Wind taken out of nuclear powers sails

Friday, August 3, 2012

It is one thing for a green pressure group to claim nuclear power is too expensive, but quite another when the charge comes from the head of an atomic industry pioneer such as General Electric.

GE built some of the world's first commercial atomic reactors in the 1950s and has remained an industry leader since its nuclear joint venture with Japan's Hitachi in 2007.

Some investors say that Jeff Immelt, GE chief executive, was merely stating an inconvenient industry truth when he told the Financial Times at the weekend that nuclear power was "really hard" to defend financially, and most countries were moving to a mix of gas and renewable energy.

Last year, economic forecasts said electricity generated from nuclear plants would be cheaper than, or as cheap as, power produced by natural gas, wind farms or solar panels for years to come.

Some experts have questioned such predictions as market prices for solar panels have plummeted, wind turbine prices have declined and large finds of shale gas have prompted hopes that the low gas prices in the US could spread.

Lengthy construction delays at the Olkiluoto 3 project in Finland and the Flamanville project in France, the first nuclear reactors to be built in Europe for two decades, have pushed up estimates of nuclear reactor costs. The disaster at Fukushima in Japan has further pushed up costs and has led some countries, notably Germany, to abandon nuclear power.

"Fundamentally, [Mr] Immelt is right. In the end it's going to be a combination of gas, wind and solar," says Samer Salty, chief executive of Zouk Capital, a London private equity investor in clean energy projects.

Nuclear industry executives say Mr Immelt's comments reflect conditions in only one country: the US. Steve Kidd, deputy director-general of the World Nuclear Association, says: "Cheap gas prices make it difficult for new nuclear plants to compete economically but we would question the likelihood of these price levels continuing much longer and their relevance to the situation elsewhere in the world.

"In Europe it seems unlikely that gas markets will replicate the US situation so, depending on the national market, nuclear projects can be justified economically. And in Asia, countries are still dependent on expensive imported liquefied natural gas and so nuclear projects look very attractive."

GE's rivals say that nuclear is a small part of GE's business and it is no longer a force in the nuclear industry outside the US.

Industry executives cannot deny that costs have risen, however, and earlier claims that new reactors could be built without state subsidies now look wide of the mark.

When the nuclear revival was gathering pace in 2007 and 2008 companies were predicting much higher power prices, making the heavy investment needed seem less risky. They also forecast higher carbon prices, which would put coal and gas-fired plants at a disadvantage to nuclear and renewables.

In many developed countries recession has kept demand for energy and power prices lower than expected, making the conditions for nuclear investment less favourable.

Since Fukushima regulators are demanding extra safeguards such as auxiliary power systems be added to plant designs. "There are definitely some design changes post-Fukushima," says Sam Laidlaw, chief executive of Centrica, the UK energy group looking at building reactors with EDF. But he points to the slow progress of the new European plants as the main reason for changing cost assumptions. Peter Atherton, utilities analyst at Citigroup in London, says the price for a 3.2GW nuclear reactor in the UK was estimated at £4bn in 2008; now it is £7bn, based on the experience of Flamanville and Olkiluoto. "If you have to pay £7bn per reactor, it becomes a real challenge to justify building them - both economically and politically."

Whether nuclear power can compete with other forms of power generation appears to depend on geography, and whether costs do come down as more reactors are built, as industry executives predict.

Some projects are likely to proceed anyway, primarily driven by governments' desire for stable, low-carbon energy supplies.

The carbon emission reduction targets many countries have adopted make it "very hard" to see how nuclear will not play a part in the future power generation mix, says Richard Nourse, non-executive director of UK uranium enrichment group Urenco and head of renewable energy investment fund Novusmodus. "That said, the reduction in the price of electricity from renewables - led by the collapse in the cost of solar - will mean that nuclear will need to remain competitive to be deployed widely."

Because of the vast investment needed and the construction risks involved, it is unlikely that the private sector will be willing to fund new nuclear plants without subsidies and incentives from cash-strapped governments.

Mr Atherton says: "There are few companies in the world that can take a loss of that size [the €2bn Olkiluoto cost overruns] and remain solvent."

With private sector interest cooling and governments scrutinising the costs of building the next generation of reactors more closely, nuclear power has a long way to go before proving Mr Immelt wrong by showing it can compete with gas and renewable energy.

European reactors hampered by delays

The new generation of European nuclear reactors is suffering more than a few teething troubles.

Olkiluoto 3 in Finland was supposed to have entered service in 2009. But it has been repeatedly delayed, leading to more than €2bn of cost overruns to its original budget of €2.5bn and causing embarrassment to Areva, the French reactor manufacturer which is building the 1.65GW-plant with partner Teollisuuden Voima Oyj, the Finnish utility. It is now due to be finished in 2015.

EDF's Flamanville 3 1.65GW reactor in northern France is also behind schedule; it was originally meant to enter service in 2012 but is now set to start generating electricity in 2016. Its budget has grown from €3.3bn to €6bn.

Benjamin Fremaux, head of strategy at Areva, says the reason Olkiluoto and Flamanville - which both use Areva's EPR technology - have gone over-budget is that they are the first of their kind. He says costs will fall for future projects because of the 'fleet effect'; the more you build, the more standardised the design becomes and there are economies of scale.

"When we built Olkiluoto 3, we were designing some of the details as we went along. When you have the design, you don't have to redo everything from scratch."

Areva has since started building two 1.65GW reactors in Taishan, China, with the country's biggest nuclear plant operator China Guangdong Nuclear Power Group and says the project is on schedule and on budget - although it says it cannot disclose the budget. Mr Fremaux says there has been a 60 per cent reduction in the time spent designing and building Taishan compared to Olkiluoto.

"Olkiluoto 3 was a first of a kind, and we took advantage of this experience to build Taishan. A lot of expertise has been transferred from the European projects to the Chinese ones."

China's better record of nuclear construction so far has encouraged the country to press ahead with plans for several more reactors, and has inspired ambitious nuclear power programmes in countries including Saudi Arabia, India and South Africa.

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