Nuclear or Fossil?
Nov 06 - Nuclear Engineering International
The right package of incentives could make new US nuclear designs competitive with fossil fuels in 2015, and carbon charges could make it the cheapest option.
The study, The Economic Future of Nuclear Power, analysed the competitiveness
of nuclear electricity and compared it to other gas and coal-fired generation.
The three sources were compared as baseload suppliers, so renewables were not
considered. Hydropower, although a baseload supplier in some regions, was not
considered because most viable sites have already been exploited.
The report analysed capital costs in detail, using the advanced BWR (ABWR)
already built in Japan, and the AP1000, which was certified by the US Nuclear
Regulatory Commission (NRC) last month. It found that undiscounted capital
outlays accounted for over a third of the levelised cost of electricity (LCOE);
interest costs on the overnight costs account for another quarter of the LCOE.
What is more, the overnight cost estimates varied widely: different sources
placed the cost of new plants from $1000 per kWe to as much as 62300 per kWe.
The report found several factors that acted to push up the capital cost of
new plants. The first was the effect of 'first of a kind engineering' (FOAKE):
early plants in a series could expect, to cost up to 35% more than later plants.
For example, several hundred million dollars may be expended to complete the
engineering design specifications for Generation III or III+ reactors.
Kashiwazaki-Kariwa 6 was the first ABWR to be built
FOAKE costs are a fixed cost of a particular reactor design. The report noted
that some costs could be shared, and how a vendor allocates FOAKE costs across
all the reactors it sells can affect the overnight cost of early reactors
considerably. A vendor may be concerned about its ability to sell multiple
reactors and therefore want to recover all FOAKE costs on its first plant.
Alternatively part of the costs could be allocated elsewhere. Building a reactor
of a particular design in one country could allow some of the engineering costs
to be transferred, and joint reactor development has taken place, for example
Europe's European Pressurized Water Reactor (EPR). But partial FOAKE costs may
still be incurred for the first construction in any given country.
Apart from FOAKE costs, developing expertise that can be transferred to later
plants also reduces the capital cost referred to in the study as 'learning by
doing'. The study explains that in building the early units of a new reactor
design, engineers and construction workers learn how to build the plants more
efficiently with each plant they build. It says that it is possible the nuclear
industry will start with very little learning from previous experience when the
first new nuclear construction occurs in the USA. The paucity of new nuclear
construction over the past 20 years in the USA, together with the entry of new
technologies and a new regulatory system, has eliminated much of the applicable
US experience. On the other hand, participation in overseas construction may
have given some US engineers experience that is transferable to construction at
home.
The study used a range of 3-10% for future learning rates in the US nuclear
construction industry, where learning rate is the percent reduction in cost
resulting from doubling the number of plants built.
PERCEIVED RISK
An important issue for potential investors in the industry is risk. The risk
premium paid to bond and equity holders for financing new nuclear plants is an
influential factor in the economic competitiveness of nuclear energy.
The perceived risk of investments in new nuclear facilities contributes to
the risk premium on new nuclear construction. This refers not to the specific
nuclear risks of operation, such as a radiological accident, but to more
familiar construction risk. The principal sources of risk are the possibilities
that construction delays will escalate costs and that new plants will exceed
original cost estimates for other reasons. A good example in the nuclear
industry is new regulations and additional safety requirements, especially if
they require permissions from regulators or government bodies.
The study used guidelines from the corporate finance literature, previous
nuclear studies, and opinions of investment analysts to specify likely
relationships between project risk and risk premiums for corporate bonds and
equity capital. It estimated that the risks associated with building a new
nuclear plant would raise the rate of return on equity required by investors to
15%, compared to 12% for other types of facilities, and debt cost to rise to 10%
from 7%.
The effect of these premiums can also be minimised. The study used a typical
construction time of seven years - the most likely time as perceived by
investors, based on both previous nuclear construction experience and new
information. If actual construction times prove to be five years, investors will
revise their expectations downward accordingly for subsequent plants. Overnight
capital cost is clearly most important, but the two-year difference in
construction period is nearly as important. If investors were convinced of the
likelihood of a five-year construction period, they would estimate the
generation cost of the $1800 per kWe plant to equal that of the $1500 per kWe
plant built in seven years; similarly, the $1500 per kWe plant anticipated to be
built in five years would have a generation cost nearly that of the 11200 per
kWe plant anticipated to be built in seven years.
The report said capacity factor (load factor) exerts a significant influence
on generation cost. Less important at the investment stage are other factors,
such as longer plant life, because these benefits occur in the distant future
and are discounted. The fuel cost was also seen to be less important: it
represents less than 10% of running costs, and the price of uranium was expected
to remain relatively stable.
THE FIRST PLANTS
The study considered a number of potential subsidies that would reduce the
costs of the first new units. They were:
* A loan guarantee of 50% of construction loan costs. This would reduce the
nuclear LCOE for the lowest-cost reactor from $53 to $49 per MWh.
* Accelerated depreciation. This would reduce the LCOE for the lowest-cost
reactor to $47 per MWh.
* An investment tax credit of 20%, refundable so as to be applicable as an
offset to a utility's non-nuclear activities. This would reduce the nuclear LCOE
to $44 per MWh for the lowest-cost reactor.
* A production tax credit of $18 per MWh for the first eight years (as
proposed in 2004 legislation). This would reduce the LCOE of the lowest-cost
reactor to $38 per MWh.
The study found that most of the individual financial policies appeared to be
insufficient to enable nuclear power to enter the marketplace competitively, but
the financial model indicated that a combination of policies at reasonable
levels could do so. An $ 18 per MWh production tax credit for eight years,
together with a 20% investment tax credit could bring the LCOE of the lower-cost
reactors ($1200 and $1500 per kWe) within the competitive range with a
seven-year anticipated construction time.
Combined with 'aggressive assumptions' on 'learning by doing', the study
found that the LCOE for the fifth plant, when most learning has been achieved,
is 144 per MWh for the lowest-cost nuclear reactor, assuming that for the first
plant the business community anticipates a construction period of seven years
and uses a 3% risk premium on debt and equity interest rates. The lowest- cost
nuclear reactors have LCOEs of about $35 per MWh even under the most pessimistic
learning rate.
Cost shares of LCOE
Contributors to LCOE
THE LONG TERM
The report considered two alternative forms of baseload generation: coal and
gas. Pulverised coal combustion is the most common source of power generation in
the USA. The study considered that coal prices would remain stable or show a
slight decrease. Fluidised bed combustion is a cleaner alternative, but its cost
competitiveness remains in question. Integrated coal gasification combined
cycle, while attractive from the perspective of thermal efficiency and
emissions, is likely to be too expensive to enter the US market in the near
term.
For gas-generated power fuel costs are more important - generally two-thirds
of the levelised cost - so a small change in fuel price or plant efficiency can
significantly reduce or increase generating costs, respectively.
For both coal and gas, environmental considerations could raise generating
costs considerably, because they emit pollutants and carbon dioxide.
Fossil fuel generation LCOEs
The study said that if presently available Generation III technologies are
deployed for several years beginning in 2015, significant cost reductions from
their replication could extend to 2025 and beyon\d. Research and development on
Generation III and IV designs is expected to allow commercialisation of
lower-cost reactors in later years.
It also noted: "The longer the time horizon, the more likely the USA
will place an increased priority on global warming, leading to an urgent need to
replace coal- and gas-fired electricity generation". In view of the time it
takes to gear up the nuclear industry, the prospect of this need is one of the
reasons for national concern with maintaining a nuclear energy capability. If
environmental policies greatly restrict carbon emissions in the period after
2025, fossil-fired LCOEs could increase by 50-100% over current levels. Nuclear
power would then acquire an unquestioned cost advantage over its gas and coal
competitors.
Copyright Wilmington Publishing Ltd. Oct 2004