Operations & Maintenance

By Elizabeth Jeffries

The NEA study aims to show the impact of carbon pricing on the competitiveness of nuclear energy compared to coal and gas-fired power generation in a liberalised market, to clarify these issues to managers in private utilities considering future investments.  The NEA helps member countries maintain and further develop the economical use of nuclear energy.

“Competition in electricity markets is today being played out between nuclear energy and gas-fired power generation, with coal-fired power generation not being competitive once carbon pricing is introduced,” the report states.  However, existing nuclear has won out financially over the last five years, earning average profits of around €40/MWh compared to about €28/MWh for coal and €19/MWh for gas.

The nuclear new-build curve ball

The future is less clear of course for utilities considering investing in new nuclear power stations.  In terms of future investment, the NEA finds that nuclear energy is competitive with natural gas as soon as three main variables: either investment costs, prices or carbon capture and storage (CCS) act in its favour.

This could be the case, for instance, if gas prices are high, which makes gas fired power generation less competitive.  If two of these variables act in its favour, the NEA indicates nuclear would dominate the competition – for instance: if gas prices were high at the same time as nuclear capital investment costs had reduced (a perhaps unlikely scenario). The report suggests gas prices are very likely to rise over the time frame of these investments.

It also warns that liberalised energy markets, which now exist in many EU countries, alter some of these considerations, because they may create greater electricity pricing volatility.  This could mean that in some situations investors would be more averse to nuclear, which is at a comparative disadvantage when electricity prices fall. 

Although this is not particularly likely, the organisation indicates that utilities should minimise risk by adopting a portfolio approach to investment.  Some utilities do not follow this model at the moment, the most striking examples being Drax (coal) and EDF (nuclear).  “A portfolio approach is a winning strategy if you are prepared for vagaries in the electricity market – it seems a sound approach,” stated a spokesman at the NEA.

Coal fired power stations and renewables

The development of CCS for coal fired power stations, of course, would also alter the relative attractiveness of each of these types of investment.  If CCS became a widespread technology, as could be the case in the next 30 years, the position of gas compared to nuclear would change.  “CCS will remarkably strengthen the relative competitiveness of nuclear energy against gas-powered generation.  The profitability of gas declines significantly once it substitutes for coal as the marginal fuel at high carbon prices,” the study’s authors explain.

Commenting on the report, Andrew Smith, an expert based at transport research and energy consultancy London Analytics, pointed out that nuclear’s financial benefit from carbon pricing over the last few years has not prompted any obvious changes to investment decisions thus far. “Nuclear capacity now is the same as 11-12 years ago and it’s hard to say a nuclear renaissance is happening,” he remarked. 

Smith also draws attention to new investment compared to renewable energy.  In 2010, 5GW of nuclear generation was commissioned across the world, compared to 60GW for renewable energy, according to UNEP’s publication Global Trends in Renewable Energy Investment 2011. Perhaps of equal concern are general assumptions that new generations of nuclear technologies could reduce investment costs, as is the case with many other technologies.  “In reality the more we do with nuclear the more expensive it gets,” observes Smith.

A paradox can be detected in the statements made by the NEA about nuclear power in a liberalised market with carbon pricing.  This is connected to changes most visible in the UK market as the Electricity Market Reform (EMR) is debated. 

“If nuclear is more economic, say, once a carbon price reaches €20-30 then why has EMR seen the need to put in place a subsidy that ensures nuclear gets built?” asks Smith. The EMR effectively partially re-regulates the UK market, once the most liberalised of all EU markets, partly to accommodate the need for nuclear new build.  This may mean that the NEA’s study is now more relevant to other EU countries, which could soon be more liberalised than the UK – a reverse of the situation a few years ago.

Clearly, the NEA’s report also does not take into account perhaps less tangible political issues following the Fukushima disaster, which may make investors more cautious than they would otherwise have been. 

ED-OP

Regardless of any analyst commentary or less harmful arm chair politics, proactive safety protocols and procedures within the established UK and US nuclear energy markets will have to lead by example and create widespread stakeholder confidence. Now, more than any other time in the industry’s history, does it have to step up to the pulpit to get its ‘baseload gospel’ heard, understood and acted upon by all of those that have a say.