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Climate Action 2010-2011

Energy and Mitigation

Energy and Mitigation The electricity market challenge for low-carbon technologies In OECD countries, nuclear plants provide large amounts of carbon-free electricity at low and predictable costs for up to 60 years under stringent regulatory oversight that ensures high standards of safety and security. Decision-makers in a majority of our member countries agree with us that the challenges of safety, waste disposal and proliferation can be suitably addressed. What then is holding back a ‘nuclear renaissance’ to slash GHG emissions? A major issue is certainly economics. While nuclear plants have attractive average costs calculated over their complete lifetime, they are expensive to build and therefore have high upfront investment costs. According to the new IEA/NEA study Projected Costs of Generating Electricity: 2010 Edition, the capital costs of an individual 1,000 Megawatt (MW) usually varies between US$3 and US$6 billion at a five per cent real discount rate and between US$4 and UD$7 billion at a 10 per cent real discount rate. Of course, the precise costs vary significantly, even between OECD countries, due to different reactor designs and different regulatory frameworks as well as due to differences in labour costs and exchange rates. The combination of high fixed costs during construction and low variable costs during operations is a characteristic that nuclear energy shares with all other low-carbon or carbon-free energies, be they renewable energies for generating electricity, carbon capture and storage or even investments in demand-side management and energy efficiency. Fossil-fuel based power plants, which emit significant amounts of CO 2 , instead have comparatively low fixed costs and comparatively high variable costs. This conjunction is not the fruit of chance. High carbon intensity and high variable costs (and comparatively low fixed costs) always come together as they are both due to the same underlying reason: the use of expensive, carbon-intensive and frequently imported fossil fuels such as gas and oil. In the marketplace for electricity, low-carbon technologies with high fixed costs and low variable costs thus compete with fossil-fuel based technologies with low fixed costs and high variable costs. Concerns about climate change have heightened the overall attractiveness of low-carbon technologies, nuclear among them, from a social point of view. This is increasingly seen in public opinion polls. However, the economic incentives for private investors have actually shifted to the other direction. The deregulation of electricity markets and the liberalisation of electricity prices have enormously increased the volatility of prices and the uncertainty of investors. Confronted with such unprecedented risks, investors will try to limit their exposure in the case that prices fall and thus opt for technologies with comparatively lower fixed costs. This, however, means more greenhouse gas-emitting, fossil-fuel technologies. The impact of carbon pricing Uncertainty in electricity markets tilts the balance against low-carbon technologies such as nuclear and renewables. While renewables have to some extent been shielded from this effect through direct subsidies or through subsidised feed-in tariffs, the magnitude of the challenge in terms of GHG emission reductions over the next decades is far too large to be solved by selective subsidisation. What has supported the drive towards low-carbon technologies in the electricity market is the widely-shared concern about climate change-inducing GHG emissions. Implicitly or explicitly, such concerns translated into an increase of the current or perceived future costs of GHG emissions or, in its simplest form, a price to pay for each tonne of CO 2 . The most concrete expression of this trend is so far is the European Emission Trading System (EU ETS), where the price for a tonne of carbon is currently hovering around €15 (slightly less than US$20). Of course, such carbon pricing has an impact on the relative competitiveness of nuclear and other low-carbon technologies. The graph below provides an indication of the magnitude of this impact on the basis of joint figures from the IEA/NEA. At a five per cent discount rate, a carbon price of US$15 makes nuclear the overall least expensive technology for baseload power generation, while a carbon price of US$60 would make (on-shore) wind Figure 1: The impact of carbon pricing (levelised average costs at 5% and 10% discount rates). 5% discount rate 10% discount rate Source: based on data of IEA/NEA (2010), projected costs of generating electricity. | 56 | www.climateactionprogramme.org

Energy and Mitigation more competitive than either gas-fired or coal-fired power generation. At a 10 per cent discount rate, which is less favourable for high fixed-cost, low-carbon technologies, a carbon price of roughly US$50 would be required to make nuclear the absolutely least expensive technology for baseload power generation (excluding so-far unproven coal with carbon capture and storage). Meanwhile, wind power would become competitive with coal only at prices of US$100 and above. However, even at 10 per cent, nuclear remains most competitive in Asia and America. While these numbers are only indicative and real capital costs in the energy market are around 8 per cent, there can be no doubt the carbon prices required for establishing competitiveness of low-carbon technologies lie somewhere in between the values mentioned above. Carbon prices play indeed an important role in ensuring the competitiveness of low-carbon electricity generating technologies. Three steps towards realising the full potential of low-carbon technologies In order to allow all capital-intensive, low-carbon technologies to realise their full potential in terms of helping provide stable electricity supplies at attractive costs and reducing GHG emissions from power generation, the simple but powerful three-point plan below needs to be followed: 1. Reduce price volatility in electricity markets: uncertainty about future electricity prices is the major hurdle for capital-intensive low-carbon technologies in their competition with coal- and gas-fired power generation. While the movement towards power market liberalisation in OECD countries is largely irreversible, we must create the conditions for long-term contracts and producer-consumer consortia. This will reduce price risks and minimise the cost of financing, which in return will allow garnering the private and social benefits from the stable variable costs and reduced GHG emissions stemming from technologies such as nuclear and renewable energies. 2. Ensure a reliable long-term signal on carbon prices: carbon prices are clearly an important driver for the competitiveness and economic viability of low-carbon technologies including nuclear energy, renewables, CCS and even demand-side measures. Most of these investments need to be planned for decades ahead. A clear commitment to a stable price for carbon emissions is the most efficient incentive measure our governments can make to initiate the transition towards a low-carbon economy. 3. Include nuclear energy in any post-Kyoto mechanism for emissions reduction crediting: Whenever a nuclear power plant is being built it substitutes primarily for coal- and gas-fired plants in the production of baseload power. It thus reduces existing emissions or ensures that future emissions do not rise. For all other low-carbon technologies, such substitution in developing countries generates certified emission reductions (CERs) under the Clean Development Mechanism of the Kyoto Protocol but currently nuclear is not included in this mechanism. In order to realise the full GHG abatement potential of nuclear energy, it should be included in any successor mechanism under conditions equivalent to those for other technologies. Carbon prices play an important role in ensuring the competitivness of low-carbon electricity generating technologies. One of the most influential publications to emphasise that stabilising concentrations of GHGs to a level that would limit temperatures increases to 2-3°C was the Stern Review on The Economics of Climate Change. Unsurprisingly, the Stern Review also foresaw a neardoubling of global nuclear capacity by 2050 to 700 GWe as one of the measures to stabilise GHG concentrations. It is one of many forecasts of this nature. However the modellers and forecasters are not the only ones who are saying it; a simple consideration of the contributors to GHG emissions suggests that any solution to the climate challenge will require a substantial contribution by nuclear energy. Luis Echávarri is Director-General of the OECD/ NEA, a post he has held since 1997. A former Project Manager for three nuclear power plants for Spanish energy company, Westinghouse Electric, he was later made Technical Director of the Spanish Nuclear Safety Council (CSN) and named commissioner in 1987. He is a Fellow of the College of Industrial Engineers in Madrid. He represents the OECD/NEA on the governing board of the International Energy Agency (IEA) and is a member of the International Atomic Energy Agency’s International Nuclear Safety Advisory Group. The NEA is a specialised agency within the OECD, an intergovernmental organisation of industrialised countries, based in France. The NEA works to assist its 28 Member countries in maintaining and developing the scientific, technological and legal bases required for the safe and economical use of nuclear energy for peaceful purposes. It is a forum for sharing information and experience and promoting international co-operation, a centre of excellence where Member countries can pool and maintain their technical expertise, and a vehicle for facilitating policy analyses and developing consensus based on its technical work. 12 Boulevard de Iles, 92130 Issy-les-Moulineaux France Fax: +33 145241115 Website: www.nea.fr www.climateactionprogramme.org | 57 |