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Can Nuclear's Longstanding Cost Curse Be Reversed?
Electricity Currents A survey of current industry news and developments
In Mature Economies, End of Demand Growth Is in Sight The U.S., like many other industrialized countries, experienced an extended period of near-double-digit growth in electricity consumption following World War II. During these golden years, installed generation capacity had to double every seven years or so. Those days are behind us. U.S. electricity demand growth has steadily declined for 60 years, asymptotically approaching zero. According to the latest projections by the Energy Information Administration (EIA), U.S. retail electricity sales are expected to increase at a compound annual growth rate (CAGR) of 0.7 percent over the period 2010 to 2025. At that rate, it would take more than 100 years to double U.S. installed capacity, if at all. It basically means that utilities are in the maintenance and replacement – not the engineering and construction – business, a reality many in the industry have yet to accept and internalize.
Continued on page 6
In Electricity Currents This Month: In Mature Economies, End of Demand Growth Is in Sight . . . . . . . . . . . . . . . . Can Nuclear’s Longstanding Cost Curse Be Reversed? . . . . . . . . . . . . . . . . . . . . Cheap and Plentiful Gas: Too Much of a Good Thing? . . . . . . . . . . . . . . . . . . . . Net Energy Metering: Consumers’ Sweet Revenge, but at What Cost?. . . . . . . . . .
.. . .1 .. . .1 .. . .3 .. . .4
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Can Nuclear’s Longstanding Cost Curse Be Reversed? Lewis Strauss, the chairman of the U.S. Atomic Energy Commission, famously predicted that, ‘‘our children will enjoy in their homes electrical energy too cheap to meter’’. Strauss was, of course, talking about the promise of cheap nuclear energy touted as the ultimate answer to man’s insatiable demand for electricity, in the context of President Dwight Eisenhower’s Atoms for Peace initiative, which he announced at the United Nations General Assembly in December 1953. That promise, as we know, never materialized. In 2012, 435 operating reactors
April 2013, Vol. 26, Issue 3
1040-6190/$–see front matter
1
with a combined capacity of 370 GW generated over 2,518 billion kWh of electricity. In countries like France, the atom generates over 3/4 of the power, while it’s around 20 percent in the U.S. But nuclear-generated power has never been cheap, and certainly not too cheap to meter, as Strauss had predicted, and generations of nuclear enthusiasts have not managed to turn that promise into reality. The main advantage of nuclear reactors has always been their relatively low fuel and operating costs – once you’ve endured the long and uncertain construction period along with the equally uncertain final price tag. The other major advantage is that they operate around the clock, 24/7, for many months at a time, only briefly stopping to get refueled. This makes them the least-cost option in competitive wholesale markets or anywhere else where plants are dispatched in so-called merit order. While nuclear’s fortunes dramatically rose in countries like France, the U.S., the UK, Germany, Russia, Japan, and South Korea during the 1970s and 1980s, relatively few new reactors have been built in the West in the past three decades. The focus has turned into extending the life of existing units, while running them full-blast – at extremely high utilization rates – whenever possible. The much-anticipated nuclear renaissance, broadly referring to new reactors with safer and more efficient designs, has not materialized in the West. In Western Europe, France is building one, Finland another. America, despite all the huffing and puffing and government loan guarantees, is building a mere handful. None are being built in the UK, while Germany is phasing out its nukes in great haste by 2022. Switzerland, Austria, and Italy have decided against building any. Japan, long a pro-nuclear country, has had its doubts following the Fukushima accident in March 2011. Today, nuclear reactors are mostly being built in countries with central planning and/or government-owned monopolies such as China, Russia, India, and South Korea. Why this turnaround in nuclear’s once promising fortunes? 2
1040-6190/$–see front matter
A Jan. 27, 2013, article posted on the EU Energy Policy Blog by Prof. Francois Leveque of Ecole des Mines de Paris blames it on the cost escalation curse of nuclear power. He writes: Since the first wave of nuclear reactors in 1970 to the ongoing construction of Generation III+ reactors in Finland and France, nuclear power seems to be doomed to a cost escalation curse. If the curse is not stopped, nuclear power competitiveness will be compromised. On the one hand, construction expenses represent about 60 percent on the total cost of generation of this technology and on the other hand alternative sources of energy have experienced important decreases in their fixed costs. If the trends go on, nuclear power will become more expensive while competing technologies will become cheaper (italics added).
The nuclear cost escalation curse, of course, is not limited to Europe, as Leveque observes: The U.S. cost escalation has been widely studied and documented. The overnight costs of the first nuclear power plants (built in the U.S. in the 1970s) . . . were seven times less than the last (units) built (in late 1980s and 1990s, adjusted for inflation).
More damaging is ‘‘that the expected cost reductions in building larger reactors were not achieved. Moreover, the learning effects were limited to a reduced number of utilities. Finally, . . . the stricter safety standards that the Nuclear Regulatory Commission set after the Three Mile Island accident were a key driver in the cost escalation.’’ The same cost escalation curse applies to the French nuclear fleet. According to a 2011 study by Grubler mentioned in the article, the units installed in 1974 were 3.5 times less costly than the post-1990 reactors, suggesting lack of any learning effects despite a much more favorable environment, namely centralized decision-making, a high degree of standardization, and regulatory stability. In other words even under the ideal prevailing conditions in France, nuclear technology did not exhibit decreasing costs over time. Moreover, there were no economies of scale, i.e., increasing the size of the reactors did not result in lower costs per MW installed. The opposite is true for wind and solar technologies, which have The Electricity Journal
exhibited broadly falling costs and improved performance associated with economies of scale. To overcome the nuclear cost escalation curse, Leveque suggests design standardization, which explains why successive nuclear reactors built in France did not cost even more, relative to their U.S. counterparts. The U.S., of course, followed the exact opposite approach, resulting in a unique, customized design for practically every reactor in the country. This meant there was no learning effects, no mass production, and no customization of design, assembly, or construction. Each part of each reactor was essentially a unique piece of hardware. Contrast this with airline design, where a large number of virtually identical planes – such as Boeing 737 – are made over decades, resulting in falling per unit costs. Leveque also believes that scaling up the size of reactors was the wrong strategy, and recommends the opposite, namely, small modular reactors (SMRs), something that many experts have been saying on both sides of the Atlantic for some time. SMRs can be expected to have a shorter construction schedule, lower cost of capital due to lower investment risks, plus a cost savings from the off-site fabrication of modules which can be shipped and quickly assembled at the site. Leveque points out that as the size of reactors increases, there is greater complexity, longer lead times, more regulatory scrutiny, and therefore more expensive reactors. This is reaffirmed with recent announcements of the Generation III+ reactors. For instance, the EPR in Flamanville has an expected cost of s5.100 per kW, much higher than prior versions with costs around s1.450/kW.& http://dx.doi.org/10.1016/j.tej.2013.03.009
Cheap and Plentiful Gas: Too Much of a Good Thing? King Midas famously wished that whatever he touched would turn into gold. He soon found out that what he had wished would ruin his life, as his food, his daughter and everything else he April 2013, Vol. 26, Issue 3
touched turned into solid gold. It is not quite that dramatic with the bounty of plentiful and cheap American shale gas, but it has certainly been a game changer beyond almost anyone’s expectations. The first and most obvious result of cheap gas has been depressed wholesale electricity prices across organized markets in the U.S. This has not been good news for the generators, but welcomed by electricity and gas consumers who are enjoying lower power bills in nearly all parts of the country. Except for a few spikes in the summer, prevailing spot prices were broadly lower across the country in 2012. Cheaper natural gas prices resulted in prices that were 15 to 47 percent lower in U.S. markets in 2012 compared to 2011. California was at the low end, Texas at the high end of the spectrum. Wholesale prices in some markets such as New York were the lowest recorded since the state deregulated its wholesale electricity market. Few consumers complained. The second obvious casualty of cheap gas has been coal. If the current low prices continue, hardly any new coal-fired plants will be built simply because it is cheaper and far less challenging – environmentally speaking – to build natural gas plants. Data from the last few years confirms that the conversion to gas is taking place on a massive scale and at unprecedented speed. With domestic demand for coal declining, coal mining companies are scrambling to find alternative customers for the surplus. Europe has emerged as a lucrative coal export market because natural gas prices in Europe are three times the U.S. prices, which makes American coal a relative bargain. The window for exporting U.S. coal to Europe, however, may be closing, perhaps as early as 2015, when more stringent environmental rules take effect across the European Union, resulting in the phase-out of many older coal-fired units. Asian markets do not seem to be bothered by environmental concerns – notwithstanding the worsening air quality in many urban areas in China, India, and elsewhere. But building export 1040-6190/$–see front matter
3
In Mature Economies, End of Demand Growth Is in Sight The U.S., like many other industrialized countries, experienced an extended period of near-double-digit growth in electricity consumption following World War II. During these golden years, installed generation capacity had to double every seven years or so. Those days are behind us. U.S. electricity demand growth has steadily declined for 60 years, asymptotically approaching zero. According to the latest projections by the Energy Information Administration (EIA), U.S. retail electricity sales are expected to increase at a compound annual growth rate (CAGR) of 0.7 percent over the period 2010 to 2025. At that rate, it would take more than 100 years to double U.S. installed capacity, if at all. It basically means that utilities are in the maintenance and replacement – not the engineering and construction – business, a reality many in the industry have yet to accept and internalize.
Continued on page 6
In Electricity Currents This Month: In Mature Economies, End of Demand Growth Is in Sight . . . . . . . . . . . . . . . . Can Nuclear’s Longstanding Cost Curse Be Reversed? . . . . . . . . . . . . . . . . . . . . Cheap and Plentiful Gas: Too Much of a Good Thing? . . . . . . . . . . . . . . . . . . . . Net Energy Metering: Consumers’ Sweet Revenge, but at What Cost?. . . . . . . . . .
.. . .1 .. . .1 .. . .3 .. . .4
Electricity Currents is compiled from the monthly newsletter EEnergy Informer published by Fereidoon P. Sioshansi, President of Menlo Energy Economics, a consultancy based in San Francisco. He can be reached at [email protected].
Can Nuclear’s Longstanding Cost Curse Be Reversed? Lewis Strauss, the chairman of the U.S. Atomic Energy Commission, famously predicted that, ‘‘our children will enjoy in their homes electrical energy too cheap to meter’’. Strauss was, of course, talking about the promise of cheap nuclear energy touted as the ultimate answer to man’s insatiable demand for electricity, in the context of President Dwight Eisenhower’s Atoms for Peace initiative, which he announced at the United Nations General Assembly in December 1953. That promise, as we know, never materialized. In 2012, 435 operating reactors
April 2013, Vol. 26, Issue 3
1040-6190/$–see front matter
1
with a combined capacity of 370 GW generated over 2,518 billion kWh of electricity. In countries like France, the atom generates over 3/4 of the power, while it’s around 20 percent in the U.S. But nuclear-generated power has never been cheap, and certainly not too cheap to meter, as Strauss had predicted, and generations of nuclear enthusiasts have not managed to turn that promise into reality. The main advantage of nuclear reactors has always been their relatively low fuel and operating costs – once you’ve endured the long and uncertain construction period along with the equally uncertain final price tag. The other major advantage is that they operate around the clock, 24/7, for many months at a time, only briefly stopping to get refueled. This makes them the least-cost option in competitive wholesale markets or anywhere else where plants are dispatched in so-called merit order. While nuclear’s fortunes dramatically rose in countries like France, the U.S., the UK, Germany, Russia, Japan, and South Korea during the 1970s and 1980s, relatively few new reactors have been built in the West in the past three decades. The focus has turned into extending the life of existing units, while running them full-blast – at extremely high utilization rates – whenever possible. The much-anticipated nuclear renaissance, broadly referring to new reactors with safer and more efficient designs, has not materialized in the West. In Western Europe, France is building one, Finland another. America, despite all the huffing and puffing and government loan guarantees, is building a mere handful. None are being built in the UK, while Germany is phasing out its nukes in great haste by 2022. Switzerland, Austria, and Italy have decided against building any. Japan, long a pro-nuclear country, has had its doubts following the Fukushima accident in March 2011. Today, nuclear reactors are mostly being built in countries with central planning and/or government-owned monopolies such as China, Russia, India, and South Korea. Why this turnaround in nuclear’s once promising fortunes? 2
1040-6190/$–see front matter
A Jan. 27, 2013, article posted on the EU Energy Policy Blog by Prof. Francois Leveque of Ecole des Mines de Paris blames it on the cost escalation curse of nuclear power. He writes: Since the first wave of nuclear reactors in 1970 to the ongoing construction of Generation III+ reactors in Finland and France, nuclear power seems to be doomed to a cost escalation curse. If the curse is not stopped, nuclear power competitiveness will be compromised. On the one hand, construction expenses represent about 60 percent on the total cost of generation of this technology and on the other hand alternative sources of energy have experienced important decreases in their fixed costs. If the trends go on, nuclear power will become more expensive while competing technologies will become cheaper (italics added).
The nuclear cost escalation curse, of course, is not limited to Europe, as Leveque observes: The U.S. cost escalation has been widely studied and documented. The overnight costs of the first nuclear power plants (built in the U.S. in the 1970s) . . . were seven times less than the last (units) built (in late 1980s and 1990s, adjusted for inflation).
More damaging is ‘‘that the expected cost reductions in building larger reactors were not achieved. Moreover, the learning effects were limited to a reduced number of utilities. Finally, . . . the stricter safety standards that the Nuclear Regulatory Commission set after the Three Mile Island accident were a key driver in the cost escalation.’’ The same cost escalation curse applies to the French nuclear fleet. According to a 2011 study by Grubler mentioned in the article, the units installed in 1974 were 3.5 times less costly than the post-1990 reactors, suggesting lack of any learning effects despite a much more favorable environment, namely centralized decision-making, a high degree of standardization, and regulatory stability. In other words even under the ideal prevailing conditions in France, nuclear technology did not exhibit decreasing costs over time. Moreover, there were no economies of scale, i.e., increasing the size of the reactors did not result in lower costs per MW installed. The opposite is true for wind and solar technologies, which have The Electricity Journal
exhibited broadly falling costs and improved performance associated with economies of scale. To overcome the nuclear cost escalation curse, Leveque suggests design standardization, which explains why successive nuclear reactors built in France did not cost even more, relative to their U.S. counterparts. The U.S., of course, followed the exact opposite approach, resulting in a unique, customized design for practically every reactor in the country. This meant there was no learning effects, no mass production, and no customization of design, assembly, or construction. Each part of each reactor was essentially a unique piece of hardware. Contrast this with airline design, where a large number of virtually identical planes – such as Boeing 737 – are made over decades, resulting in falling per unit costs. Leveque also believes that scaling up the size of reactors was the wrong strategy, and recommends the opposite, namely, small modular reactors (SMRs), something that many experts have been saying on both sides of the Atlantic for some time. SMRs can be expected to have a shorter construction schedule, lower cost of capital due to lower investment risks, plus a cost savings from the off-site fabrication of modules which can be shipped and quickly assembled at the site. Leveque points out that as the size of reactors increases, there is greater complexity, longer lead times, more regulatory scrutiny, and therefore more expensive reactors. This is reaffirmed with recent announcements of the Generation III+ reactors. For instance, the EPR in Flamanville has an expected cost of s5.100 per kW, much higher than prior versions with costs around s1.450/kW.& http://dx.doi.org/10.1016/j.tej.2013.03.009
Cheap and Plentiful Gas: Too Much of a Good Thing? King Midas famously wished that whatever he touched would turn into gold. He soon found out that what he had wished would ruin his life, as his food, his daughter and everything else he April 2013, Vol. 26, Issue 3
touched turned into solid gold. It is not quite that dramatic with the bounty of plentiful and cheap American shale gas, but it has certainly been a game changer beyond almost anyone’s expectations. The first and most obvious result of cheap gas has been depressed wholesale electricity prices across organized markets in the U.S. This has not been good news for the generators, but welcomed by electricity and gas consumers who are enjoying lower power bills in nearly all parts of the country. Except for a few spikes in the summer, prevailing spot prices were broadly lower across the country in 2012. Cheaper natural gas prices resulted in prices that were 15 to 47 percent lower in U.S. markets in 2012 compared to 2011. California was at the low end, Texas at the high end of the spectrum. Wholesale prices in some markets such as New York were the lowest recorded since the state deregulated its wholesale electricity market. Few consumers complained. The second obvious casualty of cheap gas has been coal. If the current low prices continue, hardly any new coal-fired plants will be built simply because it is cheaper and far less challenging – environmentally speaking – to build natural gas plants. Data from the last few years confirms that the conversion to gas is taking place on a massive scale and at unprecedented speed. With domestic demand for coal declining, coal mining companies are scrambling to find alternative customers for the surplus. Europe has emerged as a lucrative coal export market because natural gas prices in Europe are three times the U.S. prices, which makes American coal a relative bargain. The window for exporting U.S. coal to Europe, however, may be closing, perhaps as early as 2015, when more stringent environmental rules take effect across the European Union, resulting in the phase-out of many older coal-fired units. Asian markets do not seem to be bothered by environmental concerns – notwithstanding the worsening air quality in many urban areas in China, India, and elsewhere. But building export 1040-6190/$–see front matter
3