Listening to Others: A Personal View

by Andrew Teller, ENS Society Manager

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“Nuclear energy is too expensive,” they say. So what should one make of this?

“Pit nuclear energy against other energy sources and it loses out on cost.” This criticism – going back 25 years at least – has become a firm favourite of nuclear energy’s opponents. Bent on crunching out numbers supporting their respective position, supporters and opponents alike have produced plenty of analyses in all this time.

The debate is doomed to remain inconclusive to the uncommitted bystander, however. Arriving at so many euro or US cents (or whatever) per kWh means relying upon quite a few assumptions that are rarely detailed in press articles dealing with the subject. Even if more explanation were given, the non?specialist would probably see these assumptions as arbitrary (which they are, to some extent) and certainly difficult to assess.

Taking the impact on the environment (external costs) into account would complicate matters further. There is no universally accepted method for determining boundaries between those factors considered a consequence of energy use and those that are not.

All of this leaves laymen - by definition, those unwilling to devote hours to weighing up conflicting views – condemned to rely on indirect clues in reaching their own conclusion. Hardly a comforting outcome!

However, we supporters of nuclear energy have been focusing so narrowly on the cost question that we have not devoted enough attention to the second half of our opponents’ message. This is what they are actually saying: “Nuclear energy is not competitive and this is yet another reason for getting rid of it.” It is on the last part of the previous sentence that I would like to concentrate. Before starting, let me make it clear that I do belong to the group of individuals who are convinced that nuclear energy can be competitive in today’s market. For argument’s sake, however, I would like to investigate the issue from a different angle and prove the hypothesis that follows.

Assuming that nuclear energy isn’t competitive (we know it is), this still does not provide the economic grounds for slashing its share of the world’s energy mix to zero.

Let me explain. At a micro-economic level – the level at which individual investment decisions are made – opting for one energy source for a particular project will not impact the price of those using other sources. Rejecting nuclear on this scale has few, if any, repercussions. The trouble is: those holding this reasoning wish everyone to follow it. If all investors obliged, the outcome would eventually be macro-economic in proportion. In such a context, the respective costs of the different energy sources would not remain independent from each other.

If nuclear were to gradually exit from the world scene, this would trigger a rising demand for all other fuels – in particular, gas. As a result, the rise in the demand for the other fuels would increase their prices. Moreover, there are good reasons (more on this later) to believe that the extent of these cost increases would be sufficient to restore the competitiveness of nuclear energy.

We are therefore presented with a paradox: get rid of nuclear and it becomes competitive. This is not surprising. A principle derived at, at the micro-economic level has been blindly carried over to the macro-economic level.

So what are ‘the good reasons’ for my conviction that costs will rise? Some technical details are needed to answer this. The mathematical problem is to determine, in a macro-economic context, the optimal energy mix – i.e. that which minimises the overall cost of power generation, subject to a number of constraints. The constraints are: the need for supplying a certain level of energy and for having an installed capacity sufficient to meet a certain peak demand.

As already pointed out, fuel costs cannot be expected to remain constant - oblivious to the quantities of each fuel consumed. On a global scale, changes in the demand for a given commodity lead to variations in its price. In other words, fuel prices cease to be exogenous variables. Making them endogenous requires factoring each fuel costs’ dependency on its consumption level into the model.

The mathematical structure of this optimisation problem is such that one can predict the following with confidence:

• all energies will appear in the energy mix because this minimises the total cost; and

• the share of each energy source will decrease as its price goes up in the energy mix considered.

Considering the above, where does nuclear stand with respect to other energy sources?

Among all nuclear’s critics, those who are serious acknowledge that the cost of nuclear is not vastly different from that of fossil fuels. The difference is small enough for the discount factor used in economic analyses to tip the scale one way or the other. So if nuclear is currently more expensive than, say, gas, it will not be by a big margin. Given these circumstances, the solution to the optimisation model would inevitably feature a fair share of nuclear even when assuming that it is more expensive. This outcome is nothing less than a mathematical translation of the ‘energy mix’ concept promoted by utilities around the world.

You might object that it would very hard to figure out realistic laws linking the cost of a fuel to its consumption level. This might well be true. In the absence of witnessing such an achievement, one could spare oneself a lot of trouble and venture an educated guess: let each energy source take a share inversely proportional to its expected cost, externalities included. This approach might not be very accurate but it would at least constitute a reasonable approximation. Instead of that, nuclear’s opponents claim that nuclear should be totally excluded from the energy mix.

Once again we have a paradox: even if we cannot solve the optimisation problem described above with full accuracy, of one thing we can be sure: the optimal energy mix is not the one recommended by opponents of nuclear energy!

This last observation confirms what I suspected all along about those who are anti-nuclear. The environmentalists are not interested in economics. When they invoke cost considerations, it is not out of genuine concern for cost-efficiency. They do not share the principles they are advocating to industry and the business world. What this amounts to is nothing less than a conspicuous example of big spenders telling the thrifty that they are not saving enough. The sad thing is, too many thrifty people fall into the trap of paying attention to their recommendations.

¹ The recent Finnish decision to order a fifth reactor was backed by a thorough examination of all factors involved.

² Malcolm C. Grimston & Peter Beck, ‘Double or Quits? The Global Future of Civil Nuclear Energy’, Earthscan Publications Ltd, London 2002. See Table 3.1, p 65: a 5% discount rate ensures that nuclear is competitive in most countries; a discount rate of 10% would make it non-competitive in many countries.

³ The difficulties mentioned earlier regarding externalities are not impossible to overcome in this case. What is important is to have them computed for each energy source following a consistent methodology. Such an exercise has been undertaken under the aegis of the European Commission (the ExternE project: see http://externe.jrc.es).