projected viability of the nuclear option depends on the specific market conditions and cost assumptions used in the cost analyses — all of which may vary from country to country. Importantly, in addition to economics, a country’s national policy issues, such as diversity and security of its energy supply, may affect the decision on whether or not to construct nuclear power plants.
The importance of country specific assumptions is illustrated by more recent projections of generating costs, such as those for new base-load power production in Finland (see Annex 2).
In these studies, projected generating costs were compared for nuclear power, CCGT, coal-fired and peat-coal-fired plants. Assumptions included a capacity factor of 91 percent (which is justified for nuclear on the basis of experience with the Olkiluoto units of Teollisuuden Voima Oy, Finland) and a discount rate of 5 percent. The results were that nuclear power was predicted to provide the lowest generating costs.
Annex 3 addresses the cost economics necessary for nuclear units to be competitive based on results of a series of OECD studies on projected costs of generating electricity and related activities.
It is also important to note that the different generating options also have different cost sensitivities. Because of high capital costs and long construction periods, nuclear power generation costs, and, to a somewhat lesser extent, coal power generation costs, are highly sensitive to discount rates. Generating costs for coal-fired plants vary with coal prices and with the level of pollution abatement required. Generating costs for gas-fired power plants are highly sensitive to gas prices, which account for a large proportion of total costs5.