Climate Action 2010-2011

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