nuclear power subsidies

The Japanese Parliament has just passed a new law that pumps the equivalent of $26 billion into a fund to pay for damages caused by TEPCO's Fukushima disaster.  This is an "initial" contribution, so more could be on the way.  Rather than viewing this massive bailout to nuclear power as a failure in all dimensions of the regulatory oversight and financial assurance system of Japan, the payment is characterized as a "major step forward" by Yukio Edano, the chief cabinet secretary.

From the perspective of victims of the accident, it is a step forward -- since otherwise they would have received virtually no compensation for the damages the accident has caused to their health, their jobs, and their lives.  But this should not by any means obscure the fact that clearly nuclear power has been wildly mispriced in Japan; and that had it been properly priced their energy system could well have evolved in very different ways.  Further, other countries ought to look to this example as Exhibit A on why they need to fix their own nuclear liability regimes.

This type of bailout certaintly won't change the minds of "see-no subsidy" groups who can rationalize any level of pork as somehow not really a subsidy-- here's the World Nuclear Association ("Nowhere in the world is nuclear power subsidised per unit of production.  In some countries however it is taxed because production costs are so low.")  But the hope is that more open-minded folk will look a bit more realistically at the economics of various energy options inclusive of subsidies, and adjust policy and investment decisions accordingly.  

According to the US Energy Information Administration, Japan generated roughly 6,650 billion net kWh of nuclear power for the time period covered by EIA's data (1980 through 2009).  This single bailout contribution is equivalent to a subsidy of 0.39 cents/kWh for the entire period, a value that provides a rough proxy for what an actuarily-fair insurance premium should have been.  While there was some generation outside the range captured in the EIA time series (which would reduce the subsidy/kWh), the errors are more likely to understate the subsidy than to overstate it.  First, this calculation assumes break-even; real insurance operates to earn a return and would have set premiums higher in line with that objective.  Further, this "initial" contribution is well below the cost estimates of the accident. 

To provide a more robust range for the liability subsidy, we can use as a ballpark figure for the liability subsidy the $246 billion estimate put forth by the Japan Center for Economic Research (JCER) for the cost of the Fukushima accident.  The Center is an institution that, according to the Economist magazine, "is heavily financed by a federation of electricity utilities, all but one of which use nuclear power," so would not seem likely to unnecessarily inflate the cost of the accident.  This massive cost will not be financed by TEPCO, which is struggling to survive.  Instead, it is quite likely to be paid by taxpayers.  The full bailout would translate to a subsidy of roughly 3.7 US cents for every kWh generated in Japan between 1980 and 2009.  Clearly, proper pricing of liability alone would have greatly altered the energy landscape of Japan.

(Thanks to Ron Steenblik for the original article link)

The July 8, 2010 edition of Nucleonics Week (not available on the web) included a fairly remarkable article by Ann MacLachlan on Danny Roderick, senior vice president of new projects for GE Hitachi.  The article is based on an address he gave to the the Platts European Nuclear Power conference on June 29 in London, and a subsequent interview with Platts.  Some choice quotes from the article:

1)  Socialism's not so bad:  sell our reactors when you sell countries military equipment

Nuclear power plant deals today need to be part of a package that includes "missiles and aircraft carriers" as well as reactors and infrastructure support," he said..."If this [nuclear buildout] is going to become a team sport, we're going to have to find a team USA," he said, and find out how the US government can support reactors bids that include military equipment, electricity grids and "the entire supply chain" for nuclear power plant infrastrcture, Roderick said.

I would suggest that from the perspective of taxpayers, competing energy technologies, and for slowing proliferation, a much better path would be to challenge the various other "Teams" for violation of their WTO commitments on free trade.

2)  Most growth markets for nuclear power are "closed" to competitive bids, reliant on national champions and government investment

Of the nuclear units under construction in the world, 48 are "in closed markets where I can't compete," Roderick said.  That includes China, France, Russia and South Korea, he said...Roderick said in the last two years "there have been only two actual competitively bid [nuclear power plant] projects that were based on a private company structure.  All others were government-to-government deals..."

Since France, South Korea, and China are regularly trotted out to demonstrate that nuclear power is economically competitive, it is nice to see a clear statement from industry that government subsidies are a primary driver of nuclear construction in these supposed success stories.

3)  Renewed recognition of risk since the US financial crisis has increased the cost of financing to nuclear reactors substantially

"The financial crisis set us back," Roderick said, noting that while most utilities could get self-financing for nuclear projects three years ago, financial institutions in 2008 were reluctant to provide loans and were charging "almost usurious" interest rates for those they did offer.

Note that while I disagree with him that reactor projects could have gotten self-financing from banks three years ago at the types of interest rates Roderick is implying they could, it is useful to note that most cost models for the levelized cost of new nuclear are probably understating the cost of unguaranteed debt by a large margin.  Or, if they are assuming federally-guaranteed debt, they are understating the size of the subsidy this guarantee is conferring.  These models are also likely overstating the debt share of capital structure feasible in today's markets, further understanding the cost of capital on the projects.

4)  We're not like the other firms:  we will deliver on time, and on budget

Roderick said the experience with schedule and cost overruns for nuclear plants under construction should not be extrapolated to the ESBWR.  That design will be complete when construction begins and, thanks to modular techniques, construction will take only 36 months from first nuclear island concrete to startup.

This is an easy one to fix.  GE and Hitachi are both large and financially savvy companies.  They could demonstrate their faith in their products and process simply by using a fixed price bid with financial penalties after 36 months if the reactor were not up and running.  This bold move would no doubt be quite attractive to many potential customers.  If you see such deal structures from Roderick or from others, please let me know.

(Thanks to Ellen Vancko at UCS for bringing this article to my attention).