Nuclear power lost significant credibility after the accident in Japan of 2011, leading to downward revisions about its development in the coming years. Yet, the British government has just approved the construction of a nuclear power plant in the UK, at a strike price which has puzzled many analysts for being close that of renewable alternatives today. In this article we explore future scenarios for nuclear power vis à vis with renewables for meeting climate mitigation policies, providing insights on technological progress in renewables and overall economic costs of reducing nuclear power.
Keywords: Nuclear Power, Climate Mitigation Policies
JEL classification: Q4, Q42, Q48
Suggested citation: Carrara, Samuel, De Cian, Enrica and Tavoni, Massimo, Nuclear Expansion or Phase-Out? Costs and Opportunities (January 9, 2014). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2014.01.001
This article is also available on VoxEU.org.
Fukushima and the future of nuclear power
"We learned from Fukushima that we have to deal differently with risks… We believe we as a country can be a trailblazer for a new age of renewable energy sources….We can be the first major industrialized country that achieves the transition to renewable energy with all the opportunities – for exports, development, technology, jobs – it carries with it.” Angela Merkel (distinct quotes)
In the aftermath of the Japanese accident of the nuclear reactors of Fukushima this was the view of Angela Merkel and her government backing up the decision to immediately shutdown the oldest eight German nuclear power plants and to phase out the remaining nine by 2022. A choice that caused the reaction of the German nuclear industry, which brought up the argument that early shutdowns could significantly damage the industrial base, and thus the entire national economy.
The disaster at the Fukushima Daiichi nuclear power plant (March 2011) sparked a debate about safety of this energy technology in other countries, mostly in Western Europe. Germany, Belgium, Switzerland, Italy, and Japan, among others, decided to revise their nuclear expansion or development programs (Rogner, 2013). After a decade of steady increase, over the past two years the construction of new plants dropped considerably. Moreover, out of the 435 nuclear reactors operating worldwide as of October 2013, about 350 are more than twenty years old. The decommissioning of old plants not fully replaced by new ones, especially in the USA and Western Europe, which feature the most numerous and eldest fleets, is likely to cause a short- to medium-term reduction in electric output from nuclear.
In clear contrast with this trend, the British government has just approved the construction of a large (3.2 GW) nuclear power plant, to be constructed by EDF and a Chinese company. The strike price has been set at 11cEuro/kWh, indexed to inflation. This is way above current wholesale electricity prices and close to that of renewable alternatives, such as wind power, already today. It provides an indication of the relatively high costs of building nuclear today, even more so if one considers allegations of illegal state support and a likely probe from the European Commission [Note 1]. The deal has been regarded by many energy analysts as economically unsound, not only when referred to the costs of currently available alternatives, but also on the premise that the competitiveness of renewable is set to increase in the coming years, due to continued technological progress and cost cut downs. The Japanese government is also pushing to restart its nuclear fleet after passing safety checks.
The evolution of the renewable costs in the coming years will not be independent of the future of nuclear power, as well as of energy and climate policies. In this context of uncertainty, policy needs to understand the economic consequences of nuclear power scenarios when accounting for its interplay with innovation and cost reduction in renewables. This article summarizes the finding of a recent paper of ours (De Cian, Carrara and Tavoni, 2013), which tried to answer the following questions. What is the role of nuclear power in meeting climate mitigation goals? What would be the implications of nuclear phase-out for the development of renewables, including their technological progress? What would be the ultimate costs of nuclear phase-out when taking into account the positive spillovers in terms of innovation and diffusion processes in renewables?
The role of nuclear power for meeting climate protection goals
Nuclear power provides baseload electricity at virtually zero CO2 content, thus representing an important carbon mitigation strategy. Indeed, scenarios of integrated assessment models foresee a growing role of nuclear in the future, the more so the more ambitious will emissions reductions be. For example, future energy scenarios from a specific climate-energy-economic model (Bosetti et al. 2006, 2009) foresee a continued use of this technology over the century. In a business as usual world the nuclear share would remain close to current levels (15% in 2005), contributing to 12% of global electricity production at the end of the century. Should countries succeed in enforcing a global climate agreement limiting global warming to between 2.5 and 2 degree Celsius, the importance of nuclear power could increase considerably, reaching a share of 34% on the global electricity mix. Other models provide varying ranges of penetration of nuclear power, but all foresee a positive relation between nuclear and the stringency of climate policy (Kriegler et. al 2013).
Should nuclear power be partly or completely excluded from the energy portfolio, countries would need to look at other sources and options to satisfy the growing demand for energy. The composition of the resulting energy mix would depend quite significantly on the policy context. As a first choice, countries would expand energy investments in conventional technologies. Renewable sources and clean power R&D would also attract more resources, but the penetration of yet-to-be-proven technologies would take time to occur. According to our study, so called breakthrough technologies could start replacing nuclear power and fossil-fuel-based options not before 2035.
Coupling the nuclear ban with a price on carbon would strengthen and accelerate the transition toward a more renewable based energy mix. Fossil-fuel-based technologies could only be used if equipped with capture sequestration and storage (CCS), while the penetration of innovative renewable technologies would occur five to ten years earlier.
The rapid decline in the costs of competitive low carbon technologies over recent years, most notably renewables, has induced some policymakers to speculate that the decarbonization of the electricity sector is possible without nuclear power, and hopefully at moderate costs. Provided the climate policy is designed in a flexible enough manner, our study suggests that ambitious emission reduction goals can be met even if currently important carbon-free technologies such as nuclear power are phased out. This finding has been confirmed by large model ensamble studies (Kriegler et. al. 2013), though it is important to remark that it builds on the condition that CCS will be implementable at large scale.
Is phasing out nuclear power costly?
The phase-out of nuclear power provides an implicit subsidy to alternative technologies, including less mature ones. This induces investments in innovation to early stage technologies that feature higher learning potential and international externalities compared to the alternatives that are displaced. Learning-by-doing and international diffusion of knowledge are side effects of R&D processes and of technology deployment, which are only partly appropriated by investors, due to failure in the innovation markets. As a consequence, the economic penalty of meeting a given emission reduction target without the option of nuclear power could be partly compensated by the welfare gains caused by the penetration of technologies with innovation externalities.
Let us consider for example a policy aimed at limiting global warming to 2/2.5 degree Celsius. Phasing out nuclear increases the aggregate economic cost of the climate policy, but very mildly -from 2.74 to 2.78% (see Figure 1). If there were no positive externalities associated with the technologies that replace nuclear, policy costs would have increased more, to 3.17%. Indeed, technology benefits reduce the macroeconomic loss by 0.39% . The technology benefits due to the higher inventived activities incentivized by the implicit subsidy to learning technologies caused by the nuclear phase-out are thus able to almost completely offset the cost of losing an important mitigation option, which otherwise would be substantial. These results are robust to different climate policy scenarios.
Fig. 1 Decomposing the technology penalty from technology benefits of phasing out nuclear power in a climate stabilization policy. The y axis shows economic costs of achieving the climate goal, measured in NPV consumption losses compared to the baseline (5% discounting).
Technology benefits take time to materialize and are distributed unevenly across countries. Greater benefits would occur in the regions that in the future would rely more on nuclear power, though secondary effects also play a role. Important factors to consider are the trading position of each region on the carbon and oil market and the interaction with the international prices of carbon permits and oil, the former being much more significant. Technology benefits, in fact, reduce the carbon price by about 10%, which represents an additional benefit for permit importers but, conversely, a penalty for permit exporters.
Coal is the leading contributor to greenhouse gas emissions, which are growing at a rather steady pace of 2% per year and leading to more severe climate change, in addition to local air pollution. Nuclear power is the best available competing technology which does not emit CO2, and is expected to be part of the mitigation portfolio. In this article we have emphasized the innovation benefits of constraining a mature technology like nuclear, which can partly offset the costs of foregoing the latter. However, an even more efficient and desirable solution would be to provide a clear signal to markets in the form of carbon pricing, as a way to internalize the climate externality. This could be complemented by specific policies aimed at internalizing the technology externalities in learning technologies such as renewables, like R&D subsidies which would allow bringing R&D investments closer to the social optimum (policies so far have been concentrated on subsidies on installation, a less efficient mechanism). The future of nuclear power and the implications for innovation in renewables could be best determined by these forces alone.
[Note 1] http://www.ft.com/cms/s/0/677ddc64-6274-11e3-bba5-00144feabdc0.html#axzz2nG4A7jXF
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