Special report: Nuclear power. The shape of things to come?

THINGS have not gone well for the nuclear industry over the past quarter century or so. First came the Three Mile Island accident in America in 1979, then the disaster at the Chernobyl plant in Ukraine in 1986. In Japan, Tokyo Electric Power, the world's largest private electricity company, shut its 17 nuclear reactors after it was caught falsifying safety records to hide cracks at some of its plants in 2002. And the attacks on September 11th 2001 were a sharp reminder that the risks of nuclear power generation were not only those inherent in the technology.

Nor was safety the only worry: there were financial problems too. British Energy, Britain's nuclear-energy operator, required successive government bail-outs. Britain also recently finalised a £50 billion ($90 billion) scheme to deal with the nuclear-waste liabilities of British Nuclear Fuels (BNFL), an inept re-processor of nuclear waste that is itself bust.

But lately, things have brightened for the nuclear industry. In Asia, which never turned against it in the way the West did, the prospects are excellent. China already has nine nuclear reactors, and is planning to commission a further 30. New capacity is being built or considered in India, Japan, Taiwan and South Korea. Russia has several plants under construction.

Now western governments are increasingly looking anew at nuclear energy. A few weeks ago TVO, a Finnish consortium, started work on the first new nuclear plant to be built on either side of the Atlantic in a decade. Pertti Simola, TVO's chief executive, proclaims that, “Finland has opened the door to a new nuclear era! Many western countries will come behind us.”

France's parliament has recently given its approval for a new nuclear plant. Guillaume Dureau of Areva, the world's largest nuclear supplier, captures the dizzy mood that has overtaken vendors: “We are pretty convinced of a nuclear revival and [we] need to prepare for it. We need to hire 1,000 engineers.”

Despite its earlier doldrums, the nuclear industry is still a sizeable business. In 2004 Areva had sales of €6.6 billion ($8.2 billion). That figure includes mining uranium, designing power plants and reprocessing waste fuel. General Electric's nuclear division, which designs and builds plants but does not handle fuel or waste, turned over about $1.1 billion last year (its turnover was double that figure if sales of non-nuclear bits of nuclear plants, such as generators and turbines, are included). Westinghouse, an American brand currently owned by BNFL, which recently put it up for sale, had sales of around £1.1 billion ($2 billion).

The main reason for the shift is climate change. As it has risen up the political agenda, so the impetus for a nuclear revival has grown.

More, and more respected, voices have been making the case that nuclear energy is essential if the rate of change is to be slowed. As a result, there is an unlikely alliance between the nuclear industry and many environmentalists, as a growing number of greens have come to believe that nuclear energy is the best way to reduce carbon emissions. Industry lobbyists are finding support from unexpected areas. Keith Parker of the Nuclear Industry Association, a British trade group, points to a recent quote from James Lovelock, a founder of Greenpeace: “Only nuclear power can halt global warming.”

Scientists are also lending their support. Sir David King, Tony Blair's chief scientist, recently argued that one further generation of nuclear power stations is needed (in Britain at least) to buy time, in order to keep down emissions of carbon dioxide, the chief greenhouse gas, while new carbon-free non-nuclear technologies are developed. He thinks that renewable sources of energy are not currently up to the task: “We need another generation of nuclear-fission stations.” Others agree. The World Nuclear Association, an industry body, dismisses its green rivals in a recent report: “the potential scope for renewables contributing to the electricity supply is very much less because the sources, particularly solar and wind, are diffuse, intermittent and unreliable.”

Such opinions have caused consternation among nuclear energy's long-standing opponents, notably Europe's green movement. Anti-nuclear sentiment was so strong in Germany at the end of the 1990s that the ruling socialist-green alliance banned new plants. Sweden was the first country to turn against nuclear plants, in a referendum back in 1980; at the end of May it shut down its second nuclear plant. Yet in both countries opinion polls suggest waning public opposition to the nuclear option. Indeed, Germany's Christian Democrats now say they may overturn the ban if they win the forthcoming national election. In Finland, says TVO's Mr Simola, concern about climate change was the chief reason why his country pushed ahead with the new power plant.

In America, although the Bush administration remains hostile to any mandatory action on slowing global warming, it is keen to boost nuclear power. That has led some greens to take the view that a nuclear revival is better than doing nothing much about climate change. Leaders of respected environmental outfits such as Environmental Defence and the World Resources Institute have recently made positive noises about nuclear power as part of a response to global warming.

Of course, nuclear power is not the only carbon emission-free option. Making existing energy production more efficient, and reducing waste in the use of energy by consumers, would have a big economic and environmental impact. Renewable energy sources such as wind and waves have plenty of backers.

There are also direct rivals to new nuclear plants, such as fossil-fuel plants with carbon sequestration that can provide baseload power. A flurry of investment and experimentation, from Algeria to China to America, is already under way in this area.

Vattenfall, a Swedish nuclear utility, is investing in technology to remove carbon from its newish coal plants in eastern Germany and Poland. Cinergy, an American utility just bought by Duke, is looking into coal gasification and carbon sequestration in Indiana. A Scottish consortium led by BP recently announced the first commercial-scale project to produce carbon-free power from natural gas, re-injecting the waste carbon dioxide into fields in the North Sea - thus not only storing the gas underground, but also enhancing hydrocarbon recovery from the field. And combined heat and power, which allows companies and householders to use the heat created by power generation as well as the electricity it produces, is booming. But the nuclear industry has the momentum right now. That's partly because its economics have improved markedly.

Better management allows companies to make existing plants much more efficient. In America, for instance, the country's 103 nuclear plants are no longer owned by individual municipalities. “Nuclear consolidators are the key,” argues Michael Wallace of Constellation Energy, a utility that owns several plants and hence can retain good managers, share best practices, gain economies in maintaining parts and inventories and so on. The top ten nuclear firms now own 61% of the sector. Exelon, the largest firm, has a 15% share. American nuclear power plants' capacity utilisation has risen from 56% in 1984 to more than 90% today.

This is a lesson that France had already learned, says Bernard Dupraz of Electricite de France. EDF is responsible for all the country's nuclear plants. Unlike America, where no two nuclear plants are exactly alike, France stuck with a few standard designs. “We standardised nuclear plants like Ford did the Model T.” The results: 20% lower operating costs and 30-40% lower capital costs than those of one-off designs used elsewhere, notably in Britain.

CERA, a consultancy, calculates that 31 countries have commercial nuclear-power reactors today. Taken together, these 439 reactors produce about 16% of the world's electricity, worth annually $100 billion-125 billion. And the pot is growing.

Expansion in China alone is likely to involve some $50 billion or more of capital spending. That's quite a prize - though it is important to put China's nuclear interest into perspective. Even if it really builds all 30 mooted plants, nuclear power will still make up only about 5% of its electricity mix in 2030. Meanwhile, natural gas is expected to grow from a 1% share today to over 6%, according to the International Energy Agency (IEA).

In many power markets today, nuclear electricity is the cheapest you can buy. Entergy's deregulated nuclear plants produced 13% of its revenues but a quarter of its profits last year. It costs German utilities perhaps 1.5 (American) cents per kW-hour to make nuclear electricity, estimates Vincent Gilles of UBS, an investment bank, but they can sell it for three times that amount once credits from Europe's carbon-trading scheme are included. In contrast, it costs 3.1-3.8 cents to produce power from natural gas in Germany and 3.8-4.4 cents to produce it from coal. In America, where there is no mandatory carbon regulation (and hence no penalty on fossil fuels), nuclear power has less of an edge: coal power costs about 2 cents per kW-hour on average today, gas-fired power costs about 5.7 cents, while nuclear cranks out electricity at 1.7 cents or so.

But the economic case is not as clear-cut as it seems. The costs of nuclear power produced by existing plants are likely to be far lower than the costs of newly built plants, because the capital costs of nuclear plants - typically reflecting half to two-thirds the value of the project in present-value terms - are long forgotten. Most of today's plants were built in an era when central planners or state utility boards had no idea of the true cost of capital. Today's low interest rates are good for big capital projects like nuclear, but those rates may change sharply in the future. At the same time, gas and oil prices - whose current astronomical levels enhance nuclear's charms - may well fall.

Subsidy, what subsidy?

Critics also argue that the best designs the nuclear industry can come up with are not competitive with rival energy technologies in the open market. The nuclear industry points to some studies that seem to suggest that nuclear plants might be economic if only their “life cycle” benefits (such as lack of greenhouse gases) and their rivals' disadvantages (such as fuel costs for natural gas plants) are factored in.

For example, the Nuclear Energy Agency, an arm of the OECD, has just released a study done jointly with the International Energy Agency (IEA). After reviewing the economics, it seems to conclude that there is indeed a bright future for nuclear: “on a global scale, there is room and need for all baseload technologies.” Assuming a discount rate of 5%, it argues that the cost of generating power from new nuclear plants would cost between $21/MW-hour and $31/MW-hour; costs for gas-fired power, it reckons, would range from $37/MW-hour to $60/MW-hour. (The report also assumes high gas prices, which favour nuclear, a view contradicted by the IEA's official forecast of a medium-term reduction in gas prices.)

But there's plenty of scope for argument about the economics of nuclear power generation, because they are so sensitive to assumptions about the cost of power from other sources. As Ed Cummins of Westinghouse insists, “The biggest motivator for nuclear today is $6 [the price per MBtu] natural gas. If gas goes back to $3.50, then nuclear plants aren't competitive.”

The other source of uncertainty is the disposal of radioactive waste. That's what messed up the economics of Britain's nuclear programme: Britain decided to reprocess its waste, which proved hugely expensive. America, by contrast, just stuck it in swimming pools - literally - at the power plants. The current consensus is that the best solution is geological storage - that is, to bury the waste very deep. The bad news is that nobody is making much progress getting there, or knows how much it will all cost in the end.

Taking into account the uncertainties, most studies done on nuclear economics (including the most authoritative ones, done by the Massachusetts Institute of Technology and by Britain's Royal Institute of International Affairs) conclude that new plants built by the private sector, with investors bearing the full brunt of risks, are not economic without subsidy.

Though nuclear vendors are promising that their new designs will cost only $1,500 per kW of installed capacity, that assumes ideal conditions and no delays. A more realistic assessment (indeed, the consensus view among experts not aligned with the nuclear industry) is that new plants will probably cost close to $2,000 per kW. That may be less in real terms than the capital cost of previous generations of nuclear plants, but it is still about double the capital cost of a conventional coal plant today. The upshot of all this is that even today's cheaper, safer nuclear designs are still more expensive than coal or gas.

The money men are not very enthusiastic. Standard & Poor's, a rating agency, recently declared, “The industry's legacy of cost growth, technological problems, cumbersome political and regulatory oversight, and the newer risks brought about by competition and terrorism may keep credit risk too high for even (federal legislation that provides loan guarantees) to overcome.”

Part of the problem is that nuclear plants are seen as too “lumpy” and uncertain as investments. A 1,000MW nuclear plant would cost $2 billion and take at least five years to build. A coal plant of that size would cost perhaps $1.2 billion and take three to four years, while a combined-cycle gas plant that size costs about $500m and takes less than two years to get up and running. The bigger the project, the more susceptible it is to delays - and UBS's Mr Gilles estimates that a two-year delay in nuclear projects wipes out 20-25% of the project's value to investors.

Political risk is a problem, too. The links between nuclear power and weapons hurt the business - as was sharply illustrated last week. Westinghouse was in the bidding against French and Russian companies for a Chinese contract. But the House of Representatives, fearful of giving China access to American nuclear know-how, voted down a $5 billion loan from America's Export-Import Bank.

So, if the economics are so unpromising, why is so much nuclear capacity being built? Some of it - in China, for instance - may be the result of mixed motives. China could be after the technology that America wants to deny it. Security might also be a factor: energy importers may want a proportion of their needs met by sources over which they have control.

Nuclear fans point to Finland where a private consortium seems to have managed to finance a new power plant without government subsidy. But was it done without subsidies or unfair state aid? Absolutely, insists TVO's Mr Simola. “You must be joking,” retorts UBS's Mr Gilles.

In fact, the answer is unclear. TVO is a consortium involving six shareholders - but one of them is a state-owned utility, Fortum. TVO's owners are also its only customers. Some of those customers are big paper and pulp companies, who use a lot of power; others are municipalities, which may not be sensitive to market economics. Indeed, the €3 billion deal is not a conventional commercial transaction. Mr Simola explains that there is a lifetime power-purchase contract agreed at zero profit: “We pay dividends in the form of competitive power,” he jokes.

The plant is to be built by France's Areva on a fixed-price bid. If there are delays or massive cost overruns, Areva must cover them. Areva's Mr Dureau vigorously denies that French government ownership means that that country's taxpayers will be subsidising Finnish power: his firm will yield all its assets and go bust before the French taxpayer will pay a penny, he insists. But if it does go bust, the French taxpayer must write that cheque to TVO.

Even if the Finnish experiment is not explicitly subsidised, the model may nevertheless be tricky to replicate elsewhere. If it can be - and there is some interest in France and America among heavy energy users - then the nuclear industry may yet be justified in claiming that new nuclear plants can be built without state aid.

Yet most studies reckon that even a moderate carbon tax would not make nuclear power generation competitive in a free energy market. Europe's emissions-trading system (ETS) is, in effect, that sort of a tax. And according to Oxera, a British consultancy, even with that implicit tax on carbon-based power generation, new nuclear plants would not be economic without government help.

But if the implicit tax rose, that might change. The point of a carbon tax is to reflect the cost to society of damage that using carbon does. Setting a price on those social costs is difficult. Europe's ETS implies that the social costs of carbon dioxide are €20 per tonne; but a British government study in 2002 estimated them at £70 (€112). Such estimates are necessarily vague; but if that higher figure is fed into Oxera's model, new nuclear plants begin to look economically viable.

However, politics make it unlikely that carbon is going to pay its full social costs - for some time to come. That's why some governments - including America's - are thinking of subsidising nuclear instead.

President Bush is trying to shoehorn a provision into his energy bill that would give the nuclear industry about $500m in insurance against the risk of regulatory delays, and a further $6 billion or so in subsidies now being considered for new nuclear plants. American utilities want several billion dollars for the engineering and construction costs associated with building the first three or four such plants. They are also hoping for over $500m in subsidies to go through the licensing process, and an extension of the government's blanket insurance policy against catastrophic accidents.

They may get them. There's a powerful business lobby in America that's hostile to the idea of importing emissions trading from Europe. Subsidising nuclear is one of the only ways of squaring that lobby's interests with the electorate's rising awareness of the need to do something about climate change. With President Bush and the tree-huggers both on its side, the nuclear industry is back in the game.

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