Basic Economics of Nuclear Power

Ian Schultz
March 19, 2012

Submitted as coursework for PH241, Stanford University, Winter 2012

It's All About Money

For all the public talk of clean energy and need for reduced pollution, where we actually get our energy from ends up being largely decided by simple economics. Further, an economic discussion of energy is useful because in the context of efficient markets, price captures a large multidimensional space of competing options and reduces them to a single dimension to determine feasibility. People follow money and will ultimately only pursue the cheapest option that satisfies external requirements. In particular, power generation has two primary cost modes that determine economic feasibility: Capital costs and fuel costs. In the case of nuclear power fuel costs are relatively inexpensive, however there are significant costs associated with the construction of a new power plant. [1]

How Much Does a Nuclear Plant Cost?

Costs for nuclear power plants are driven primarily by the upfront cost of capital associated with construction. While a natural gas power plant could be constructed for as little as $850/kW, recent estimates put construction of a nuclear power plant at $4000/kW. [2] This estimate means a 1 GW plant should cost about $4 billion if financed by a lump upfront payment. In practice, however, it is much more expensive to construct nuclear power stations because there are significant uncertainties associated with their construction times. Because construction of a new nuclear power plant represents a significant cost it must be financed as an investment and requires interest payments over the life of a loan. The rate of interest (discount rate) represents uncertainty in whether the plant will be able to service payments on its loan. The construction of a new nuclear power plant involves risk in construction delays, public opposition, and changes in the regulatory environment, all of which could lead to significant cost overruns and adversely affect the profitability of a project. Modeling a nuclear power plant as an annuity costing an initial $4 billion with a 40 year life and interest rate of 11% (corresponding to approximately 50-50 debt/equity split) results in a total cost of more than $17 billion over the life of the loan. [3] The point is that an attempt to fund construction of a new nuclear power station is squeezed from both sides: they are inherently more expensive to manufacture and also have a much higher cost of capital than fossil-fuel power plants. In reality construction costs could be even worse; recent examples in the United States have priced from $5 to $12 billion per 1.1 GW reactor over the relatively short construction time span. [4] Even though the fuel costs of a nuclear plant are fairly low, these upfront costs associated with construction and financing tend to dominate the ultimate cost of nuclear power and make it significantly more expensive than fossil fuel power. [3]

Incentives & Subsidies

Another important aspect of nuclear energy is that federal subsidies and incentives to the energy industry can significantly alter the cost structure and ultimately competitiveness. It has been claimed that in the United States building new nuclear power plants is only possible through generous government subsidies. [5] In fact according to one study nuclear energy is the third most heavily subsidized industry on a per-kWh basis, receiving less than only solar and wind energy. [6]

Looking to the future, one of the most important questions yet to be answered regarding the viability of nuclear energy is how policy makers will choose to deal with excessive greenhouse gas emissions. The argument is that the external costs in the form of carbon emissions associated with fossil-fuel power plants should be internalized into real costs through a carbon tax. [7] Because nuclear power emits virtually no carbon dioxide, even a moderate carbon tax could significantly boost the economic appeal of nuclear power. For instance, a $100/tonC tax would make nuclear power very competitive with natural gas power. [3]

Conclusions

The nuclear energy industry faces many hurdles to grow on a worldwide scale in coming decades. In addition to the known costs discussed already, additional safety requirements after the Fukushima Daiichi nuclear disaster are likely to increase both capital and operating costs of nuclear power. [5] Even more important are the negative externalities associated with Fukushima: nuclear power was never particularly popular to begin with and public support in much of the world has declined significantly in the wake of the Japanese disaster. [8] Despite these challenges, nuclear power enjoys several important economic advantages over competing technologies. It has a proven track record of large-scale baseload power generation as well as long plant lifetimes and therefore if should remain part of the energy portfolio well into the future. There could even be a nuclear renaissance should construction costs of plants be reduced significantly or, perhaps more likely, if a carbon tax is instituted. While most developed nations have been decreasing reliance on nuclear power in recent years, either of these events could be the paradigm shift that the nuclear industry desperately desires.

© Ian Schultz. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.

References

[1] M. Kazimi et al., "The Future of the Nuclear Fuel Cycle," Massachusetts Institute of Technology, April 2011.

[2] J. M. Deutch, et al., "Update of the MIT 2003 Future of Nuclear Power," Massachusetts Institute of Technology, 2009.

[3] S. Ansolabhere, et al., "The Future of Nuclear Power," Massachusetts Institute of Technology, 2003.

[4] R. Smith, "New Wave of Nuclear Power Plants Faces High Costs," Wall Street Journal, 12 May 08.

[5] O. Morton, "The Dream That Failed," The Economist, 10 Mar 12.

[6] J. Badcock and M. Lenzen, "Subsidies For Electricity-Generating Technologies: A Review," Energy Policy 38, 5038 (2010).

[7] "Splitting the Cost," The Economist, 12 Nov 09.

[8] S. Cooke, "After Fukushima, Does Nuclear Power Have a Future?" New York Times, 10 Oct 11.