Chinese nuke plants: really cheaper or just more heavily subsidized?

In one of their recent blog posts, the Nuclear Information Resource Service (NIRS) called attention to the apparently amazing efficiency of Chinese new build nuclear reactors.  Two new units are being built at a stated cost of roughly $2.5 billion each, significantly less expensive than what it would cost for similar projects in other countries (access the NIRS posting here).  Plant Vogtle in the US State of Georgia, for example, will cost well more than $8 billion for each of two planned new reactors.  Olkiluoto-3 in Finland is now estimated to cost nearly $12 billion (8.5 billion euros).

The Western and Chinese cost figures are literally worlds apart.  Yet the core question with most heavy industry in China is what drives this difference.  What proportion of the cost differential is due to real competitive advantages, and what proportion is the result of simple, old fashioned industrial subsdization policies?

The US nuclear industry likes to point to Asian costs as the "real" economics of nuclear builds.  They frequently blame nuclear opponents for their economic troubles, arguing that irrational opposition drives up costs by elevating safety standards and plant delays unnecessarily.  If only they could just get on with their work, the argument goes, new reactors would be very inexpensive even in the United States.

Such arguments are actually unhelpful, even to the industry itself.  They deflect attention from real structural problems in the way they operate and manage risk, and the sooner they fix those problems, the sooner they have a chance of a competitive market offering without the coddling hand of government. 

The reality is that nuclear has a number of characteristics that make it difficult to build cheaply, regardless of where the plants are built.  The facilities are capital intensive and complex, a combination that often triggers significant construction delays and overruns well beyond the nuclear sector.  Think of big tunnel, highway, and building projects. Financing costs are high not only because the project is big, but also because investors worry a great deal about overruns, and therefore require more compensation for risk.  Interest compounds mightily because large investments take years to begin producing revenues even in the best of times.  This makes the levelized costs of power sensitive to financing costs and delays, as interest on a large investment base continues to compound during delays.   It also means that taxpayers and investors alike are right to favor smaller, quicker-to-build sources of energy or energy efficiency to very large nuclear plants.

Subsidies in the west: cheap money, shifting risks to ratepayers and taxpayers

In Western countries, the industry has focused on trying to get subsidized debt, both through using tax-exempt bonds and through government guarantees on borrowing.  The government loan guarantees subsidize nuclear projects in two ways:  by allowing higher risk projects to borrow at a lower interest rate (the "risk-free" Treasury rate rather than a rate reflective of the project itself); and by enabling them to use much more debt (which is less expensive than equity) than would be possible in a market transaction.  Purchase guarantees have also been popular in the UK.

The states currently developing new reactors have also employed favorable Construction Work in Progess surcharges that "avoid" interest charges altogether by forcing ratepayers to fund the interest costs upfront.  This works, at least for the utilities.  They even get to keep the money if the plant is never completed.  It's not such a great deal for ratepayers though, as can be seen in a $1.5 billion bill faced by customers in the cancellation of Duke Power's planned Levy reactors in Florida.

Chinese approach:  direct government ownership, very little transparency

Tapping into cheap sources of capital and CWIP has been effective in the US projects that continue to move forward.  But nuclear projects do still face market risk and scrutiny from bond underwriters.  Government subsidy programs are at least moderately visible, and subject to public challenge.  These factors help explain why the vast majority of US nuclear projects announced 7-10 years ago have been cancelled. 

In China, the state is directly involved with key parts of the supply chain and the scale of their interventions is murky at best.  While the World Nuclear Association is often a mere cheerleading squad for the expansion of nuclear power, they do have a good summary of the structure of the Chinese industry.  Many, many of the entities have substantial government involvement, sometimes with ownership shares by both national and provincial interests.  It is likely that somewhere in China, somebody knows how much money has been fronted by the government to each part of their nuclear infrastructure.  One should not expect that analysis ever to see the light of day, however.

Suffice it to say that if the Chinese government views nuclear power as a strategic industry (as it does), the costs they report on any part of the nuclear market need to be taken with a grain of salt.  How much capital is the government putting into not only the reactor projects directly, but into key components in the nuclear fuel chain and related infrastructure?  Are those funds entirely free or at terms more favorable than would be offered in an arms-length transaction?  When there are plant delays or changes in market conditions affecting the value of future power sales, are plant returns and costs adjusted appropriately, or are these costs merely socialized? 

Costs are kept low through other subsidy mechanisms as well:  state funded R&D; less expensive labor, part of which is likely due to fewer options for workers to unionize or organize; and woefully inadequate requirements for accident liability (roughly $45 million --see page 809) -- the losses from Fukushima are $500 billion and counting.  Additional support likely comes through how Chinese nuclear waste is managed and government involvement with uranium mining and enrichment.  Whether Chinese nuclear is really less expensive than reactors in the West, or simply more heavily subsidized, remains an open question.

This challenge is not unique to nuclear investment:  it is very difficult to get data on how China subsidizes any of its energy industries.  This was a clear conclusion of our review of data sources on Chinese fossil fuel subsidies a few years ago.  The trade cases on solar probably identify many of the instruments the government is also using in the nuclear sector to subsidize its investments, though doing a detailed exposition to the nuclear sector would be a fair bit of work.  One interesting aspect that I'd expect to emerge from such a comparison is that the same exact subsidy instrument would turn out to be more valuable to nuclear new build than when it is applied to renewable energy.  This is because the market risks of nuclear are higher (so the difference between subsidized and market interest rates would be bigger on a nuclear project) and the scale of construction is larger as well (so any subsidy will apply to a larger base of money, and often remain in place over a longer period of time).