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The economics of nuclear energy.
What is true and what is false in the Italian debate.

di - 23 Febbraio 2011
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To answer this question the structure of the market has to be considered. One may expect consumers to gain if competitive conditions prevail while the less competitive are the markets the greater will be the gains secured by producers. We will come to this later, but it is immediately clear that costs’ reduction does not coincide with tariffs’ reduction (the household bill) and therefore the current argument about consumers’ benefits/gains is flawed because it is referred to costs’ reduction. Furthermore, notwithstanding its neatness and transparency, the ExternaE methodology does not consider all the externalities due to energy production because it is concerned only with the impact of CO2eq emissions. This is a serious shortcoming if we want to compare the ‘true’ social cost of energy production from several sources. In the case of nuclear energy the external effects to be evaluated are not CO2 emissions (even if it is not totally carbon free because plants construction do produce CO2), but the risk of accidents. Nuclear accidents are a very special type of risk-based events, in that their probability is very low but their damage is enormously high. As a matter of fact it is extremely difficult to evaluate such external costs, but giving the impression that nuclear energy comes with no externalities is a falsity. In theoretical terms the problem is as fascinating as it is difficult. It has an historical tradition in science and it also enjoys a revival. As recently as in 2009, Weitzman[2] has addressed the issue by providing an economic-statistical model of high-impact, low probability catastrophes. In empirical terms the difficulties are all there, but to go without any estimation cannot be justified on the basis of the practical difficulties of attempting quantification, when honest comparisons are at stake. One way of overcoming such difficulties might be to look for some reasonable proxy, which could be represented by an estimation of people’s ‘risk aversion’. This can be performed through a contingent valuation exercise that quantifies people’s willingness to pay to avoid a negative external effect.[3] After all, when the building site of a nuclear power station (or of a waste disposal plant) is announced, people take to the streets to oppose it, thereby showing their preferences. Using questionnaires meant to evaluate people’s WTP allows to translate such preferences into a monetary valuation. Once the risk of an accident is evaluated a more reasonable comparison will emerge. This means that fig. 2 needs integration in order to deserve its name as a table showing estimated external costs. But also fig.1 needs additional clarifications. The last column gives qualitative information in terms of sensitivity to fuel price. Once more, nuclear energy looks appealing because it has a much better performance than oil and gas and a better one than coal and biomass. But again, a less superficial reading of the table suggests the information of the last column to be either redundant or insufficient, since the price of raw materials, namely uranium, accounts just for 8% of total costs, and therefore its price variations cannot have a high impact[4]. What might have a non-negligible impact is a shortage in the industrial capacity required for its enrichment, since it is enriched uranium that enters the reactor. But industrial capabilities, and the associated costs, for the enrichment of uranium do not enter the figures. What we want to draw attention to is the fact that energy production processes are so different from each other that a mere comparison of the type shown in figure 1 and 2 can be misleading. In other words, the fact that nuclear energy does not create the same problems of fossil fuels, namely CO2 emissions, does not mean that it is problem-free. And although, contrary to the geographic concentration of oil-fields, uranium ore deposits are diffuse, uranium needs conversion and enrichment processes whose capabilities may be concentrated in few countries. And indeed they are. Large commercial enrichment plants are in operation in France, Germany, the Netherlands, the UK, the USA and Russia, with only smaller capacity plants in other countries. Again, comparing oil-fields concentration to non-concentrated uranium deposits does not capture the essence of the problem: in terms of the vulnerability of importing countries, industrial capabilities for uranium enrichment may play a similar role to that played by specific oil supply sources.

Let us now turn to the construction costs of a nuclear plant and then to the market structure. Estimating the costs of construction of a nuclear plant is no easy task, mainly because they are very sensitive to the distinctive features of its location. It is therefore incorrect in principle to predict how much it will cost to build a nuclear plant in Italy on the basis of the available data pertaining to plants in existence or under construction in other countries. In other words, in order to figure out how much the building of a reactor of a given type and power will cost, its geographical location is a most important factor. Keeping this general warning in mind we discuss the figures that have been circulated, beginning with those circulated by ENEL. According to ENEL, building a 1700 MWh power plant would cost around 3-3 ½ billion €, while according to other international sources, such as E.ON, Florida Power & Light and Moody’s, it would cost two or three times as much. And notice that Moody’s estimates are likely to be more credible because, contrary to ENEL, it is not a candidate for construction. If we now look at the only new nuclear plant under construction in Europe, the Olkiluoto plant in Finland[5], we can compare such figures on paper with the ones emerging in practice and learn some important lessons.

Note

2.  Weitzman Martin L., 2009, ‘On modeling and interpreting the economics of catastrophic climate change’, The Review of Economics and Statistics, vol. XCI, n. 1

3.  Longo, A., Markandya, A., Petrucci, M. (2008), ‘The internalization of externalities in the production of electricity: Willingness to pay for the attributes of a policy for renewable energy’, Ecological Economics, 67, 140-152.

4.  Although uranium price increases cannot have a great impact, uranium price does increase with the changing of market conditions. ‘New’ and increasing demand for it from China, India and Russia is causing production to be below requirements while at the same time a transition from an inventory-driven supply market to a production-driven one (mining) has taken place. Furthermore market production has become more concentrated. Economic conditions in the uranium market have undergone large and fast changes whose impact needs to be investigated. Just in 2009 Kazakhstan has become the largest exporter of uranium production with a share of 27%, followed by Canada with a 20% and Australia with 16%, Uranium Market Outlook, December 2010.

5.  In non democratic countries nuclear plants are under construction while where democracy prevails, specifically in Europe, Olkiluoto is the only example to look at. In France at Flamanville another reactor of EPR type (European Pressurized Reactor) is under construction since 2006, but it is not a completely new location.

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