26 April 2016. “New Nuclear – the Economics Say No” was the headline of a 2009 analyst report from Citigroup. The bankers had taken a closer look at the financial viability of the proposed construction of new nuclear power plants in the UK and concluded that five risks make it very difficult to profitably invest in nuclear: planning, construction, power price, operational and decommissioning. They went on to conclude that each of the middle three of these risks alone would be enough to “bring even the largest utility company to its knees financially”. Two years after the report was published, Citi’s claim was empirically validated.
Rethinking of nuclear policy after Fukushima
The meltdown in three reactors of the Fukushima Daiichi nuclear power plant in Japan led to widespread contamination. The event marked a human and environmental tragedy, but the magnitude of the financial loss – estimates of which range from $250bn to $500bn – also forced the operating company, Tepco, into the largest government bail-out in Japanese economic history. In some countries, the disaster led to a sharp rethinking of nuclear policy. Switzerland is a case in point. Before Fukushima, the Swiss utility industry had sought permission to build up to three new nuclear reactors. After the accident, the government shelved those plans. Safety concerns were one factor, but economics have played a role, too – after all, insurance coverage of Swiss nuclear power plants is limited to less than CHF2bn, a tiny fraction of the costs of the Fukushima or Chernobyl accidents. And unlike the North of Japan or rural Ukraine, the surroundings of nuclear sites in Switzerland are densely populated. The country’s financial hub, Zurich, is just 30 km from two of the oldest nuclear power plants in the world, Beznau I and II.
Prospects of profitably operating new nuclear power
Leaving the risk of a large accident aside, what are the prospects of profitably operating new nuclear power plants under normal conditions? The UK experience suggests they are not very bright. The government’s call for tenders for a new nuclear power plant at Hinkley Point ended up with just one bidder: state-owned Électricité de France (EDF). Such exclusivity does not come for free to British electricity consumers. EDF’s offer to build the plant was conditional on receiving a guaranteed price for the electricity produced. The government reacted with a proposed subsidy that resembles feed-in tariffs used in many countries to promote investment in renewable energy. While the level of feed-in tariffs has been reduced for wind and solar in countries like Germany and Switzerland to reflect technology learning curves, the price guarantee for nuclear locks in the opposite trend.
Cost of running ageing power plants
If financing new nuclear is not a straightforward proposition, what about just operating existing nuclear power plants a little longer? For quite some time, the idea of sticking to the status quo has had political and economic appeal to governments and utility industry professionals. One reason is the fat tail of the lifecycle cost distribution of nuclear power. Once a reactor has reached the end of its lifetime, the cost of decommissioning and storing nuclear waste for hundreds to thousands of years have to be borne. Utilities have a mandate to make provisions for this, but whether or not the funds will actually suffice remains to be seen. When electricity prices were high, delaying the end of the lifetime was almost a license to print more money from written-off assets. Notwithstanding the increased risk and repair cost of running ageing power plants, the decline in European wholesale power prices has made this argument less valid in recent years.
Economic meltdown of nuclear power
In Switzerland, a board member of nuclear power operator Axpo has recently stated that in the current price environment, nuclear operators lose money with every kilowatt-hour that they produce. The fat tail of the cost distribution is a feature that nuclear power shares with other non-renewable energies – a painful lesson that Swedish utility Vattenfall had to learn when trying to sell their German coal-fired power-generation assets. The company saw their expectations for achieving a €2bn sales price tumble to potentially negative enterprise value amid concerns of potential buyers that decommissioning lignite mines and the requirement to buy carbon emission allowances would eliminate the firm’s basis to operate these assets profitably in the future.
The positive business case for non-renewable energies seems to have come to an end. Thirty years after Chernobyl and five years after Fukushima, the economic meltdown of nuclear power should be a wake-up call for investors and governments. It’s time to invest in a cleaner energy future.
Photo: Copyright Keystone