+The economic background to nuclear power

Adrian Ham, Oxford 2009

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What do these people have in common ?

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01/08/2009

+ Economics is not a science

It’s about people’s decisions

You can’t carry out experiments on people and repeat them

People constantly change the way they react to economic situations

People are learning about situations, and changing their behaviour

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+ We’re in a crisis4

+ Economics-What’s it all about?

Companies, individuals

Microeconomics

Government

Macroeconomics

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+ What’s it all about?

Decisions of companies and individuals in markets

1. investment

2. Purchase

3. Selling

4. Prices

5. Costs

Decisions of government

1. Investing in public projects

2. Taxes

3. Borrowing

4. Pricing to the public

5. Selling public assets

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+ It’s about decisions

Companies and individuals

Getting good return on investments

Keeping the company growing

Ready for the future

Government

Getting good value for public projects

Placing acceptable burdens on the economy

Giving security to citizens (e.g. energy security,climate change security)

Decisions robust in uncertain times- ready for the future

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+ Every cash decision has an ‘Opportunity Cost’

The benefits you would have got if you had taken the next best alternative

For example:

You could have made profits elsewhere

You could have got interest on bonds

You could have avoided borrowing

Etc, etc

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+ Comparison of World Oil and Gas prices

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2

4

6

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10

12

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1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

LNG to Japan

Europe

OECD Oil

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$ per MBtu

+ Why the renaissance ? Does the financial crisis matter?

We’re brilliant? ( in the nuclear industry)

We’re worried? ( in Government)

We can make some money ?

We’re worried about the environment?

But where’s the money coming from?

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+ Economics of the environmentfor example: there is a pollutant which threatens health or crop yields

Governments have a choice between:

1. banning a pollutant outright

2. Putting a tax on it

3. Allocating quotas-shrinking them year by year

4. Issuing ‘tradeable permits’- reducing them year by year

5. And same as 4, with ‘bubbles’

6. -if pollutant is international- Trading permits internationally?

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+ Economic decisions of governments have major political consequences

Particularly true in energy field

Nuclear power decisions are very political, engage the public

Wind power decisions affect fishermen,ornithologists,landscape enthusiasts, aircraft, defence

Hydro decisions have a huge affect on villages, water supply etc.,

Why?

Public attitudes

Individual costs

Campaigning groups

Cost

Fears over energy shortage

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+ Types of Electricity Supply System

Centrally planned, centrally co-ordinated

Government owned, part owned

Or:

Owned by private capital

Competing in a market of some kind

Or:

Hybrid system

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+ Economics of electrical power supply

What determines the price of any commodity ?

What determines the cost of production?

What determines the demand for an essential commodity?

Where does nuclear stand against its competitors?

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+ Basic economics of supply and demand 1

Supply depends on:

Costs of production

Price obtained in the market

Future price expected in the market

Historic assets in production

Demand depends on:

Need !how much people want,at what price

Price in the market

Price of alternatives

Adaptability

Consuming assets in place

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+ Daily electricity supply/demand

DemandObviously highly variable-by season,by time of day,by year

But within each hour, highly price inelastic

SupplyHas to be highly variable at the margin

Price inelastic

But if there is a market, operating hourly, half hourly?

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+ Basic economics of supply and demand 217

price

quantity

supply

demand‘equilibrium price’

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+ Supply Curve for Industryshort run

Summation of all marginal cost curves of all types of supplier

True for centrally planned or market based system

Nuclear almost zero marginal cost

Hydro - same

Wind -same

Gas- depends on marginal gas price

Coal-depends on marginal coal price

Oil- depends on marginal oil price

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+ Who supplies to a highly variable electricity market? Non-market

Short run

Non market system

Someone-chooses a merit order-

Lowest marginal cost available first in order

Highest marginal cost last-usually most flexible!

Long run

Non-market-

Forecast future costs-marginal and non marginal

Plan a future merit order

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+ Costs of productionelectricity

Total

Capital costs

Labour costs total

Fixed site costs

Fuels

maintenance

Marginal costs

Fuel

Variable maintenance costs

Some labour

Hydro-almost no labour cost

Wind – almost no labour cost

Oil?

Gas?

Nuclear?

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+ Problems of investing-liberalised market based

Making investment cost competitive

Future profit/success

Unitary cost ! Betting the company?

Best replicable technology

Limit market risk

Fund via consortia,

best loan terms possible, best ‘financial cocktail’

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+ Criteria for new plant investment

Centrally run system

Long run cost

Forecast requirement

Capital limitations

Social costs

Environmental criteria

Market system

Construction time

Long run cost-

Competitiveness

Flexibility

Size &Capital availability

Possible government/regulatory changes

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+ Encouraging New Market Entrantssupply characteristics-UK

1990s, Government wanted new CO2 free power

What could come into the supply system ?

renewables

Wind ?

Hydro?

Burning wood?

Burning chicken manure?

Tidal?

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+Problems of intermittent sources of powerWind Power UK

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+ Lifetime (Levelised) Electricity Cost The discounted costs divided by the discounted electricity produced over the complete lifetime

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Jam tomorrow, never today ?

Time preference and discount factorsr ?

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Capital cost

Views are changing all the time

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+ Capital Costs Electricity Generation

A US view in 2004$US / kW, 2003 prices

Gas (CCGT)- 590Gas (open cycle) – 490 Coal (old)- 1189Coal (GCC)- 1338Nuclear- 1200-1800

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Capital Costs Electricity Generation

+ Capital Costs Electricity Generationnot static!

International View 1991-

$US ’89 prices

Gas (CCGT)- 535

Gas (open cycle) – 325

Coal (old)- 1200

Coal (GCC)- 1450

Wind- on-shore 1200

Nuclear- 1500-2500

Hydro- 1800-3000

A UK view in 2004

$US 2004 prices

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Gas (CCGT)- 450Gas (open cycle) – 490 Coal (old)- 1095Coal (GCC)- 1500Wind- on-shore 1110Wind-Offshore 1380Nuclear- 1725Wave- 2100

Views change over time-

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• International View 1991-

• Gas (CCGT)- 736• Gas (open cycle) – 447 • Coal (old)- 1650• Coal (GCC)- 1996• Wind- on-shore 1650• Wind offshore-not given• Nuclear- 2064- 3440• Hydro- 2500-4100

• A UK view in 2004

•Gas (CCGT)- 450•Gas (open cycle) –490 •Coal (old)- 1095•Coal (GCC)- 1500•Wind- on-shore 1110•Wind-Offshore 1380•Nuclear- 1725•Wave- 2100

($/kw ,2004 prices,exchange rates)

+Investment-Size Matters

The risk /reward trade off

Unitary investment is compared with the size of the company

How is a company valued ?

How quickly does it get its investment back ?

Big companies can spread the risk of big investments

Even Shell/Exxon share risky investments

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In the market context:

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Construction timeand cost

Replication vital!

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Lifetime levelised costs: nuclear generationnot static international estimates early 2000s, p/kWh

replication 1st 4th 8th

Capital 1.82 1.11 1.05O & M .69 .69 .69Fuel .3 .3 .3Spent fuel management

.08 .08 .08

Decommissioning .06 .06 .06Total 2.95 2.24 2.18

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+ Do you work for a big company?35

+ Dou you work for a big company?36

050100150200250300350400

Turnover, 2006 &’7, $ billions

Turnover

In 2008,Shell invested $35 billion.In 2006 Constellation invested $0.3 billion

Generation Costs- ComparisonType Time to

construct-yearsCostPer kWh,pence(2004 prices)

Lifetime

Nuclear 5-? 2-3 40Onshore Wind 2 3-4 +2 20Offshore wind 2? 5-6 +2 20

Wave 2 6-7 15Gas CCGT 2 2-3 * 25Coal ICGT 5 3-4 25

*this assumed gas prices at

23p/therm- they have since risen to over 60p, and are around 30p in the summer downturn

Red figures indicate cost of back-up, due to intermittency of wind supply

Source- PB power for Royal Academy Eng

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Environmentalfactors

Future: carbon targets favour nuclear

But don’t forget waste issues!

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Carbon Emissions000s tonnes, per TWh, different forms of generationillustrative, for use in game

Nuclear NegligibleOld Coal 800-900

Gas (ccgt) 500

Oil 750- 900

New Coal 650-900

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Forecastingheadaches

Uncertainty and risks

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+ Forecasting problems

6th Century BC -Chinese poet - Lao Tzu: ‘those who have knowledge don’t predict- Those who predict don’t have knowledge’

20th Century- Nils Bohr Nobel Laureate, Physics:’Prediction is very difficult, especially if it’s about the future’

Attributed to Mohammed: ‘Those who claim to forecast the future are all liars- even if later events prove them correct’

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+ Consequences of getting investment decisions wrong

Market system

Company goes bankrupt (too much or wrong investment)

Company taken over by successful rival (too little successful investment)

Non-Market System

Too little or wrong investment- country suffers from power failures, expensive electricity vs. competitors- needs to find import sources, or expensive short term supply

Too much investment-undue burden on tax payers-uneconomic electricity consumption – export markets

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+ Problems of Investing in New Plant

Your capital cost not fixed over replications

Capital cost for close competitors not known

Need to forecast fuel prices

Need to forecast sales prices over time – 30 years!

Cost overruns

Construction delays

Regulatory policies

Forecasting prices!

Load factor forecast!

Therefore contractual problems

Future environmental policies unknown

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+ Forecasting problems (2)fuel costs-for example-future natural gas prices etc.

Chicago study 2004-forecast used:

Range for 2010-2020

‘12% above or below 2000 price’

US wellhead: +125%!

LNG (US) : +220%!

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•May 2008

( 2000 prices)

+ Future price of electricity

Future marginal costs

Your future fuel and labour costs

Competitors fuel costs

Future market configuration-& risk factors

Your market strength

Future capital costs

New entrants to market

Future demand for electricity

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+Econometrics can help(example-aluminium price model, Economist Intelligence Unit)

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+Forecasting problems -finally

But accurate forecasting is impossible

Unfortunately, to make investment decisions we have to do it!

What do we do about it ?

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+ Meanwhile- the financial crisis48

+ Stock market crash 2009-today’s South Sea Bubble

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+ International cash flows are still huge

Funding the US current account deficit 2008: $673 billion

Funding the Euro area deficit 2008: $96 billion

Source: OECD

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And US savings about $1680 billions pa

+ QUESTIONS-

NEA Energy Outlook 2008, OECD

IMF World Economic Outlook, April 2009

‘The Economic Future of Nuclear Power (University of Chicago,2004)

OECD Factbook 2009,

The Cost of Generating Electricity , Royal Academy of Engineering, 2004

Useful reading:

Senior Expert Symposium on Electricity and the Environment, IAEA1991

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