Nuclear costs

Nuclear costs Why do they keep rising? Gordon MacKerron

Nuclear power has performed badly in recent years as a new investment everywhere except Japan and Korea. This has mainly been for orthodox financial and economic reasons. Among the factors contributing to this loss of competitiveness, persistently rising real capital costs have been particularly important. While the nuclear industry has believed it could control and reduce capital costs, increasing regulatory stringency has made designs more complex and correspondingly more costly. These cost increasing factors have far outweighed traditional cost reducing factors (like learning). The only lasting way to meet increasing stringency in safety at acceptably low cost is likely to be the development of new and simpler reactor designs. Keywords: Nuclear power; Capital costs; Safety regulation

Nuclear power has been performing badly as a new investment option in recent years. In North America, no new investment was undertaken in the 1980s at all, and in E u r o p e the level of orders has declined so far by the early 1990s that enormous interest now surrounds the possibility that Finland may buy one new unit: no other decisions are likely for some time. In the former Communist countries new investment in nuclear power is improbable and few if any of the ex-Soviet reactors not yet completed are likely to be finished. In the developing world, real interest is at a low ebb. Only in Korea and Japan is there significant new investment activity: out of five new units ordered in 1991, two will be in Japan and two in Korea. While the possibility that global warming will be taken seriously may help nuclear power to compete Gordon MacKerron is with the Science Policy Research Unit, Mantell Building, University of Sussex, Falmer, Brighton BN1 9RF, UK.

0301-4215/92/070641-12© 1992 Butterworth-HeinemannLtd

better (for instance, by the levying of carbon taxes on its main competitor, fossil fired power) a real nuclear revival would have a fragile base if it depended mainly on a politically determined handicap on its rivals. It is therefore important to understand the causes of the low recent levels of nuclear investment and how far it may be possible for nuclear power to become more competitive again by reducing its own costs. There is, however, no single explanation for the almost universal trend away from nuclear construction. In many industrialized country electricity systems, overforecasting of electricity demand in the 1970s led to a reduced need for new plants of any kind in the late 1980s, and to that extent nuclear investment was likely to suffer along with all power station investment. But this is not the whole story: the share of nuclear power in new investment has also fallen sharply. Why should this be? Whether nuclear power is competitive depends both on its own costs and on those of its rivals, which are traditionally coal firing, and increasingly gas firing. Some of the causes of the diminishing competitiveness of nuclear power have been to do with improvements in the economics of its rivals, and here the dip in fossil fuel prices since the mid-1980s has been the most important factor. Thus traded steam coal was over 25% cheaper (in real terms) in 1991 than in 1985, t and traded gas prices have also fallen substantially. If utilities expect such trends to continue, lower fuel prices will reduce the expected costs of fossil firing by significant amounts. But within the costs of nuclear power, there are also forces which are almost entirely outside the industry's control and which have also worked against nuclear power in the last decade. Vitally important here has been the widespread international movement towards a higher cost of capital (discount rate) over the last decade or so. This movement has had a variety of roots (the large US deficit 641

Why do nuclear costs" keep rising?

under Reagan, the Third World debt crisis and the movement towards more market oriented behaviour in utility industries, among others), but has had a major and apparently lasting impact on the allocation of investible resources in general. Besides discouraging investment, higher discount rates also skew the portfolio of investment choices away from capital-intensive options such as nuclear and renewables towards quicker payback investments like coal and especially gas firing. If these were the only problems - falling fossil fuel prices and rising discount rates - the nuclear industry could do little to improve its competitive position (although it could benefit in the longer term if either or both trends reversed). But there is evidence that those costs apparently within the control of the industry have undergone large increases, thus aggravating the problems of nuclear competitiveness. This paper concentrates on the most important of these internal factors, the capital cost of construction, and assesses both the extent and the causes of real cost escalations in this important area. It concludes by suggesting some implications of this experience for the future. DOES THE NUCLEAR DOWNTURN HAVE MAINLY ECONOMIC CAUSES? So far in this paper the decision whether or not to invest in nuclear generation has been treated as if it were purely a matter of economic rationality. Given the political controversy surrounding nuclear technology, it may, of course, be the case that other factors predominate. One school of thought, for instance, maintains that despite the kinds of cost increase referred to above, nuclear power remains the most competitive option for new baseload generation. If this were so, then the decline in nuclear fortunes must have explanations that go beyond finance and economics and into the realm of the technology's political and social acceptability. Thus the most recent study of comparative generating costs by the OECD's Nuclear Energy Agency and the International Energy Agency (NEA/IEA) concluded, in its reference case, that out of 12 OECD countries studied, 8 had nuclear costs below those of coal firing, 2 (USA and Canada) showed that the result varied regionally, while only 2 (the Netherlands and Spain) produced results, very marginally, in favour of coal. 2 Even in developing countries, coal comes out clearly best in only 1 out of 5 countries studied. If the NEA/IEA analysis were right, then it would

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have to be the case that nuclear's poor recent performance had to be explained in terms of enthusiastic utilities being prevented by social and political pressure from investing rationally in the lowest cost technology. In practice, however, this is not, on the whole, true. While some utilities still believe that nuclear power would offer them a cost minimizing option, many now do not, and this scepticism seems well justified: nuclear is no longer the cheapest option on traditional financial grounds for the great majority of countries. So what is wrong with the NEA/IEA study? Broadly the problem is that the data used in the study (as in many other, often prestigious international studies of nuclear costs) come from official nuclear agencies which are traditionally enthusiastic about nuclear power. Data are rarely if ever informed by the concrete, historical record of nuclear costs in the real world: instead they are always forecasts of future performance, where past problems are always solved and new problems will not emerge. Hence, in the NEA/IEA study, the capital costs of a PWR for the UK are put at a level over 10% below the then estimated cost for the UK's only real PWR (an estimate that has subsequently risen by a further 24%). 3 Another example is that coal prices in some cases are expected to more than double by the year 2005 (most analysts would expect no more than a gentle increase in coal prices over that period). But much the most obviously unrealistic assumption in the reference case concerns the value of the discount rate: 5%. In the UK the public sector discount rate rose from 5% to 8% in 1989 and this single change produced a 38% rise in the per kWh cost of a proposed PWR. 4 As coal firing is less capital intensive than nuclear, increases in the discount rate tend to make the economics of coal firing relatively better. The NEA/IEA study also provides a variant of its analysis which holds all other assumptions constant but raises the discount rate to 10%. This has a large impact: now nuclear shows as a cheaper bet in only 4 out of 12 countries. 5 Given that utilities are almost everywhere being encouraged by governments to behave in a more market oriented and less public service mode, and given the worldwide rise in real interest rates, 10% represents the real opportunity cost of nuclear investment much more fairly than 5%. Given, too, the other assumptions in the NEA/IEA study which tend to favour nuclear power, it is possible to see that the case for regarding nuclear power as a cost minimizing option is now, at best, thin. Added to this is the fact that the financial and political risks

ENERGY POLICY July 1992

Why do nuclear costs keep rising?

attached to nuclear power are substantially greater than those affecting alternatives. Hence a clear economic advantage is needed in favour of nuclear before it is seen as a wise option, and this further handicaps nuclear power where the costs of nuclear and alternatives seem substantially similar. Accepting that nuclear power is performing badly mainly for orthodox cost reasons does not, however, mean that the political and social controversies surrounding the technology have played no role in the recent downturn in nuclear fortunes. As is argued later in this paper a significant part of the upward pressures on capital costs has had its origins precisely in political and social concerns over nuclear technology.

THE ROLE OF CAPITAL COSTS WITHIN N U C L E A R ECONOMICS Generally, the economics of a nuclear unit are determined by three main parameters: the discount rate, the capital costs of construction, and the operating performance. The common reason for the importance of all three is the capital intensity of nuclear power. Characteristically, some 60% to 70% of the per k w h costs of a nuclear project are directly related to capital costs. 6 This necessarily means that keeping construction costs down and maximizing running performance are crucial for overall economic viability. To give some examples of the sensitivity of total generating costs to changes in the values of these three variables, examples from recent UK experience (where discount rates are of the order of 10%) are as follows: 7 •

•

•

A change in the discount rate by 10% (eg from 10% to 11%) alters total generating costs by 12%. A change in operating performance by 10% (eg from 60% to 66% load factor) will change generating costs by around 10%. A change in capital costs by 10% has a 9% impact on total per kWh costs.

Of these three factors, discount rates are the most important of all (bearing in mind, as in the UK case, that they can change by large amounts over short periods). As argued earlier, however, they are essentially beyond the control of utilities and may in any case move in either direction in the longer term. They are not considered further in this paper. Capital costs and operating performance are of roughly equal importance in determining nuclear costs.

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Operating performance, after some poor experiences in the early 1980s in a number of countries, has generally improved slightly in recent years. While the worldwide load factor of commercial reactors was just over 67% in 1986, it had improved to 71% by 1991. 8 If anything, then, changes in operating performance have served to improve nuclear economics rather than worsen them. Before turning to capital costs, it is necessary to deal briefly with two other categories of cost which have significantly deteriorated in recent years. These are operating and maintenance costs and so-called back end costs - the management of used fuel and decommissioning of reactors. In the first case of operations and maintenance (O&M), the worst experience in recent years has been in the USA, where O&M costs rose from $22/kW in 1974 to $84/kW in 1989 (all in 19895). 9 At a 70% load factor, this is an increase in 15 years of around lc/kWh in the cost of nuclear power. The main reason for the escalation in US O&M costs was increased regulatory stringency (although the full causes are not yet clear). Whether this experience will be reproduced elsewhere is not clear, although in other areas of nuclear power early US experience tends to be reproduced in other countries. There is certainly evidence that the apparently low levels of O&M costs in other countries partly reflect omissions of off site overheads in those countries' data. While not considered further in this paper, O&M costs may become a real issue in new project economics in the future. This leaves the costs of the back end. While a good deal of uncertainty has characterized many types of nuclear related cost, back end costs have been particularly difficult to estimate. Three important operations may be involved - fuel reprocessing, high level waste disposal and decommissioning. For the world's overwhelmingly predominant reactor types (light water reactors of the pressurized or boiling water type) only reprocessing has been carried out at commercial scale, and then only at one plant at La Hague in France. There is therefore little real world experience on which to base cost estimates. As such estimates attempt to keep up with escalating safety standards, so they have tended to rise strongly in all areas of the back end. This can provide serious financial problems in situations such as those of the UK, where bulky gas cooled reactors are nearing the end of their lives and have been inadequately provided for financially earlier in their lifetimes. ~° However, costs at the back end for light water reactors are likely to be significantly lower than for gas cooled reactors, and while some problems may arise for underprovisioned older reactors,

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Why do nuclear costs keep rising?

the sensitivity of project economics to changes in back end costs is quite small. This is because even at low values of discount rates the fact that back end costs are postponed for 40 or more years reduces their weighting in calculations of the present value of costs. The conclusion of this discussion of O&M and back end costs is that there have been significant real escalations in both and that this can have serious financial impacts on operating nuclear reactors, especially if their economic status is already marginal. And these escalations certainly affect the climate in which investment decisions are taken. Nevertheless in terms of the economics of new investments (the focus of this paper) it is the three main parameters of discount rates, operating performance and capital costs that most importantly determine the economic status of nuclear investments. And it is capital costs where the industry may hope for some measure of control and where past experience has, as seen below, been poor.

So, leaving expectations and explanations to a later section of the paper, what is the record? Experience is presented briefly below for the main countries where data are available and reasonably reliable. Note that except where specified otherwise, all data refer to the overnight cost of building reactors. This refers to the total cost of building a plant as if all costs were incurred at one moment in time. In other words it excludes all interest or financing charges and abstracts from inflation. Overnight cost therefore measures, in the prices of one year, the total (materials and labour) cost of construction. Although overnight costs abstract from financing issues, they cannot escape from some time related questions. For instance, if two identical plants take different lengths of time to construct, the slower will often have a higher overnight cost (reflecting a larger labour input). It is important to remember that while the use of overnight costs allows analysis of underlying cost forces, financial considerations remain highly relevant to real investment decisions.

CAPITAL COST HISTORIES

The USA

This section discusses the evidence on the experience of nuclear capital costs. Data on the historical record are patchy: plentiful, for instance in the USA, but more limited in most European countries, especially France. It is important to remember that most of the data on nuclear capital costs that are made public are about expected future costs; much of the data displays classic signs of appraisal optimism (projecting surprise free futures and expecting large savings compared to past projects). Such data, of which the N E A / I E A study is a prime example, are of little or no value in assessing nuclear costs realistically, largely because nuclear capital costs have so stubbornly refused to fall as experience has accumulated. While appraisal optimism is characteristic of many large projects, nuclear power is something of a special case. This is because of the almost missionary zeal and the large emotional commitment which many nuclear supporters (including governments) have brought to the technology. In such a climate the political and ideological commitment to the idea that nuclear power is inevitably cheap is often high, and this colours both the availability of data and its quality. It is perhaps no surprise that it is in the countries with the highest levels of official commitment to nuclear power that data are scarcest. Japan is clearly in this category, as is France (although in the latter, some generalized data are available).

Much of the most comprehensive and reliable data come from the USA, and Table 1 summarizes the record. This illustrates a number of phenomena. First it shows that the level of appraisal optimism (the tendency to underestimate final costs) was both high in all plant vintages, and showed no signs of improvement. Thus even by 1976-77, when there were ten years of experience, the degree of underestimation of final cost was if anything greater than it had been earlier. At 25% completion the degree of underestimation was actually higher for projects starting in the 1974-77 period than it had been for those started in 1966-67. This suggests very limited feedback or learning from experience in early projects. Second, and even more important for present purposes, Table 1 illustrates a tendency for later projects systematically to prove more expensive than earlier ones. Thus, on a per kW and constant price basis, reactors started in the 1974-77 period were almost 3.6 times as expensive as those started in 1966-67. This fact alone is probably the most important single explanation for the demise of nuclear power in the USA after the mid-1970s (the absence of data on reactors started after 1977 simply reflects the fact that none has been started, without subsequent cancellation, since 1974). Even the appearance of a levelling off in costs for reactors started since 1974 is probably illusory (as the note to Table 1 explains in detail). Thus it is clear that from the late 1970s through to

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Why do nuclear costs keep rising? Table 1. Average estimated and actual overnight costs of US nuclear plant (by year of construction start: 1982 US$/kW). a

Estimated costs at different stages of completion Year of start 1966-67 1968-69 1970-71 1972-73 1974-75 1975-76

Number of plants 11 26 12 7 14 5

0% 298 361 404 594 615 794

25% 378 484 554 631 958 914

50% 414 552 683 824 1132 1065

75% 558 778 982 1496 1731 1748

90% 583 877 1105 1773 2160 1973

Actual cos~ 623 1062 1407 1891 2346 2132

Note: aThe figures for actual costs in the last two rows may be biased downwards for two reasons. First, some eight plants were only 90% complete and were included on the assumption that their 90% estimate would accurately measure actual cost. Second, some plants scheduled to operate after 1986 were excluded, and they are likely to have high costs.

Source: US Department of Energy, An Analysis of Nuclear Power Plant Construction Costs, Washington, DC, 1986, Table ESI, p xvi.

the mid-1980s the capital costs of nuclear power in the USA escalated at an exceptionally high rate. However, it is possible to argue (and is, indeed, often argued, especially in Europe) that the USA made a particularly poor job of commercializing nuclear power: the USA was the first in the field with LWRs and was therefore liable to teething problems; utilities were small and ill prepared for a demanding new technology; plants were customized to individual utility requirement and no economies of replication could be obtained; scaling up was too rapid, so that there was little feedback into later and larger designs of the experience gained from early reactors; and finally, an unstable regulatory climate meant that the rules kept changing in apparently arbitrary ways, including, often, a need to tear out and backfit components or systems to meet new and more stringent standards. All these processes did indeed take place, and undoubtedly account for a large part of the poor US capital cost record. And the bad experience of one country certainly does not prove a general point. It is necessary to look, therefore, at other countries. The UK

The U K operates only gas cooled reactors (it is currently constructing a lone PWR). For some time, gas cooled reactors have been outside the mainstream of nuclear development, and experience on the first generation units (Magnox) is probably of limited relevance, given the obsolescence of the design and the fact that none has been completed for over twenty years. The second generation, advanced gas cooled reactors ( A G R s ) are of some greater relevance, because two stations of a recent design of A G R (Torness and Heysham 2) were built and

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completed - largely to time - between 1980 and 1988. Data allowing comparison between the cost of these recent A G R units and the five earlier A G R s (started between 1966 and 1971) are only available for Scotland, u where Hunterston B was completed in 1976 and Torness was completed in 1988. At a common discount rate (5%) and the prices of one year (1991) the capital cost of Hunterston B contributed 1.35p/kWh to total generating costs, while the capital cost of Torness contributed 3.02p/kWh. Given that these data are presented in a lifetime levelized cost calculation assuming common load factors, this difference in per kWh cost should translate directly into a difference in capital cost per kW. This indicates, therefore, that in real terms the per kW capital cost of Torness was some 124% higher than that of Hunterston B. The other relevant data for the U K concern the incomplete P W R project at Sizewell B. It is important in showing that the trend towards higher capital costs applies to reactors of current vintage and relatively recent start of construction (1987 in this case). Table 2 shows the evolution of capital cost estimates for the Sizewell reactor: at present it is expected to cost 40% more in real terms than the estimate on which the government gave permission for the project to go ahead. It should be borne in mind that the most recent estimate was made with the project only half completed, and that further escalations cannot be ruled out. The Sizewell case is another example of appraisal optimism: at each of the first three estimates shown in Table 2 the utility argued that the most recent estimate was reliable and soundly based. 12 In practice things are turning out rather differently. The

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Why do nuclear costs keep rising? Table 2. Utility estimates of capital cost of Sizewell B PWR (March 1991 prices).

Table 3. Design and construction costs for completed Ontario reactors.

Date of estimate 1982 April 1987 October 1989 June 1990 June 1991

Picketing 1-4 Bruce 1-4 Pickering 5-8 Bruce 5-8

Capital cost (£ million) 1896 2141 2353 2566 2648

Increase over original budget (%) 13 24 35 40

1982 C$/kW 852 878 1145 1019

Index 100 103 134 120

Source: S.D. Thomas, The Realities of Nuclear Power, Cambridge University Press, Cambridge, 1988, Table 7.8, p 185.

Source: G. MacKerron, The Economics of Nuclear Power in Britain, SPRU mimeo, 1991, Table 1.

main explanations offered for the escalations are that as Sizewell is a sole project, economies expected from replication are not available (this is a weak argument as the original estimate was explicitly for a stand alone project) and that the complexity and cost of all kinds of software has risen rapidly in real terms. 13 In other words, changes in design are, again, pushing costs upwards. But the UK is another country known to have managed nuclear power rather poorly: so it is necessary to look at two countries where the record is somewhat better: Canada and Germany.

Canada and Germany Data for both countries are much more limited than for the USA, but what is available confirms the general trend towards higher capital costs over time. In the case of Canada Table 3 shows aggregative data for the four four-unit stations completed in Ontario. The only Ontario reactors excluded from Table 3 (there are only two other completed commercial stations in Canada: both are single units) are the four units currently still under construction at Darlington. The record shown in Table 3 shows much less real cost escalation over time than in either the US or the UK case, and indeed the most recent completed units (Bruce 5-8) were significantly cheaper than Pickering 5-8. However, as the Pickering 5-8 station took significantly longer to construct that any of the other Canadian stations (a factor which probably affected overnight costs via higher labour use) it would be unwise to suppose that the reductions in the costs of Bruce 5-8 were necessarily the start of a downward trend. Reinforcing this, the incomplete Darlington units, the subject of considerable controversy and some deliberate delays in construction, seem certain to have much higher overnight costs than any of the stations shown in Table 3. The Canadian record, then, has not been one in which capital cost escalations have by themselves seriously threatened the economic status of nuclear power. Nevertheless, such trends in real capital cost 646

as there are do point upwards, if only marginally by the standards of the other English speaking countries. Germany is one of the countries where many estimates of future capital costs are available, but where accurate, real cost data on actual construction costs are quite limited. Some fragmentary evidence, however, all points to reasonably rapid escalation in real capital costs over time. Between 1969 and 1982 estimates of real overnight capital costs rose by 9% yearly (almost a tripling in 13 years), t4 Not too much should be read into such figures, however, because they include a number of early investments made on a turnkey basis (where vendors may have absorbed higher costs in a way that could not have happened in later cost-plus contracts). Nevertheless, it seems highly likely that these data at least establish a reasonably strong upward trend in German capital costs over time, although it may have been significantly less than 9% per annum. A second piece of evidence concerns the capital cost of three reactors operated by Germany's largest utility, RWE. Total investment costs (including interest during construction) rose from 500 DM/kW and 620 DM/kW for two early reactors (Biblis A and B) to 1620 DM/kW (constant price basis) for the later Gundremmingen. j5 Now the early stations were built partly on a turnkey basis, and interest rates rose slightly between the time of the first two and the third reactor. This suggests that the appearance of over 200% escalation is probably exaggerated: but again, there is little doubt that German reactors have cost substantially more per kW over time. The German experience again confirms, if only in a fragmentary way, the international trend towards higher costs. But both Canada and Germany, while evidently more successful in nuclear development than the USA and UK, have nevetherless suffered significant problems in their histories. The real test of the idea that capital cost trends are universally upwards comes in two of the countries where nuclear has by

ENERGY POLICY July 1992

Why do nuclear costs keep rising? Table 4. Estimates of French capital costs 1974--90.

In c/kWh in original prices In c/kWh in 1986 prices In c/kWh with discount rate adjustmenta In FF/kW (1986 prices)b

1974 2.45 7.4

1976 3.9 9.5

1978 5.0 10.2

1982 10.0 13.5

1984 12.0 13.4

1986 11.2 11.2

1990 12.9 12.2

6.6 4050

8.5 5210

10.2 6250

13.5 8280

13.4 8220

12.3 7540

13.4 8220

Notes: ayhe discount rate was 10% up to 1977, then 9% to 1984, and 8% subsequently. Rough standardization has been carried out on the basis of a 9% rate. bit has been assumed that baseload means a load factor of 70% for all calculations. Source: F. Nectoux, Crisis in the French Nuclear Industry, Greenpeace, London, 199 l, Table 7 and Chapter IV, Section 1, plus author's own calculations.

common consent been regarded as particularly successful: France and Korea. France and Korea

There is no doubt that the large-scale and systematic organization involved in the large French nuclear programme of the late 1970s and early 1980s has led to a level of capital costs significantly below those of other E u r o p e a n and North American countries. 16 Further there is evidence (mainly from construction times, which tend to be correlated to overnight capital costs) that in four-unit sites later units have cost less than earlier ones. 17 There is also evidence that within tranches (French reactors have been ordered in tranches or groups of essentially identical design), later units have also been cheaper. However, these effects have been marginal, and have been overwhelmed by large increases in capital costs between each successive tranche. 18 Over the whole period of the French nuclear programme since the early 1970s, therefore, French experience is consistent with that of other countries studied here. E D F (the French utility) do not publish data on costs for individual stations (or even for groups of stations): however, they do publish slightly stylized data for reference nuclear stations. These are all forecasts of future costs, but they are clearly informed by experience of cost evolution over time. Such data for reference plants are available from studies conducted between 1974 and 1990. They are in baseload generating cost terms, and the discount rate has varied slightly over the years, but corrections for these two factors (assuming that baseload is a constant 70% load factor) yields the FF/kW picture shown in the final line of Table 4. Table 4 shows a doubling, in real terms, of capital costs for plants started between 1974 and 1982 (notionally completed between 1980 and 1992), followed by a levelling off in subsequent years. Given that these are forecasts rather than an historical record, how far can they be trusted as a guide to real

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capital costs? The answer is that for the years to 1982 they are probably fairly accurate, and reflect actual escalation experience in earlier periods (the fact that estimates have stayed roughly constant for the years 1982-90 probably also reflects experience on plants being completed in the late 1980s). There is in any case other evidence in support of increases of this magnitude. As early as 1978, the official P E O N Commission expressed concern about the problems of the new 1300 MW units, the first of which was expected to cost 50% more than 900 MW units (per kW) rather than the 10% less that had been anticipated. Another estimate is that the capital costs of the most recent design of PWR are as much as 150% higher (in constant prices) than the earliest designs. ~9 The increases shown in Table 4 can therefore be regarded as a fair, if rough, guide to the extent of increases. The apparent constancy of capital costs since 1982 is, however, more open to question: the plants referred to are not yet complete, and have been constructed in an environment of severe slowdowns in the rate of construction starts. Since 1984, only five reactors have been started in France, against an average of over five per year in the period 1974 to 1981. Recent units are therefore likely to prove more expensive than in the reference cases, which assume standard (favourable) conditions. Korea was perhaps the world's most successful economy (in terms of the rate of G D P growth) during the 1980s. It invested in eight reactors between 1971 and 1982, all of which were in service by 1989. 2o Although capital costs had risen sharply from the very low levels experienced in the first unit (started in 1971) the record of the eight units showed, if there was any trend at all, a slight reduction over the five-year period. H o w e v e r , Korea ordered a further two units in 1989, and the anticipated capital cost of these is apparently considerably higher in real terms than for the units started in 1982. Recalculating the relevant data to

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Why do nuclear costa" keep rising?

allow for the mixed current dollar basis of the figures for completed reactors and for the new inflation expectations over the period of construction of the new station, it turns out that Korea expects its new reactors to cost between 19% and 38% more than the most recently completed units. 21 Allowing for the possibility of appraisal optimism in the estimate for reactors currently under construction, it is apparent that not even Korea has succeeded in controlling (let alone reducing) capital costs in the 1980s. It is therefore clear that for all the countries surveyed here, including those commonly regarded as having developed nuclear power successfully as well as those with poorer records, there has been a clear trend towards substantially higher real capital costs over time. This trend that has not showed any signs of lessening in recent years. Why has this consistent experience occurred? EXPLANATIONS INCREASES

FOR CAPITAL COST

In a technology as complex as nuclear power, varying so substantially in detail within and between countries, and with a history that is so entwined with politics, providing precise or statistically significant explanations for economic trends is impossible. Nevertheless some broad causative factors may be identified, and some attempt made to rank their significance. First, however, it is important to look at those processes which should, in principle, help to reduce the capital costs of a technology over time. Such processes are variants of the ideas that economies of scale, technical progress and learning should reduce costs as experience evolves. The question here is whether or not these processes have been at work in nuclear power - and have simply been overwhelmed by other, cost increasing forces - or whether in the nuclear case they have been largely absent. The nuclear industry always argued that substantial economies of scale should reduce nuclear costs in a variety of ways. 22 First there was the traditional engineering economics view that larger vessels require fewer materials per unit output than smaller ones. Because of the large fixed costs of nuclear power, due to the need for significant safety protection (eg in the form of reinforced concrete foundations) irrespective of electrical output, it was believed that this effect would be particularly powerful. Thus scaling up to 1300 and 1400 MWe size was rapid. But in addition, other scale related economies were expected to be significant, particularly econo-

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mies of series production, and standardization. These effects are in principle achievable without significant technical advances. It can also be argued, however, that in so R&D intensive an industry as nuclear power, large reductions in costs should be possible over time, many achieved by applying the lessons of experience from early designs. Thus processes involving the use of better and cheaper materials, and more radically, simpler and less complex design processes, should lead to lower real costs. In practice all these effects have played some part in providing a downward pressure on nuclear costs, but to a much smaller degree than in many other industries. A number of statistical studies have identified such factors as scale, multiple-site construction and learning as having a cost reducing impact, but in all cases to a rather faint degree. 23 Why should this be? At the most general level, the problem has been the very long construction times and product lifecycle of nuclear power plant, restricting the scope for rapid feedback or potential technical improvements into the design process. The second has been the need for a good deal of engineering conservatism in seeking improvements. This has been largely safety driven: new design configurations must be shown to be safe to the satisfaction of regulators before they can be tested in operation, and the nature of the technology means that destructive testing is virtually impossible in most circumstances. This has meant that designs in nuclear power (at least those with chances of commercial application) have evolved rather slowly, and few radical changes have been introduced. At the same time, hopes for the various kinds of economies of scale and replication have largely been disappointed. In the area of replication, this is largely because it has only been in France (and then only in the 1974-84 period) that a significant degree of replication, with the opportunities for series production, has ever emerged. In France in that period, replication and standardization did keep costs lower in other countries; now there is no country (probably not even Japan) where this can be done. And traditional economies of scale have also proved elusive: reactors at sizes above 1000 MW have not, in general, proved cheaper to build than those below 1000 MW. The full reasons are not clear, but the disproportionately increasing complexity as size increases (bearing in mind the enormous technical complexity of even small reactors) has almost certainly played a part. Generally, then, scale economies and technical progress sources of cost reduction have played a relatively minor role in the evolution of nuclear power; however, if they were the only forces at

ENERGY POLICY July 1992

Why do nuclear costs keep rising?

work, they might have led to a slow fall in real capital costs over time. In practice, however, there has been a more or less rapid, and continuing, rise in capital costs. What are the countervailing forces that have moved nuclear costs in this direction? Poorer site quality One factor, much quoted by the French nuclear industry, is the problem that the best sites for nuclear reactors were used first, and that those now being chosen are inherently more expensive. Thus in France good coastal sites were used initially, and it is now necessary to use inland sites (necessitating cooling tower construction) or poorer coastal sites (necessitating large earthworks). 24 It is undoubtedly the case that the falling quality of sites has had an influence on French capital costs, but unlikely that this contributes more than a small proportion to the total escalation in French costs. In other countries, site constraints have become important in Japan and Korea, but to only a limited extent elsewhere. Consequently, this deterioration in site quality can only have a marginal impact on the general level of nuclear capital cost, and should certainly have been anticipated. The relative price effect This is the phenomenon that the prices of commodities (materials and labour) entering into nuclear construction may have a tendency to rise in price more rapidly than the general level of inflation. 25 This would reflect the growing relative expense of, say, complex capital goods (with high intensity of skilled labour use) in those sectors where information technology has had limited impact. Whatever the precise explanation, the existence of such a differential in price movements will inevitably show nuclear power as becoming more expensive in relation to a general inflation index (which it is appropriate to use, given that the need is to show the cost of nuclear power in relation to all other possible uses of resources). The evidence of the existence, and persistence, of this effect is limited. However, in the UK there is evidence over many years that such a relative price effect discriminating against nuclear power (and indeed power station construction in general) is a real one. Between 1965 and 1989 the power station cost index (virtually identical to the nuclear index) increased more rapidly than retail prices in 20 out of the 24 years covered. 26 The only exceptions were in the deep recession years from 1979 to 1983. On average the differential was just over 1 percentage point per annum, implying that the real cost of a

ENERGY POLICY July 1992

nuclear reactor built at the end of the period would be some 20% higher than the same reactor built 24 years earlier. This has, therefore, made a real contribution to escalating costs in the UK, although it still accounts for a minor share in the total level of escalation. The evidence is not clear for other countries, but it seems likely that UK experience will be repeated to a degree elsewhere. In relation to these first two effects, poorer sites and the relative price effect, it seems fair to conclude that both have worked against nuclear power to some degree, but that the bulk of the explanation for the increases in nuclear capital costs - bearing in mind the existence of some cost reducing forces lies elsewhere. The direct impact of opposition and mistrust It is at this point that it is necessary to return to one of the earlier themes of this paper: the impact of the politicization of nuclear technology on its own costs. Clearly, there have been large political campaigns against nuclear power in a number of countries at particular times, especially in the USA, Germany and France in the later 1970s and early 1980s. 27 In addition, however, there has been a significant level of more widespread public mistrust and sometimes hostility to nuclear power more widely. Direct evidence of this comes from referenda decisions to discontinue nuclear power in Sweden, Italy, Austria and California, and in a huge number of opinion surveys in many countries. The major accidents at Three Mile Island and Chernobyl have clearly played a part in this consciousness, but the evidence is that more general fears about radioactivity, and a widespread conviction that the nuclear industry (and supporting governments) have frequently been less than honest in their public statements about nuclear power, have also been important in many countries. Except where major local employment is at stake, politicians generally lose votes by identifying with nuclear power, and occasionally may win some by opposition to it. However, the question here is how far such opposition and mistrust has translated directly into higher costs. Clear evidence for this is difficult to find, but it does not seem probable that direct impacts have been substantial. The main routes by which opposition may have impact on capital costs is via the legal system, by delay in licensing and planning procedures, or by successful attempts to force retrofitting of safety equipment. In the delay category, the UK utility the CEGB claimed that £98 million escalation (about 6% of then expected total cost) in the estimated cost of the

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Why do nuclear costs keep rising?

Sizewell B PWR was due to long delays in the public inquiry which preceded a decision to build. On the other hand it is important to remember that both the industry (anxious to blame others for escalations) and opposition groups (keen to take credit for successful campaigns) may have a tendency to exaggerate such effects: the CEGB did not produce any detailed support for its claim. In the second category, some of the retrofitting of safety equipment in Germany and the USA (although by no means all) can be attributed to opposition inspired legal challenges. These relatively limited impacts do not mean that public opposition has had no effect on nuclear policy. Clearly in the USA, Germany, Sweden, Austria and Italy (most visibly) and doubtless in other countries as well, opposition and disquiet have been material in limiting and even abandoning nuclear programmes or specific reactors. But the direct impact on those specific projects which go ahead seems on the whole to have been small. However, indirect impacts, as discussed below, have probably been of considerable significance.

Increasing complexity The most important cause of increases in capital costs internationally has been the growing complexity of nuclear plants. As argued earlier, technical change (especially in the nuclear core of the plant) has been extremely limited, and the history of the technology has essentially been one of upgrading the safety characteristics of the same basic design. But this does not really explain why complexity has increased, nor why there seems to have been no serious diminution in the pressure towards greater complexity right up to the present time. There are, perhaps, two stages to the attempt to explain this long trend. The first is the history of regulation in the USA. The reason why this matters so much is twofold. First, the light water reactor designs which evolved in the 1960s and 1970s in the USA have subsequently dominated world commercial nuclear power. Thus modern French, German or Japanese designs are recognizably versions of US designs, and are now mostly variants of the Westinghouse pressurized water reactor. Second, the politicization and safety concerns about nuclear power mean that there is a powerful international demonstration and ratcheting effect. For reactors with similar generic design, there is a strong pressure for meeting at least the minimum standards of safety that are perceived to apply elsewhere. Thus if in the home of the technology, safety standards continuously become more stringent, then it is difficult

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to argue for lower standards in any other country. So the early (1970s) experience of regulation in the USA had a powerful impact on the design of LWRs throughout the world. This regulatory experience in the USA was exceptionally turbulent. There was undoubtedly a strong underlying pressure over time to more stringent regulation, but three major crises, in 1971, 1975 and 1979 (the last two following the Browns Ferry safety incident in 1975 and Three Mile Island in 1979) created a state of extreme uncertainty and strong upward cost pressures as regulators required utilities to rip out existing systems thought to be inadequate, and backfit new and (optimistically) improved systems. 28 By the early 1980s, therefore, the regulations applying to a US reactor were very much more stringent than those that applied before 1970. The causes of this escalation are complex. Certainly growing pressures from environmental opposition movements to raise compliance issues (especially in the 1971 crisis) and generic safety issues (such as emergency core cooling standards) had a real impact on the regulatory process. But a number of design issues were also essentially unresolved, and the industry found itself building many large units long before any operating experience of smaller units had been obtained. This also necessitated redesign, often for purely engineering reasons and often leading to greater complexity. Another powerful force to more stringent regulation was that it became increasingly clear (especially after Three Mile Island) that then current designs were inadequate to meet pre-existing standards. Thus a major part of increased stringency was not an escalation in safety standards that had to be attained, but rather that regulators required operators to do more to ensure that those standards could indeed be reached. 29 Apart from adding more materials (eg piping, cabling, concrete) and more systems (eg extra emergency core cooling systems), there were two other routes by which complexity and costs rose in this process. These were enormously expanded systems of quality assurance inspection and the need to use better quality materials (eg steel in steam generators) to meet given objectives. By the early 1980s it was therefore clear that the simple and potentially cheap LWR of the late 1960s could not be sustained, partly on engineering, but mainly on safety grounds. The reactor that by then seemed acceptable to safety regulators in the USA (and Germany, where the late 1970s had also seen much regulatory intervention) was much more complicated, contained many more systems, and used many more materials than the earlier versions. In-

ENERGY POLICY July 1992

Why do nuclear costs keep rising?

evitably, then, it was substantially more expensive. (And some have argued that this complexity in pursuit of better safety may even be counterproductive: that whatever the official safety analyses show, the crowded and multiple systems surrounding a modern reactor may even impede each other and reduce safety.) But this does not explain the further escalation in costs since the early 1980s, despite the more stable regulatory climate that even the Chernobyl accident did little to disturb. It might be expected that once a safe design of reactor had been established, the normal processes of learning and technical improvement would take over, and reduce costs. But evidence from earlier in the paper makes it clear that this has not happened, and that real cost escalation has continued. Why should this be? The fact is that while regulatory climates have been more stable, regulation itself has continued to become more stringent. This means that, given that the traditional LWR is the basis of nuclear design, reactors continue to become more complex. The driving forces are several. First, evolving medical evidence about the relationship between radioactive exposure (especially small dose exposure) and damage to human health has continued to accumulate, and nearly all of it has tended to suggest that the effects are more harmful than was once thought. 3° Second, general public consciousness about environmental matters has undoubtedly become much more acute, and increasingly translates into political commitments to more stringent standards. Nuclear power is far from exempt from this pressure, especially given the medical evidence about more serious health impacts. These forces continue to be reinforced by increasingly coherent and professionally organized environmental opposition to nuclear power. Third, it has continued to be true (as in the USA after Three Mile Island) that to meet given standards in some areas, further changes in designs have been necessary, usually requiring more sytems and materials. Finally, the nuclear industry itself is acutely aware that after Three Mile Island and Chernobyl it cannot afford another major accident, and to that extent finds it difficult to resist pressures for stricter standards. Hence the pressure, even from within the nuclear industry, for higher safety standards continues substantially unabated. Thus the French safety regulator has recently suggested that a further fall by a factor of up to five in accident probabilities is necessary for the next generation of French reactors. 31 Even more radically, Alvin Weinberg (a pioneer of nuclear power) also suggests a reduction by two

ENERGY POLICY July 1992

orders of magnitude in the accident probabilities to retain or regain future public acceptance. 32 Any significant expansion of nuclear power in an attempt to counter global warming would be likely to be accompanied by further strengthening in safety standards. CONCLUSIONS

AND IMPLICATIONS

It is clear that the pressures to higher capital costs (and therefore increases in overall nuclear costs almost in proportion) have been powerful in all the countries surveyed here. While the escalation in real costs has been most pronounced in those countries widely held to have a poor record in nuclear development (the USA and the UK) there have been large, and continuing, increases in countries usually seen to have done rather well (France and Korea). The pressures for increases in cost have mostly been connected to the growing complexity of broadly similar basic design, and they have easily overwhelmed the opposite pressures (learning, technical change and economies of scale and series) to lower costs. The growing complexity has itself been driven primarily by persistently more stringent safety requirements, themselves driven by medical evidence, growing public environmental consciousness, awareness that existing standards cannot always be reached by current designs, and increasingly sophisticated anti-nuclear campaigning. These forces mean that the NEA/IEA world, in which final nuclear costs can be accurately predicted from the detailed plans emerging from nuclear design offices before a project starts, is far from reality. The industry has in practice had much less control over capital costs that it would wish: the initial design estimate has simply been one among many factors determining the eventual cost outcome. The nuclear industry must necessarily live with pressures to higher safety standards. Its real difficulty is that if it continues to use the same basic light water reactor technology developed in the 1960s and 1970s, it can only meet those standards by making designs even more complex, as more and more engineered safeguards are added. Evolving designs of advanced LWRs attempt to simplify where possible, but it seems unlikely that major cost savings are possible within the configuration of LWR technology that is still at the heart of the newer designs. To meet more stringent safety requirements and avoid ever increasing complexity, it therefore seems likely that nuclear power will need to evolve quite different designs which embody more inherent safety 651

Why do nuclear costs keep rising?

features than LWR designs. This is certainly a common view in the USA, and informs the attempts, for instance by the European company ABB, to develop an inherently safe system. Whether such a system will prove safer (and be so perceived by public opinion) is yet to be tested. In the meantime, the immediate problem for such radical departures is to find the private or public actors who can put up the development money and take the necessary commercial risks. Until or unless global warming really does become a global political issue, such commitments seem improbable. 1Data derived from Financial Times, International Coal Report, various 1985 and 1991 issues. In money of the day, delivered coal ~oriCes were at similar levels in both years ($42/tonne). ECD Nuclear Energy Agency/International Energy Agency (NEA/IEA), Projected Costs of Generating Electricityfrom Power Stations for Commissioning in the Period 1995-2000, OECD, Paris, 1989. 3G. MacKerron, The Economics of Nuclear Power in Britain, SPRU, mimeo, 1991. 4F. Jenkin, Proof of Evidence on the Need for Hinkley Point 'C' to Help Meet Capacity Requirement and the Non-Fossil Fuel Proportion Economically, CEGB 4, Hinkley Point 'C' Public Inquiry, September 1988, Tables 13 and 14, pp 94, 95. SOp cit, Ref 2, Table 13, p 78. 6See S.D. Thomas, The Realities of Nuclear Power, Cambridge University Press, Cambridge, 1988, Chapter 3 and Table 3.1, ~0p39, for a fuller treatment of this issue. cit, Ref 3, p 4. 8Data from various issues of McGraw Hill, Nucleonics Week. These exclude reactors from the former Communist countries. 9See J. Hewlett, 'The operating costs and longevity of nuclear power plants: evidence from the USA', in this special issue of Energy Policy, on which much of this section is based, and also US Department of Energy, Energy Information Administration, An Analysis of Nuclear Plant Operating Costs: A 1991 Update, US Government Printing Office, Washington, DC, May 1991. l°G. MacKerron, 'Decommissioning costs and British nuclear policy', in M. Pasqualetti and G. Rothwell, eds, The Energy Journal, Special Nuclear Decommissioning Issue, Vol 12, 1991, ~p 13-28. Scottish Nuclear Limited, Costs of Generation from Hunterston 'B' and Torness Power Stations 1990/91, Glasgow, 1991.

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~20p cit, Ref 3. 13Nuclear Electric, Revised Capital Scheme Sanction, Sizewell 'B' Power Station, Meeting of the Board, 7 June 1990; and S. Goddard, 'Future programmes' in Institute of Energy Seminar Series, Where are we now on Nucler Power?, Proceedings of a one-day seminar, 13 March 1991. 140p cit, Ref 6, Chapter 6, pp 128-164, 151bid. 16F. Nectoux, Crisis in the French Nuclear Industry, Greenpeace, London, 1991, Chapter IV, p 73. 170p cit, Ref 6, Chapter 8, pp 195-238. 180p cit, Ref 16, p 65. 191bid, p 71. 2°All data for Korea are from C.-T. Park, 'The experience of nuclear power development in the Republic of Korea: growth and future challenge', to appear in Energy Policy, Vol 20, No 8, August 1992. 2~The precise figure depends on the inflation index used. 22For a fuller treatment see S.D. Thomas, 'The development and appraisal of nuclear power. Part II: the role of technical change', Technovation, Vol 7, 1988, pp 314-315. 230p cit, Ref 6, p 105. 240p cit, Ref 16, p 68. ZSA more extended treatment of the relative price effect is contained in R. Grove-White and G. MacKerron, Capital Costs of PWRs: a response to CEGB, ADDS 7 and 8, Council for the Protection of Rural England, CPRE 5 ADD 3, Hinkley Point 'C' Power Station Public Inquiry, September 1988, pp 2%33. 261bid, p 31. 27E. Rolph, Nuclear Power and the Public Safety: A Study in Regulation, Lexington Books, MA, 1979; and D. Nelkin and M. Pollak, The Atom Besieged: Extraparliamentary Dissent in France and Germany, MIT Press, Cambridge, MA, 1981. 28Electric Power Research Institute, An Analysis of Power Plant Construction Lead Times, 2 vols, EPRI E-2880, Palo Alto, CA, 1984. 29See V, Gilinsky, 'Nuclear safety regulation: lessons from US experience', to appear in Energy Policy, Vol 20, No 8, August 1992. 3°See International Commission for Radiological Protection, Recommendations of the 1CRP, ICRP Publication 26, Annals of the ICRP, Vol 1, No 3, Pergamon, New York, 1977; and ICRP, The 1990 Recommendations of the ICRP, ICRP Publication 60, Annals of the ICRP, Vol 21, Nos 1/2, Pergamon, New York, 1991. 31McGraw Hill, Nucleonics Week, 20 June 1991, p 12. 32A. Weinberg, 'Nuclear energy and greenhouse emissions', International Journal of Global Energy Issues, Vol 2, No 2, 1990, pp 99-104.

ENERGY POLICY July 1992