Christopher B. Anderson
Out of Chernobyl’s shadow: Finding investors willing to finance a new nuclear plant is formidably hard. The countries keenest on nuclear power—China, France, India and, less so nowadays, Japan—have been ones without genuinely competitive power markets. On May 4th, for example, China announced a $600m deal to help Pakistan build its second nuclear power plant. In such places, central planners and power monopolies have triumphed over market economics. [The Economist]
For the most part, I agree with the Economist’s take. Nuclear power isn’t an attractive solution in competitive energy markets. As an aside, truly competitive energy markets are pretty rare. I mention this not to start a long discussion over what constitutes a competitive market, just to record my dissent. For the most part, what I have to say doesn’t depend on the definition.
The way to approach this is to look at a nuclear plant as an investment choice. Nuclear power has a number of substantial risks. Some of them are common to other power sources and others are unique to nuclear.
Maturity risk/duration mismatch: The Economist article points out that much of the lifetime costs of a nuclear plant are upfront costs. This is a problem since in order to benefit from the economy of scale; the projects have to be large. Even the largest energy companies in the world would have a hard time funding a project with their own cash. They have to tap the capital markets. Even long term corporate debt has a shorter lifetime than a nuclear plant. The end result is that a company’s debt has a (relatively) short duration and its assets and income streams have a long duration. If a company accepts this risk, it is effectively sacrificing both profit and cash flow in the short term for profit in the long (15-20 years +) term. Now compute the present discounted value (PDV) of these future income streams and it is relatively easy to see why projects with a duration mismatch are unattractive. I want to point that duration mismatch is a common problem in the energy industry. It is particularly true with renewable sources (hydro, wind, solar) that typically have an even higher percentage of their overall costs be up front costs. This problem is frequently cited as the biggest single hurdle to renewable energy projects in the conferences I’ve attended. So, even if nuclear had no other risks this problem alone would stifle investment.
But nuclear has many other risks. Fuel and waste transport, waste disposal, accident insurance, etc… In the U.S., the Price-Anderson act was meant to mitigate some of these risks to make investment attractive. Even with this subsidy, plants still aren’t attractive investments. It also has an unenviable track record that will take years if not decades to cleanse in public opinion.
Plant construction is another problem. To overstate things a bit, each nuclear plant is custom engineering and construction. This complexity adds both cost and the risk of the completion date slipping. It also means that each project is different. As such, the experience from one plant doesn’t fully apply to another. The operating history of one plant isn’t a reasonable guide for another. In contrast, one of the reasons why natural gas has fared so well in the past few years is that much of the plant is manufactured, not constructed on site. This cuts down on the lead-time and expense of the project.
Given all of the risks, it’s not hard to see why no-one would invest in a nuclear plant unless their return was guaranteed.
After what I’ve written, it’s natural to ask why I am a nuclear power supporter. There are next-generation designs that alleviate some of the problems I’ve mentioned. A common trait of these designs is that rather than have a single, large, reactor vessel they have many small reactor vessels. This decreases the costs in many ways: They can be manufactured. They can be taken down for service without shutting down the entire plant. Operators can be trained on the common design, rather than on a per-site basis. Common techniques and best-practices can be applied from plant to plant. The operating history of a plant becomes a much better guide for others. One design that I particularly like is the pebble bed reactor.
Edward and Chris – Thanks !