Can Nuclear Compete With Natural Gas Generation?

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February 16, 2010, 6:39 pm — Updated: 8:53 pm -->
A Comeback for Nuclear Power?
By THE EDITORS
Jeff Haynes/Agence France-Presse — Getty Images The Exelon nuclear generating stations in Byron, Ill.
The Obama administration has approved a $8 billion loan guarantee to support the construction of two nuclear reactors in Georgia. If the project goes forward, the plants would be the first built in the United States since the 1970s.
The 2005 Energy Policy Act authorized $18.5 billion in loan guarantees, but none have been issued until now. President Obama has proposed tripling that amount to expand nuclear power as a way to control greenhouse gas emissions and bolster domestic energy production.
Does the need for new sources of low-carbon energy now outweigh the costs and risks associated with nuclear power?
Samuel Thernstrom, American Enterprise Institute
Robert Hahn and Peter Passell, regulation2point0.org
Ellen Vancko, Union of Concerned Scientists
Peter van Doren and Jerry Taylor, Cato Institute
Christopher Paine, Natural Resources Defense Council
Denis Du Bois, Energy Priorities Magazine

The Greatest Danger Is Financial
Samuel Thernstrom is a resident fellow and the co-director of the Geo-engineering Project at the American Enterprise Institute.
Nuclear power is not a silver-bullet solution to America’s energy challenges, but it is an essential part of the puzzle that has been largely neglected until now for political reasons.
President Obama took office a year ago with high hopes for ambitious action on climate; today, it seems clear that no federal emissions limits will be enacted this year. The gridlock that grips the Senate has forced the president to consider other approaches to climate, and these loan guarantees are clearly part of that strategy.
If construction costs soar because of regulatory or political obstacles, the administration could end up with little to show for these efforts.
The president’s initiative should be commended both on the merits — we need the clean energy — and for the politics. As the president noted, “changing the ways we produce and use energy … demands of us a willingness to extend our hand across old divides, to act in good faith, to move beyond the broken politics of the past.” Given the depth of the ideological divide over climate policy, the administration cannot afford to ignore the few opportunities there are to bridge the gap with bipartisan initiatives that can generate megawatts of reliable clean energy.
Read more…
What about the risks of nuclear power? Historically, those dangers have been extraordinarily low, despite popular fears to the contrary, and the next generation of nuclear plants will be even safer than those built in the 1960s and ’70s. The real safety issue is not the risk of accidents or attacks on nuclear plants, it is the vexing problem of waste disposal, and on that front, the administration appears unfortunately unwilling to take on the longstanding dispute over Yucca Mountain.
The greatest danger associated with these loan guarantees is not environmental but financial; the risk of default on these loans is high, given the uncertain economic and regulatory environment for these plants. If construction costs soar because of regulatory and political obstacles, the administration could yet end up with little to show for these efforts. There are no simple solutions to America’s energy challenges.

A Good Start
Robert Hahn is a visiting senior fellow at the Smith School, Oxford University and Peter Passell is editor of the Milken Review. They recently co-founded regulation2point0.org, a web portal on regulatory policy.
Providing more than $8 billion in loan guarantees to build the first American nuclear power plant in three decades is one way to jumpstart the industry, but this sort of indirect subsidy leaves a lot to be desired from an economist’s point of view. Indeed, while we’re ready to be convinced that nuclear power’s virtues (zero greenhouse emissions) outweighs its vices (cost and waste disposal), we’d like any incentives to produce more nuclear power to be part of a coherent energy-climate change strategy.
Any incentives to produce more nuclear power need to be part of a coherent energy-climate change strategy.
What passes for energy policy is a Rube Goldberg construction, a machine powered by direct subsidies, tax breaks and mandates that is going in no particular direction. Is ethanol worth the cost in lost taxes and higher food prices? If General Motor’s heavily subsidized plug-in electric car catches on, will there be enough electricity to keep them on the road on a hot summer afternoon? Don’t ask Congress or the White House — they don’t have a clue.
Of course, the energy bell has already been rung a zillion times; we can’t start over.
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We could, however, try to make sense of where we are and where we should be going by applying some straightforward economic principles — in particular that, while markets aren’t perfect in deciding how much energy to use and in what form, they can do better than the alternatives. The key, then, is to get prices right — to calculate the external costs and benefits of energy sources in terms of climate change risk, localized pollution and maybe national security, then offset them with a system of taxes or tradable emissions rights.
An impossible dream? Sure. But it’s a good place to begin thinking about what’s wrong with current energy policy and what might make it a bit better.

Better Environmental Options
Ellen Vancko is Nuclear Energy and Climate Change Project Manager for the Union of Concerned Scientists in Washington, D.C. She was the former director of communications and government affairs for the North American Electric Reliability Council.
Does the need for low-carbon energy outweigh nuclear power’s risks and costs? The short answer is no. Even discounting nuclear power’s significant security and safety problems, rapidly escalating construction costs could be the industry’s biggest challenge.
Building wind and solar projects and natural gas power plants would be cheaper, faster and safer.
Earlier this month, President Obama proposed tripling nuclear loan guarantees to $54 billion from the $18.5 billion the Department of Energy allocated in 2005. The industry, however, wants more. It wants taxpayers to underwrite all the new reactors it wants to build.
Why loan guarantees? Because six top investment firms told the Department of Energy in 2007 that they were unwilling to finance new reactors in light of the industry’s horrible financial track record. Utilities don’t want to take that risk, either. But both would consider new reactors if taxpayers assumed the risk — in the form of federal loan guarantees.
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Taxpayers should be skeptical. First, projected construction costs have skyrocketed. In 2002, the industry estimated it would cost $2 billion to $3 billion to build a typical 1,100-megawatt reactor. Now projected costs run as high as $9 billion per unit.
Second, based on the industry’s history of cancellations and defaults, both the Congressional Budget Office (2003) and the Government Accountability Office (2008) estimate that the average default risk on a federal loan guarantee for new construction could be as high as 50 percent.
A 2009 peer-reviewed Union of Concerned Scientists study, “Climate 2030: A National Blueprint for a Clean Economy,” found that the United States does not need to significantly expand its reliance on nuclear power to make dramatic cuts in power plant carbon emissions through 2030, and that new reactors — beyond a handful of “first-mover” reactors built with the $18.5 billion in loan guarantees — would be uneconomical.
The study found it would be more cost-effective to meet a stringent emissions cap with a mix of energy efficiency; wind, solar and other renewable resources; and combined-heat-and-power plants fueled by natural gas. Those options are not only safer and more environmentally friendly, they could be built much more quickly and at much lower risk to investors and taxpayers.

Stop Nuclear Welfare
Peter van Doren and Jerry Taylor are senior fellows at the Cato Institute.
If building new nuclear power plants is such a good idea, why won’t anyone put their own money at risk without government loan guarantees?
Federal efforts to force construction of the plants will prove economically counterproductive.
The answer is that nuclear power is risky for investors because it ties up more capital for longer periods of time than its main competitor, natural-gas-fired generation. Nuclear power makes economic sense only if natural gas prices are very high. Then, over time, the high initial costs of nuclear power would be offset by nuclear power’s lower fuel costs.
Natural gas prices are not high enough at present to allow nuclear to compete. So what could make natural gas prices go up enough to make nuclear power attractive?
One possibility is natural supply constraints. Until recently, North American gas supplies were thought to be increasingly scarce, but in 2009 natural gas reserve estimates increased by 35 percent because of technological advancements in shale rock drilling — the largest reserve increase in 44 years. So natural constraints are no longer in play and natural gas prices have returned to reasonable levels.
Close
A second possibility is a (direct or indirect) carbon tax to reduce greenhouse gas emissions. The Congressional Budget Office reported in 2008 that a carbon tax of $45 a ton would induce market interest in nuclear power plants. And that’s if natural gas prices were to stay relatively high.
If gas prices were to return to their historical norm — which they have — the tax would have to be $80 a ton. And if construction costs were to double (and, historically speaking, the C.B.O. reports that a 207 percent cost overrun was the norm for nuclear power plant construction when we built them 30 years ago), it would require a $150 per ton carbon tax to induce market actors to build nuclear power plants rather than to respond to the tax with some other technology or market adjustment.
The bottom line is that nuclear power cannot compete against natural gas except under relatively extreme future cost scenarios, none of which are likely in the foreseeable future. Federal efforts to force nuclear power plant construction will thus prove economically counterproductive.