The Economist
9 November 2006
Business: Nuclear power

The nuclear industry is predicting a rapid expansion—but that will not happen without government help.

“Nuclear has to be part of the energy mix,” insists Claude Mandil, the head of the International Energy Agency (IEA), a think-tank-cum-watchdog for power-hungry countries. He was speaking at the launch this week of a report that overturned the IEA’s previously pessimistic view of the prospects for nuclear power.

It now estimates that nuclear generation will grow by at least 13% by 2030, and perhaps as much as 40%. The firms that build nuclear plants are making similarly rosy projections.

The nuclear division of General Electric (GE), an American conglomerate, predicts that 66 gigawatts of new capacity—equivalent to the output of about 44 big reactors—will be ordered by 2020. Areva, a French nuclear firm, foresees 130 new plants by 2030.

There are several reasons for this optimism. The prices of rival power sources, including coal and natural gas, have risen dramatically in recent years. At current levels, the IEA calculates, nuclear power is cheaper than gas and almost as cheap as coal. Unlike such fossil fuels, which release climate-changing carbon dioxide when burnt, nuclear power is “carbon free”.

Better yet, uranium comes from stable countries such as Canada and Australia, so interruptions to supplies are unlikely. GE, Areva and another rival, Westinghouse, are also touting new designs that they say are safer than existing nuclear plants.

Yet just one such reactor is under construction, in Finland, and there are firm plans for only one other, in France. Utilities and financiers, it seems, are less certain about the merits of new nuclear plants than the IEA’s economists.

The main problem seems to be “regulatory risk”—a euphemism for fears that politicians, planning officials and protesters will hold up or entirely derail the construction of new plants. Another worry is that new reactors, based on unproven technology, will cost more than expected to build and run.

Construction accounts for as much as three-quarters of the cost of nuclear generation, since fuel and other operating costs are relatively low. (At power plants running on natural gas, by contrast, construction is cheap but fuel is costly.)

The expense of financing this big initial outlay leaves profits susceptible to delays in licensing or construction—problems that have
afflicted nuclear projects in the past. The risks are all the more pronounced in liberalised markets, where power plants cannot be sure that there will be customers for the electricity they generate. In such circumstances investors tend to plump for less capital-intensive facilities which provide a quick return.

The reactor that Areva is building in Finland might have dispelled worries about the commercial viability of new plants, were it not behind schedule and over budget itself. Areva dismisses these setbacks as the typical teething pains that come with any new design, but the result is a big hole in its balance sheet: its reactor division reported a loss of €266m ($340m) in the first half of the year.

Moreover, it will not be easy to replicate the Finnish reactor’s financial model. The consortium of utilities and their main customers that is paying for the reactor will also purchase its output at cost, providing an assured market and so lowering borrowing costs and dispensing with the need for profits.

Electricité de France (EDF), the utility that is about to build a new reactor in France, says it will pay the €3.3 billion bill out of normal revenue. But only the biggest power firms have the financial muscle required to do this. What is more, the regulatory risk is negligible in France and Finland, since nuclear power is widely accepted by politicians and public alike, so financiers are less skittish.

In other countries nuclear firms are hoping that governments will ease the way. Britain recently promised to make it easier for new reactors to win planning permission, although it also pledged not to subsidise nuclear power. America has no such qualms: it is offering a raft of incentives for the first few new plants to be built there, including insurance against regulatory risk. In many
countries with regulated electricity markets, incumbent firms, many of them state-owned, can simply pass the costs of construction on to customers or taxpayers. It is no coincidence, nuclear analysts say, that the majority of American firms planning new nuclear plants want to build them in the relatively heavily regulated south-east.

In France, too, the government’s role is crucial. During the oil crises of the 1970s it decided that nuclear power offered the best route to energy independence. In true dirigiste tradition it launched a reactor-building programme with little public consultation. EDF, which is state-controlled, now derives 85% of its production from nuclear power plants. Public opinion has accepted nuclear reactors as a fact of life.

On a recent trip to China the French president, Jacques Chirac, lobbied hard on behalf of Areva, which is vying with Westinghouse to build four new nuclear-power plants there. But the government’s strong links with Areva have proved to be a mixed blessing. Last year, at the last minute and to the great disappointment of Areva’s boss, Anne Lauvergeon, the government cancelled the firm’s planned share sale, depriving it of funds earmarked for the expansion of its fuel-processing business. At the end of June it extended Ms Lauvergeon’s term in office on the condition that she stop talking about a share offering.

Even her original appointment was political: she was a protégée of François Mitterrand, a former president.

Areva’s political problems pale next to those of E.ON, a German electricity giant. Although Germany also started to build nuclear reactors in response to the oil crises of the 1970s, public opinion soured in the aftermath of the Chernobyl disaster in 1986. In 2000 the government of the day, a coalition of leftists and Greens, passed a law forcing the shutdown of the country’s 19 reactors by 2020.

E.ON, which owns six reactors outright and holds shares in five more, will have to use gas or coal to make up for the loss of the 33%
of its power output generated by nuclear reactors.

The firm hopes that the law requiring the nuclear shutdown will be changed—something Angela Merkel, the German chancellor, promised during last year’s election campaign but has yet to deliver. But E.ON concedes that building new nuclear plants in Germany would be inconceivable, since public opinion is so hostile.

In most countries, in other words, the future of nuclear power rests more on political considerations than commercial or technological ones. Investors will be reluctant to commit themselves without a big shift in public opinion or pledges from governments to push through planning approval or defray the cost of any delays.

As Fatih Birol, the IEA’s chief economist, puts it: “If governments do not facilitate the investment, I don’t think nuclear will fly.”