costs
Pick a title, any title Nuclear Economics will do… “Key Issues in the World Nuclear Renaissance”
Milt Caplan President MZConsulting Inc.
This is a sample of how Course our WNU PowerPoint presentation sSouth could Africa look in the future October 2010
OUTLINE
Outline of today’s presentation • Electricity and its market • Cost structure of nuclear plants • Economics of current reactors • Economics of new reactors • External costs • Summary and discussion points
Key WNA report
Recent Reports
Economics of nuclear • New build nuclear must demonstrate that it is competitive in an economic sense. • Nuclear is capital intensive with long project schedules • Nuclear has low operating costs due to low cost of fuel • General belief is that nuclear is not economic, is too expensive and needs subsidies • In reality nuclear is economic relative to the alternatives • And economics are improving as climate change concerns continue to increase
ELECTRICITY AND ITS MARKET
Electricity • Electricity is essential to the operation of modern industrial societies • Cannot be easily stored – so supply and demand must always be in balance • Reliability of generation is vital – customers do not accept the lights going out! • Therefore need a stable grid – combination of reliable generation and a reliable delivery system (transmission and distribution) • It’s a basic commodity – price is very important to customers.
Base load against peak load • Huge variations in electricity demands according to time of day and year. • Pattern is also country-specific – climate, industrial structure, etc. • Base load – that part of demand which is steady throughout the day and year. • Peak load – the additional supply required to meet the additional demands during the day. • Different generation options are suited to either base or peak loads – due to technology and economics.
Electricity markets - historical • Historically vertically integrated monopolies (generation – high voltage transmission – regional/local distribution) owned by the state • Prices were generally “cost plus” and in some cases – even subsidised • To maintain a high level of reliability, Investment in new capacity was generous – tendency to overcapacity • This model led to Inefficiencies in companies and the risk of high prices
Electricity markets – Current • Widespread privatisation, market liberalisation, deregulation, “unbundling” • Huge number of models tried – still somewhat experimental around the world – UK a pioneer in 1989. • Concentration on developing competitive generation • Prices generally fall as overcapacity is eliminated, then may stay stable or rise.
Electricity markets – Issues • Uncertainty about future prices • Market structures under liberalised regimes have been evolving eg UK • Risk of monopolies re-emerging • Risk of insufficient investment in new capacity • Investors in long term power projects need some assurance of prices
Merit order dispatch in generation • Demand for electricity varies through the day • Different technologies – hydro, coal, gas, nuclear, oil - are called upon to supply according to their marginal cost – ie fuel plus O&M – operations & maintenance • Low marginal cost (hydro and nuclear) will operate as base load • Higher cost (gas) will come in to cover peaks. • In many cases, renewables will operate as baseload and distort the market
World primary energy demand (Mtoe)
World energy demand expands by 45% between now and 2030 – an average rate of increase of 1.6% per year – with coal accounting for more than a third of the overall rise Sources: IEA "World Energy Outlook 2008" - “Reference Scenario"
Per Capita electricity demand by region
Other regions start to catch up to the OECD in consum ption Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
World Electricity Generation by Fuel
M ost of the additional dem and for electricity is ex pected to be m et by coal, w hich rem ains the w orld’s largest source of electricity to 2030 Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
Increases in OECD Electricity Generation
In the OECD, the total projected increase in renewable electricity generation is bigger than the combined increase in fossil fuel-based and nuclear power generation Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
Reductions in energy-related CO2emissions in the climate-policy scenarios
Efficiency gains and deployment of existing low-carbon energy accounts for most of the savings
World Electricity Generation by Scenario
Half of total electricity generation in 2030 in the 550 Policy Scenario comes from low carbon sources; this share rises to two-thirds of the total in the 450 Policy Scenario
Total Power Generation Today and in 2030
In the 450 Policy Scenario, the power sector undergoes a dramatic change –with CCS, renewables and nuclear each playing a crucial role Sources: IEA "World Energy Outlook 2008"
Global Savings in Energy-Related CO2 Emissions
Nuclear capacity additions are comparable to CCS and about 7 times lower than renewables Sources: IEA "World Energy Outlook 2008"
World Nuclear Capacity
In the Policy Scenarios, nuclear capacity expands almost twice faster until 2015 Sources: IEA "World Energy Outlook 2006"
Reference Scenario Electricity-Supply Investment
Investment of $26 trillion, or over $1 trillion/year Sources: IEA "World Energy Outlook 2006"
The Future Potential
Source: IEA NEA Technology Roadmap: Nuclear Energy 2010
• • • 24
IEA Blue Map scenario targets 50% CO2 reduction by 2050 Nuclear capacity triples and its share of electricity generation rises from 14% today to 24%, the largest of any generation technology Under a High Nuclear case, nuclear share could reach 38%
Security of supply • Key motivation why countries “went nuclear” in 1970s/1980s – France, Japan • Dependence on fossil fuels from politically unstable regions • Risk of loss of supply • Currently a very important issue in the USA and Europe
Energy policies • Should countries have an energy policy or leave it to the market? • Oil crises of 1970s put focus on energy sector and planning. • Market liberalisation in 1990s. • Recognition that energy policies are essential for security of supply and the environment
Why may we have more nuclear in the future? • IEA is seeing more nuclear but implementation remains moderate • Environment and greenhouse gas emissions. • Security of supply. • Better economics of plants. • Return to energy planning by governments. Increased nuclear in the future will depend upon favourable economics
Summary on electricity • Demand will grow strongly over the next 25 years • Electricity is a commodity to be bought and sold in competitive markets • Supply and demand must always be kept in balance • Reliability is essential • Price is important • Climate change concerns will impact the market and how decisions are to be made • Governments are recognizing that energy policy is important for society
COST STRUCTURE OF NUCLEAR PLANTS
Categories of generation costs • Investment (capital) costs and interest charged on these • Fuel costs • Operations & Maintenance (O&M) costs - fixed and variable For nuclear, fuel cost includes used fuel management/waste disposal. Decommissioning of nuclear plants is an additional investment cost, but comes many years in the future
Existing generating plants • Fuel and O&M costs are called “marginal” or “avoidable” or “production” costs • Investment costs are “sunk” - whether or not they are depreciated/amortised in the company’s accounts • If electricity price is higher than the marginal costs the plant will operate • Different generating modes compete on the basis of marginal costs only
New generating plants • To be economic, these must cover their investment costs, interest charged and the marginal costs – “full costs” • Compare these full costs against the likely electricity price to be received over the lifetime of the plant • When considering different options for new generating capacity, they are assessed on these full costs • But the timing of the costs, as well as their magnitude, is crucial
Costs and their time schedule • Hydro plants – high investment costs and very low marginal costs – no fuel cost! • Gas plants – low investment costs but high marginal costs (gas price) • Nuclear close to hydro - but more significant marginal costs (O&M and fuel) • Coal fits between nuclear and gas – average investment costs and average marginal costs • Renewables such as wind and solar have high investment costs, low marginal costs but resource is intermittent
Example of expenses schedule before discounting for a nuclear power plant (40 years economical lifetime) $million 300
250
200
150
100
50
0
Dismantling Fuel O&M variable O&M fixed Investment
Relative Cost Structure of Generation
General shares
Nuclear
Gas CCGT
Coal
Investment
50-60%
15-20%
40-50%
O&M
20-35%
5-10%
15-25%
Fuel
15-20%
70-80%
35-40%
Fuel as a Percentage of Electric Power Production Costs 2007 Fuel 27% Fuel 77%
4% 9%
Conversion Fabrication
17%
Waste Fund
35%
Fuel 93%
Enrichment
O&M 73% 35%
O&M 23% Coal Coal
Uranium
O&M, 7% Gas Gas
Source: Global Energy Decisions; Energy Resources International, Inc. Updated: 5/08
Nuclear Nuclear
Nuclear NuclearFuel FuelCost Cost Components Components
Time value of money - discounting • $1000 today is not the same as $1000 in 5 years time! • Evaluating costs and revenues of new plants must take account of this • Bring all back to current values – levelise them – by a discount rate • LCOE – levelised cost of electricity
Methodology - LCOE • LCOE – Levelized Cost of Electricity – Sometimes called LUEC – Levelized Unit Energy Cost
• Defined as fixed price of electricity that will balance all of the costs over the plant lifetime on a discounted basis • Σ Income i / (1+d)i = Σ Expense i /(1+d)I • Income = Fixed Price (P) x ΣGeneration i/(1+d)I • Fixed Price (P) = Σ Expense i /(1+d)I / ΣGeneration i/(1+d)I = LCOE • Or LCOE = Discounted Costs/ Discounted Generation
Impact on projects • Discount rate depends on interest rates, view of the future, project risk • Public sector – low (3-5%) and private sector higher (515%) • Low discount rated reflect lower perception of risk favours projects with high investment costs, longer schedules and low marginal costs ie hydro and nuclear plants • High discount rates reflect higher perception of risk favours projects with low investment costs, shorter schedules and high marginal costs ie gas plants • Hence it is difficult for hydro and nuclear to be viable in liberalised markets
ECONOMICS OF CURRENT REACTORS
Current reactors • Dramatic improvement in operating performance has transformed economics • Previous forecasts that half of US reactors would be victims of electricity liberalization have been proven wrong! i.e. liberalization has been a success • Higher capacity factors • Power up-rates • Licence extensions • Market in “used” reactors
20 04
20 01
19 98
19 95
19 92
19 89
19 86
19 83
19 80
19 77
19 74
19 71
TWh
Nuclear growth since 1970 3000
2500
2000
1500
1000
500
0
Economic performance • Low marginal costs – fuel and O&M – typically below 2 US cents per kWh. • Best plants in Europe and US achieving 1.3 to 1.6 US cents per kWh. • Only hydro can beat this for base load power – but limited by water availability. • Fossil fuel price escalation – pushing up coal and gas plant marginal costs. Temporary or permanent?
U.S. Nuclear Industry Production Costs 1995-2005 (In 2005 cents per kilowatt-hour)
Production Costs = Operations and Maintenance Costs + Fuel Costs Source: Global Energy Decisions Updated: 6/06
U.S. Electricity Production Costs 1995-2005 (Averages in 2005 cents per kilowatt-hour)
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05
2005 Nuclear 1.72 Coal 2.21 Gas 7.51 Oil 8.09
Production Costs = Operations and Maintenance Costs + Fuel Costs Source: Global Energy Decisions Updated: 6/06
U.S. Nuclear Industry Non-Fuel O&M Costs 1995 2005 (In 2005 cents per kilowatt-hour)
Source: Global Energy Decisions Updated: 6/06
Annual Fuel Costs to U.S. Electric Utilities 1995-2005 (In 2005 cents per kilowatt-hour)
8.0
Nuclear 0.45 Coal 1.72 Gas 7.05 Oil 7.36
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1995
1996
Source: Global Energy Decisions Updated: 6/06
1997
1998
1999
2000
2001
2002
2003
2004
2005
Impact of 50% increase in Fuel Costs
increase in generating cost
40%
30%
20%
10%
0% Nuclear
IGCC
Sources: IEA "World Energy Outlook 2006" - " Reference Scenario "
Coal steam
CCGT
Fuel Cost is Important • Operational Costs ~ 1.7 cents/kWh • Fuel Costs ~ .4 cents/kWh – – – –
Uranium cost ~ .1 cents/kWh At uranium price of $10/lb At uranium price of $100/lb Uranium cost ~1 cent/kWh
• Total Operational Cost ~2.6 cents/kWh • Nuclear remains the most cost effective in liberalized markets but margins have been eroded
Summary on current plants • Still a common view that even existing nuclear cannot make economic sense and require subsidies! • Dramatic improvement in operating performance has transformed economics • Low and stable marginal costs • Nuclear plants, operating well, should make significant operating profits for owners in any conceivable type of electricity market
ECONOMICS OF NEW REACTORS
New nuclear plants • If operating plants are profitable, why are there not more current orders? • Perception of risk • Nuclear has high investment costs, takes long time to come into operation, then has low and stable operating costs • Gas plants have low investment costs, are built quickly and have high and variable operating costs • Which is the most economic depends heavily on 3 things – (1) nuclear investment cost (2) gas price (3) interest/discount rate used • Various recent studies choose varying combinations of the relevant parameters – investment costs, fuel prices, interest rates
Capital Costs • Some uncertainty on the likely investment costs of evolutionary reactors – EPR, AP-1000, ESBWR, ACR-1000 etc – lack of recent build experience – has caused initial costs to rise • Industry has projected – from new build experience in Asia, Europe and detailed engineering estimates – that investment costs are in about $4000 per kWe • Nuclear investment costs are expected to fall, with standardized designs and shorter construction times
Reducing Risk is Key to Cost Reduction • The benefits of low fuel costs are realized with reduced investment costs • Latest designs are evolutionary versions of existing reactors that emphasize improved economics through simplification • Standardization will ensure further reductions due to fleet economies of scale • Improved regulatory risk due to improved processes and design standardization • Several standardised designs on existing nuclear sites, using modular construction etc.
Schedule and Financing • Construction time and financing cost vital – interest payments build up with delays. • Innovative financing – need to reflect long term thinking – can such large investments be financed in liberalised power markets? • Conclusions of various studies depend on these factors and fossil fuel price assumptions.
Economics of New Build Nuclear
Gas-fired generation is set to remain more expensive than coal, nuclear or wind – Increasing carbon cost will improve nuclear economics further Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
OECD Study – Large Regional Differences
Current Capital Cost Estimates • Current estimates of capital costs in the US are in the $3,500 to $4,500 /kW range • Other generation types have also increased in cost
Source: The Cost of New Generating Capacity in Perspective, NEI August 2008
The Changing Costs of Nuclear
Update of the MIT Future of Nuclear Power 2009
Commodity Price Increases
Cost Increases are expected to subside • The MIT study update shows that recent completed plants in both Korea and Japan have reduced in cost from previous units due to experience and replication ($3,000 /kW range) • Korea has just won its first international order in the UAE with a cost lower than its competitors ($2,300 /kW) •
US Department of Energy EIA assumes in its Annual Energy Outlook (AEO) that efficiencies will be gained in the US and assume a cost reduction to 2030
Fossil fuel prices • Escalation clearly increases nuclear’s attractions further, beyond that of recent studies • But recent drop in prices show that – we can’t predict this or depend on it to ensure that nuclear is economic • Emphasis should be on the clear impact of fossil fuel price volatility on electricity price and nuclear’s superior position
New nuclear build – key element of risk allocation • Role of government – regulation, waste and decommissioning policies, nuclear liability & plant security – need a consistent policy • Plant vendor, contractors and operator must each take on relevant risks • Power market – various models – need to have power off-take agreements in place
Roles of government • To combine their regulatory, safety oversight responsibilities with efficient licensing procedures which facilitate timely introduction of new reactors • To ensure certainty on national waste management and plant decommissioning – these are included in the costs of nuclear plants but nuclear plant economics are largely insensitive to them • To introduce incentives, as appropriate from a public policy perspective, to accelerate the transformation to clean-energy economies
Financing and discount/interest rates • Markets have a short term bias – Short schedule lower investment cost projects have lower cost of funds – Longer schedule higher investment cost projects have higher cost of funds – Nuclear plants are perceived as higher risk resulting in a risk premium
• Structuring projects for success means an equitable sharing of risks amongst all stakeholders • Need project successes to convince investors to reduce the risk premium • New nuclear power plants should be attractive investments for those with long-term liabilities – pension and life assurance funds
Discount rate is important
Lessons from the past • Consistency of government policy in energy planning and regulation – France, Japan, Korea • Limited number of strong, large companies owning and operating reactors – previous weakness in USA • Strong, possibly international, major contracting companies • Standardization of reactor designs on a limited number of sites – previous weakness in UK and USA
Summary on new nuclear plants • Investment costs of nuclear plants have gone down • Prices of oil, gas and coal have risen, pushing up marginal costs of these generating units. • Governments need to develop the appropriate frameworks for new nuclear build – regulation, waste policies etc. • New nuclear build should now be very economic in most countries, even without any credits for low emissions or security of supply. • Nuclear needs investors who can take a long term perspective.
EXTERNAL COSTS
External costs • Those which are incurred and put a burden on society but are not accounted for in measures of cost and which are not compensated for by those creating them. • Sometimes called “externalities” • Examples include noise, air pollution etc • Current focus is on greenhouse gas emissions • Nuclear power incorporates (“internalises”) its external costs – through making provisions for managing wastes, ensuring low radiation emissions and final plant decommissioning which are all considered in the economics
External Cost Figures for Electricity Generation in the EU (Eurocents per kWh) Wind PV Hydro Biomass Nuclear Gas Oil Peat Coal 0
2
4
6
8
€ Cents per kWh Source: EU-EUR 20198, 2003
10
12
14
16
Externalities of Electricity Generating Technologies
Source: EU-EUR 20198, 2003
Impact of Carbon Value on Generating Costs
A carbon value im proves the com petitive position of w ind & nuclear pow er Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
The Cost of Reducing Carbon • 550 Policy Scenario – Energy demand continues to expand, but fuel mix is markedly different – CO2 price in OECD countries reaches $90/tonne in 2030 – Additional investment equal to 0.25% of GDP
• 450 Policy Scenario – – – –
WEO 2008
Energy demand grows, but half as fast as in Reference Scenario Rapid deployment of low-carbon technologies –particularly CCS CO2 price in 2030 reaches $180/tonne Additional investment equal to 0.6% of GDP
Dealing with external costs • Those creating an external cost should arguably pay compensation to those suffering – or introduce new technology to remove it • Imposing taxes etc costs would discourage use and promote alternatives • Greenhouse gas abatement can be helped by (1) carbon taxes, (2) carbon emission trading schemes or (3) incentives to non-carbon emitting technologies • All would benefit new nuclear build
SUMMARY & DISCUSSION POINTS
The “new economics” of nuclear power • In most industrialised countries today, new nuclear power plants are a very economic option to generate base load electricity – even without consideration of additional geopolitical and environmental advantages that nuclear power confers • However, risking costs need to be contained, otherwise the nuclear renaissance may be at risk!
Discussion points • How can low carbon sources of electricity (eg renewables and nuclear) be promoted to the customers – residential, commercial and industrial? • How can we persuade the general public, media etc that nuclear is a fully economic way of generating electricity? • How important are the economic advantages of nuclear compared with the others – energy security and low GH gas emissions? • How can we encourage big power users to invest in new nuclear power plants? • Should governments worry about security of supply – if so, how could more secure supply sources be incentivised economically? • Will large scale, centralised generation – like nuclear – eventually be replaced by small scale local supply – “distributed generation”?
Thank You
Milt Caplan President MZConsulting Inc [email protected] +1.647.271.4442
Milt Caplan President MZConsulting Inc.
This is a sample of how Course our WNU PowerPoint presentation sSouth could Africa look in the future October 2010
OUTLINE
Outline of today’s presentation • Electricity and its market • Cost structure of nuclear plants • Economics of current reactors • Economics of new reactors • External costs • Summary and discussion points
Key WNA report
Recent Reports
Economics of nuclear • New build nuclear must demonstrate that it is competitive in an economic sense. • Nuclear is capital intensive with long project schedules • Nuclear has low operating costs due to low cost of fuel • General belief is that nuclear is not economic, is too expensive and needs subsidies • In reality nuclear is economic relative to the alternatives • And economics are improving as climate change concerns continue to increase
ELECTRICITY AND ITS MARKET
Electricity • Electricity is essential to the operation of modern industrial societies • Cannot be easily stored – so supply and demand must always be in balance • Reliability of generation is vital – customers do not accept the lights going out! • Therefore need a stable grid – combination of reliable generation and a reliable delivery system (transmission and distribution) • It’s a basic commodity – price is very important to customers.
Base load against peak load • Huge variations in electricity demands according to time of day and year. • Pattern is also country-specific – climate, industrial structure, etc. • Base load – that part of demand which is steady throughout the day and year. • Peak load – the additional supply required to meet the additional demands during the day. • Different generation options are suited to either base or peak loads – due to technology and economics.
Electricity markets - historical • Historically vertically integrated monopolies (generation – high voltage transmission – regional/local distribution) owned by the state • Prices were generally “cost plus” and in some cases – even subsidised • To maintain a high level of reliability, Investment in new capacity was generous – tendency to overcapacity • This model led to Inefficiencies in companies and the risk of high prices
Electricity markets – Current • Widespread privatisation, market liberalisation, deregulation, “unbundling” • Huge number of models tried – still somewhat experimental around the world – UK a pioneer in 1989. • Concentration on developing competitive generation • Prices generally fall as overcapacity is eliminated, then may stay stable or rise.
Electricity markets – Issues • Uncertainty about future prices • Market structures under liberalised regimes have been evolving eg UK • Risk of monopolies re-emerging • Risk of insufficient investment in new capacity • Investors in long term power projects need some assurance of prices
Merit order dispatch in generation • Demand for electricity varies through the day • Different technologies – hydro, coal, gas, nuclear, oil - are called upon to supply according to their marginal cost – ie fuel plus O&M – operations & maintenance • Low marginal cost (hydro and nuclear) will operate as base load • Higher cost (gas) will come in to cover peaks. • In many cases, renewables will operate as baseload and distort the market
World primary energy demand (Mtoe)
World energy demand expands by 45% between now and 2030 – an average rate of increase of 1.6% per year – with coal accounting for more than a third of the overall rise Sources: IEA "World Energy Outlook 2008" - “Reference Scenario"
Per Capita electricity demand by region
Other regions start to catch up to the OECD in consum ption Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
World Electricity Generation by Fuel
M ost of the additional dem and for electricity is ex pected to be m et by coal, w hich rem ains the w orld’s largest source of electricity to 2030 Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
Increases in OECD Electricity Generation
In the OECD, the total projected increase in renewable electricity generation is bigger than the combined increase in fossil fuel-based and nuclear power generation Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
Reductions in energy-related CO2emissions in the climate-policy scenarios
Efficiency gains and deployment of existing low-carbon energy accounts for most of the savings
World Electricity Generation by Scenario
Half of total electricity generation in 2030 in the 550 Policy Scenario comes from low carbon sources; this share rises to two-thirds of the total in the 450 Policy Scenario
Total Power Generation Today and in 2030
In the 450 Policy Scenario, the power sector undergoes a dramatic change –with CCS, renewables and nuclear each playing a crucial role Sources: IEA "World Energy Outlook 2008"
Global Savings in Energy-Related CO2 Emissions
Nuclear capacity additions are comparable to CCS and about 7 times lower than renewables Sources: IEA "World Energy Outlook 2008"
World Nuclear Capacity
In the Policy Scenarios, nuclear capacity expands almost twice faster until 2015 Sources: IEA "World Energy Outlook 2006"
Reference Scenario Electricity-Supply Investment
Investment of $26 trillion, or over $1 trillion/year Sources: IEA "World Energy Outlook 2006"
The Future Potential
Source: IEA NEA Technology Roadmap: Nuclear Energy 2010
• • • 24
IEA Blue Map scenario targets 50% CO2 reduction by 2050 Nuclear capacity triples and its share of electricity generation rises from 14% today to 24%, the largest of any generation technology Under a High Nuclear case, nuclear share could reach 38%
Security of supply • Key motivation why countries “went nuclear” in 1970s/1980s – France, Japan • Dependence on fossil fuels from politically unstable regions • Risk of loss of supply • Currently a very important issue in the USA and Europe
Energy policies • Should countries have an energy policy or leave it to the market? • Oil crises of 1970s put focus on energy sector and planning. • Market liberalisation in 1990s. • Recognition that energy policies are essential for security of supply and the environment
Why may we have more nuclear in the future? • IEA is seeing more nuclear but implementation remains moderate • Environment and greenhouse gas emissions. • Security of supply. • Better economics of plants. • Return to energy planning by governments. Increased nuclear in the future will depend upon favourable economics
Summary on electricity • Demand will grow strongly over the next 25 years • Electricity is a commodity to be bought and sold in competitive markets • Supply and demand must always be kept in balance • Reliability is essential • Price is important • Climate change concerns will impact the market and how decisions are to be made • Governments are recognizing that energy policy is important for society
COST STRUCTURE OF NUCLEAR PLANTS
Categories of generation costs • Investment (capital) costs and interest charged on these • Fuel costs • Operations & Maintenance (O&M) costs - fixed and variable For nuclear, fuel cost includes used fuel management/waste disposal. Decommissioning of nuclear plants is an additional investment cost, but comes many years in the future
Existing generating plants • Fuel and O&M costs are called “marginal” or “avoidable” or “production” costs • Investment costs are “sunk” - whether or not they are depreciated/amortised in the company’s accounts • If electricity price is higher than the marginal costs the plant will operate • Different generating modes compete on the basis of marginal costs only
New generating plants • To be economic, these must cover their investment costs, interest charged and the marginal costs – “full costs” • Compare these full costs against the likely electricity price to be received over the lifetime of the plant • When considering different options for new generating capacity, they are assessed on these full costs • But the timing of the costs, as well as their magnitude, is crucial
Costs and their time schedule • Hydro plants – high investment costs and very low marginal costs – no fuel cost! • Gas plants – low investment costs but high marginal costs (gas price) • Nuclear close to hydro - but more significant marginal costs (O&M and fuel) • Coal fits between nuclear and gas – average investment costs and average marginal costs • Renewables such as wind and solar have high investment costs, low marginal costs but resource is intermittent
Example of expenses schedule before discounting for a nuclear power plant (40 years economical lifetime) $million 300
250
200
150
100
50
0
Dismantling Fuel O&M variable O&M fixed Investment
Relative Cost Structure of Generation
General shares
Nuclear
Gas CCGT
Coal
Investment
50-60%
15-20%
40-50%
O&M
20-35%
5-10%
15-25%
Fuel
15-20%
70-80%
35-40%
Fuel as a Percentage of Electric Power Production Costs 2007 Fuel 27% Fuel 77%
4% 9%
Conversion Fabrication
17%
Waste Fund
35%
Fuel 93%
Enrichment
O&M 73% 35%
O&M 23% Coal Coal
Uranium
O&M, 7% Gas Gas
Source: Global Energy Decisions; Energy Resources International, Inc. Updated: 5/08
Nuclear Nuclear
Nuclear NuclearFuel FuelCost Cost Components Components
Time value of money - discounting • $1000 today is not the same as $1000 in 5 years time! • Evaluating costs and revenues of new plants must take account of this • Bring all back to current values – levelise them – by a discount rate • LCOE – levelised cost of electricity
Methodology - LCOE • LCOE – Levelized Cost of Electricity – Sometimes called LUEC – Levelized Unit Energy Cost
• Defined as fixed price of electricity that will balance all of the costs over the plant lifetime on a discounted basis • Σ Income i / (1+d)i = Σ Expense i /(1+d)I • Income = Fixed Price (P) x ΣGeneration i/(1+d)I • Fixed Price (P) = Σ Expense i /(1+d)I / ΣGeneration i/(1+d)I = LCOE • Or LCOE = Discounted Costs/ Discounted Generation
Impact on projects • Discount rate depends on interest rates, view of the future, project risk • Public sector – low (3-5%) and private sector higher (515%) • Low discount rated reflect lower perception of risk favours projects with high investment costs, longer schedules and low marginal costs ie hydro and nuclear plants • High discount rates reflect higher perception of risk favours projects with low investment costs, shorter schedules and high marginal costs ie gas plants • Hence it is difficult for hydro and nuclear to be viable in liberalised markets
ECONOMICS OF CURRENT REACTORS
Current reactors • Dramatic improvement in operating performance has transformed economics • Previous forecasts that half of US reactors would be victims of electricity liberalization have been proven wrong! i.e. liberalization has been a success • Higher capacity factors • Power up-rates • Licence extensions • Market in “used” reactors
20 04
20 01
19 98
19 95
19 92
19 89
19 86
19 83
19 80
19 77
19 74
19 71
TWh
Nuclear growth since 1970 3000
2500
2000
1500
1000
500
0
Economic performance • Low marginal costs – fuel and O&M – typically below 2 US cents per kWh. • Best plants in Europe and US achieving 1.3 to 1.6 US cents per kWh. • Only hydro can beat this for base load power – but limited by water availability. • Fossil fuel price escalation – pushing up coal and gas plant marginal costs. Temporary or permanent?
U.S. Nuclear Industry Production Costs 1995-2005 (In 2005 cents per kilowatt-hour)
Production Costs = Operations and Maintenance Costs + Fuel Costs Source: Global Energy Decisions Updated: 6/06
U.S. Electricity Production Costs 1995-2005 (Averages in 2005 cents per kilowatt-hour)
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05
2005 Nuclear 1.72 Coal 2.21 Gas 7.51 Oil 8.09
Production Costs = Operations and Maintenance Costs + Fuel Costs Source: Global Energy Decisions Updated: 6/06
U.S. Nuclear Industry Non-Fuel O&M Costs 1995 2005 (In 2005 cents per kilowatt-hour)
Source: Global Energy Decisions Updated: 6/06
Annual Fuel Costs to U.S. Electric Utilities 1995-2005 (In 2005 cents per kilowatt-hour)
8.0
Nuclear 0.45 Coal 1.72 Gas 7.05 Oil 7.36
7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1995
1996
Source: Global Energy Decisions Updated: 6/06
1997
1998
1999
2000
2001
2002
2003
2004
2005
Impact of 50% increase in Fuel Costs
increase in generating cost
40%
30%
20%
10%
0% Nuclear
IGCC
Sources: IEA "World Energy Outlook 2006" - " Reference Scenario "
Coal steam
CCGT
Fuel Cost is Important • Operational Costs ~ 1.7 cents/kWh • Fuel Costs ~ .4 cents/kWh – – – –
Uranium cost ~ .1 cents/kWh At uranium price of $10/lb At uranium price of $100/lb Uranium cost ~1 cent/kWh
• Total Operational Cost ~2.6 cents/kWh • Nuclear remains the most cost effective in liberalized markets but margins have been eroded
Summary on current plants • Still a common view that even existing nuclear cannot make economic sense and require subsidies! • Dramatic improvement in operating performance has transformed economics • Low and stable marginal costs • Nuclear plants, operating well, should make significant operating profits for owners in any conceivable type of electricity market
ECONOMICS OF NEW REACTORS
New nuclear plants • If operating plants are profitable, why are there not more current orders? • Perception of risk • Nuclear has high investment costs, takes long time to come into operation, then has low and stable operating costs • Gas plants have low investment costs, are built quickly and have high and variable operating costs • Which is the most economic depends heavily on 3 things – (1) nuclear investment cost (2) gas price (3) interest/discount rate used • Various recent studies choose varying combinations of the relevant parameters – investment costs, fuel prices, interest rates
Capital Costs • Some uncertainty on the likely investment costs of evolutionary reactors – EPR, AP-1000, ESBWR, ACR-1000 etc – lack of recent build experience – has caused initial costs to rise • Industry has projected – from new build experience in Asia, Europe and detailed engineering estimates – that investment costs are in about $4000 per kWe • Nuclear investment costs are expected to fall, with standardized designs and shorter construction times
Reducing Risk is Key to Cost Reduction • The benefits of low fuel costs are realized with reduced investment costs • Latest designs are evolutionary versions of existing reactors that emphasize improved economics through simplification • Standardization will ensure further reductions due to fleet economies of scale • Improved regulatory risk due to improved processes and design standardization • Several standardised designs on existing nuclear sites, using modular construction etc.
Schedule and Financing • Construction time and financing cost vital – interest payments build up with delays. • Innovative financing – need to reflect long term thinking – can such large investments be financed in liberalised power markets? • Conclusions of various studies depend on these factors and fossil fuel price assumptions.
Economics of New Build Nuclear
Gas-fired generation is set to remain more expensive than coal, nuclear or wind – Increasing carbon cost will improve nuclear economics further Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
OECD Study – Large Regional Differences
Current Capital Cost Estimates • Current estimates of capital costs in the US are in the $3,500 to $4,500 /kW range • Other generation types have also increased in cost
Source: The Cost of New Generating Capacity in Perspective, NEI August 2008
The Changing Costs of Nuclear
Update of the MIT Future of Nuclear Power 2009
Commodity Price Increases
Cost Increases are expected to subside • The MIT study update shows that recent completed plants in both Korea and Japan have reduced in cost from previous units due to experience and replication ($3,000 /kW range) • Korea has just won its first international order in the UAE with a cost lower than its competitors ($2,300 /kW) •
US Department of Energy EIA assumes in its Annual Energy Outlook (AEO) that efficiencies will be gained in the US and assume a cost reduction to 2030
Fossil fuel prices • Escalation clearly increases nuclear’s attractions further, beyond that of recent studies • But recent drop in prices show that – we can’t predict this or depend on it to ensure that nuclear is economic • Emphasis should be on the clear impact of fossil fuel price volatility on electricity price and nuclear’s superior position
New nuclear build – key element of risk allocation • Role of government – regulation, waste and decommissioning policies, nuclear liability & plant security – need a consistent policy • Plant vendor, contractors and operator must each take on relevant risks • Power market – various models – need to have power off-take agreements in place
Roles of government • To combine their regulatory, safety oversight responsibilities with efficient licensing procedures which facilitate timely introduction of new reactors • To ensure certainty on national waste management and plant decommissioning – these are included in the costs of nuclear plants but nuclear plant economics are largely insensitive to them • To introduce incentives, as appropriate from a public policy perspective, to accelerate the transformation to clean-energy economies
Financing and discount/interest rates • Markets have a short term bias – Short schedule lower investment cost projects have lower cost of funds – Longer schedule higher investment cost projects have higher cost of funds – Nuclear plants are perceived as higher risk resulting in a risk premium
• Structuring projects for success means an equitable sharing of risks amongst all stakeholders • Need project successes to convince investors to reduce the risk premium • New nuclear power plants should be attractive investments for those with long-term liabilities – pension and life assurance funds
Discount rate is important
Lessons from the past • Consistency of government policy in energy planning and regulation – France, Japan, Korea • Limited number of strong, large companies owning and operating reactors – previous weakness in USA • Strong, possibly international, major contracting companies • Standardization of reactor designs on a limited number of sites – previous weakness in UK and USA
Summary on new nuclear plants • Investment costs of nuclear plants have gone down • Prices of oil, gas and coal have risen, pushing up marginal costs of these generating units. • Governments need to develop the appropriate frameworks for new nuclear build – regulation, waste policies etc. • New nuclear build should now be very economic in most countries, even without any credits for low emissions or security of supply. • Nuclear needs investors who can take a long term perspective.
EXTERNAL COSTS
External costs • Those which are incurred and put a burden on society but are not accounted for in measures of cost and which are not compensated for by those creating them. • Sometimes called “externalities” • Examples include noise, air pollution etc • Current focus is on greenhouse gas emissions • Nuclear power incorporates (“internalises”) its external costs – through making provisions for managing wastes, ensuring low radiation emissions and final plant decommissioning which are all considered in the economics
External Cost Figures for Electricity Generation in the EU (Eurocents per kWh) Wind PV Hydro Biomass Nuclear Gas Oil Peat Coal 0
2
4
6
8
€ Cents per kWh Source: EU-EUR 20198, 2003
10
12
14
16
Externalities of Electricity Generating Technologies
Source: EU-EUR 20198, 2003
Impact of Carbon Value on Generating Costs
A carbon value im proves the com petitive position of w ind & nuclear pow er Sources: IEA "World Energy Outlook 2008" - " Reference Scenario "
The Cost of Reducing Carbon • 550 Policy Scenario – Energy demand continues to expand, but fuel mix is markedly different – CO2 price in OECD countries reaches $90/tonne in 2030 – Additional investment equal to 0.25% of GDP
• 450 Policy Scenario – – – –
WEO 2008
Energy demand grows, but half as fast as in Reference Scenario Rapid deployment of low-carbon technologies –particularly CCS CO2 price in 2030 reaches $180/tonne Additional investment equal to 0.6% of GDP
Dealing with external costs • Those creating an external cost should arguably pay compensation to those suffering – or introduce new technology to remove it • Imposing taxes etc costs would discourage use and promote alternatives • Greenhouse gas abatement can be helped by (1) carbon taxes, (2) carbon emission trading schemes or (3) incentives to non-carbon emitting technologies • All would benefit new nuclear build
SUMMARY & DISCUSSION POINTS
The “new economics” of nuclear power • In most industrialised countries today, new nuclear power plants are a very economic option to generate base load electricity – even without consideration of additional geopolitical and environmental advantages that nuclear power confers • However, risking costs need to be contained, otherwise the nuclear renaissance may be at risk!
Discussion points • How can low carbon sources of electricity (eg renewables and nuclear) be promoted to the customers – residential, commercial and industrial? • How can we persuade the general public, media etc that nuclear is a fully economic way of generating electricity? • How important are the economic advantages of nuclear compared with the others – energy security and low GH gas emissions? • How can we encourage big power users to invest in new nuclear power plants? • Should governments worry about security of supply – if so, how could more secure supply sources be incentivised economically? • Will large scale, centralised generation – like nuclear – eventually be replaced by small scale local supply – “distributed generation”?
Thank You
Milt Caplan President MZConsulting Inc [email protected] +1.647.271.4442
