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ENERGY: Nuclear Does Not Make Economic Sense Say Studies

Julio Godoy

BERLIN, Feb 12 2010 (IPS) - The enormous technical and financial risks involved in the construction and operation of new nuclear power plants make them prohibitive for private investors, rebutting the thesis of a renaissance in nuclear energy, say several independent European studies.

The risks include high construction costs, likely long delays in building, extended periods of depreciation of equipment inherent to the construction and operation of new power plants and the lack of guarantees for prices of electricity.

Adding to these is the global meltdown and the consequent cautious behaviour of investors as also fiscal and revenue difficulties of governments in the industrialised countries, say the studies.

In the most recent analysis on the feasibility of new nuclear power plants, the Citibank group concludes that some of “the risks faced by developers … are so large and variable that individually they could each bring even the largest utility company to its knees financially.”

The Citibank paper, titled ‘New Nuclear – The Economics Say No’, lists five major risks developers and operators of new nuclear power plants must confront. These risks are planning, construction, power price, operational, and decommissioning. According to the study, most governments in industrialised countries today have only “sought to limit the planning risk” for investors.

But, while it is “important for encouraging developers to bring forward projects, [planning] is the least important risk financially,” the survey goes on. According to the Citibank group, the most important risks are construction, power price, and operational. The paper dubs these risks “the corporate killers.”

Environmental activists would add safety issues as another major risk – both the handling of highly radioactive nuclear waste and the likelihood of accidents at nuclear power stations.

The Citibank bases its conclusions on estimated costs of construction and operation and in the necessity of setting too high electricity prices for consumers, and which have seldom been reached in the past.

According to the paper, the costs of constructing a new nuclear power plant range between 2,500 to 3,500 euros (3,420 US dollars) per kilowatt hour.

For an average 1,600 megawatt (Mw) unit, such a range leads to construction costs of up to 5.6 billion euros (7.6 billion dollars). “We see very little prospect of these costs falling and every likelihood of them rising further,” the study says.

To meet such costs, the operator would need a guarantee of constant electricity prices around 65 euros (88.9 dollars) per Mw/hour for a long period of time.

The Citibank paper cites the British case where prices at that level on a sustained basis have occurred only 20 months during the last 115 months. “It was a sudden drop in power prices that drove British Energy to the brink of bankruptcy in 2003,” the survey recalls.

Another survey of the so-called renaissance of nuclear power, carried out by physicist Christoph Pistner for the German Institute for applied ecology, comes to similar conclusions.

In the paper ‘Renaissance of nuclear energy’, Pistner argues that developers “must finance in advance and for an unusual long period of time the huge construction costs of a new nuclear power plant.”

In an interview with IPS, Pistner said that most power plants have to be running for at least 20 years to reach the operation period free of depreciation and impairments costs. Only after this period, a nuclear power plant starts yielding returns.

In addition, Pistner said, developers of nuclear power plants are confronted with yet another risk: “The industry disposes of little references on the buildings costs of new nuclear power plants because there are very few units in construction.”

Actually, there is a new nuclear power plant that serves as a warning example of the risks involved in such a project: the nuclear power plant of Olkiluoto 3 in Finland, under construction since 2004.

Although the plant was supposed to have started delivering electricity in May 2009, its completion was postponed several times in the past two years. On Feb. 11, the Olkiluoto 3 project manager Jouni Silvennoinen announced in Helsinki that the plant’s start “may be pushed back further than June 2012, which is the current deadline confirmed by the equipment manufacturer.”

The manufacturer is the French state-owned company AREVA. The plant was ordered by the Finnish company TVO.

Olkiluoto 3 is also facing an explosion of construction costs. Initially, it was estimated that the plant’s construction would cost three billion euros (4.1) – but now the bills amount to well over 5.3 billion euros (7.2 billion dollars). How much the plant is actually going to cost remains unclear.

These costs must be added to the revenues losses TVO had budgeted as electricity sales, but which were never realised due to the non operation of the plant.

The delays in completion and the explosion of costs have led to litigation between the Finnish operator TVO and the manufacturer AREVA.

In yet another critical appraisal of the feasibility of new nuclear power plants, French energy expert Thibaut Madelin says that the uncertainties linked to the construction costs of such plants have been magnified by the global financial crisis, which makes such huge investments unlikely.

Madelin said that construction delays of nuclear power plants constitute the central argument against them. “You can build a combined cycle gas turbine with a capacity of 800 Mw in four years, for a construction cost of some 550 million euros (752.4 million dollars),” Madelin told IPS.

“But for a nuclear power plant of 1,600 Mw, you need at least eight years, and a construction budget of up to six billion euros (8.2 billion dollars),” Madelin added. “That means that the investor of a new nuclear power plant would start seeing some money only eight years after she invested a huge amount of money.”

According to Madelin, “if the construction of a nuclear power plant lasts more than 10 years, the project becomes a financial catastrophe.” Figures by the International Atomic Energy Agency (IAEA) say that construction delays jumped from 64 months (more than five years) to 146 months (more than 12 years) between 1976 and 2008.

In a recent commentary published by the IAEA, Sharon Squassoni, researcher at the U.S. Carnegie Endowment for International Peace, also concluded that the financial crisis and the construction costs constitute almost insurmountable obstacles to the renaissance of nuclear power.

“The current economic crisis could make financing nuclear power plants particularly difficult,” Squassoni wrote. “Financing costs account for between 25 and 80 percent of the total cost of construction because nuclear power plants take much longer to build than alternatives.”

For example, wind plants require 18 months to build, combined cycle gas turbines need 36 months, but nuclear power plants take at least 60 months, Squassoni noted.

Squassoni warned that the global tightening of risk management standards in the wake of the current economic crisis could imperil the nuclear industry, “in particular, because a reactor entails such a large investment (between five billion and 10 billion dollars per plant) relative to the typical financial resources of electric utilities.”

The Citibank paper, referring to the Olkiluoto 3 plant, points out that cost overruns and time slippages of even a fraction seen by TVO and AREVA would be more than enough to destroy the equity value of a developer’s investment “unless these costs can be passed through somehow”, an euphemism for state subsidies.

“Given the scale of these costs, a construction programme that goes badly wrong could seriously damage the finances of even the largest utility companies,” the Citibank survey says.

The Citibank survey concludes that without taxpayers money there is “little if any prospect that new nuclear stations will be built … by the private sector unless developers can lay off substantial elements of the three major risks. Financing guarantees, minimum power prices, and/or government-backed power off-take agreements may all be needed if stations are to be built.”

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