Is nuclear too expensive for climate change abatement?

The European Commission rigorously reviews investment agreements of EU member states. For nuclear power, the United Kingdom and Hungary are suspected of disproportionately subsidizing agreements. Are EU member states reviving an uneconomic energy technology? How does this affect climate change abatement policy?

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Recent nuclear investment agreements between EU countries on the one side and deep-pocketed non-European partners on the other side have become subject of scrutiny by the European Commission (EC). The latest such assessment concerns an investment agreement between Hungary and the Russian Federation for nuclear power in Paks. It resembles another recently closed case before the EC regarding the construction of a European Pressurized Reactor (EPR) at the UK’s Hinkley Point Site. As with the UK, Hungary is subjected to critical scrutiny by the EC over disproportionate state aid and violation of market pricing. Both the UK and Hungary argue nuclear energy is cost-competitive; but how so exactly?

In the UK, a ‘contract for difference’ (CFD) was proposed to attract investment in the British nuclear fleet. A CFD (explained here: https://emrsettlement.co.uk/about-emr/contracts-for-difference/) sets a strike-price, a fixed rate at which the generator sells power to the contractor (that’s the UK). If the actual price of generation is lower than the strike-price, the UK pays the generator the difference. If it is higher than the strike-price, the generator pays the UK. A good contract for the UK? The Hinkley strike-price has been criticized to be more than double the rate of UK electricity market prices. So who pays, if the real price is lower than the strike-price? This is just a question of how far one is willing to disaggregate the construct of the ‘contractor’, who it represents and where it gets its money from – which is arguably the same.

Who pays for nuclear?

contract for difference
Source: EMR Settlement Limited (2015). Contracts for Difference. https://emrsettlement.co.uk/about-emr/contracts-for-difference/

This subsidy agreement was targeted by the EC, which confirmed its validity in terms of state subsidies for nuclear power later on. Subsequently, a lawsuit spearheaded by the Austrian government was brought to the European Court of Justice aiming to reverse the EC’s decision. In the end, this effort became de facto irrelevant with an investment deal between the UK and China on 21.10.2015.

Hungary faces similar investigations by the EC, specifically regarding Hungary’s investment endeavors for Rosatom reactors. The EC is trying to assess whether such an investment would constitute disproportionate state-aid. The assertion is that state-aid should be proportionate to one’s objectives (power generation) and addresses or serves as a response to market failures (i.e., the private sector would not want to invest). Should the investigation find that there is a genuine market failure, this would equate a legitimized view of state-sponsored nuclear power in line with the UK’s objectives. The Hungarian-Russian agreement of 2014 for two VVER-1200 reactors comprises a EUR 10 billion loan, which makes up 80% of the project costs according to World Nuclear News (http://www.world-nuclear-news.org/NN-Hungary-faces-state-aid-investigation-over-Paks-II-project-23111501.html). The national stake held by the Russian Federation raises serious questions regarding the legitimate nature of Hungarian energy policy.

Any debate of legitimacy without a holistic consideration of the Hungarian case is not worth having. Finance and cost-competitiveness are not everything. Above, I wrote that part of the EC’s assessment was to study whether or not the investment project is proportional to the objective of power generation. There are many aspects how to go about power generation, e.g. human rights, the environment or human health. Those three are merely aggregates which require subsequent disaggregation if one is to really weigh the advantages and disadvantages of nuclear energy. Human rights questions traditionally highlight displacement, forced migration and loss of cultural identity. Concerns about the environment typically focus on biodiversity and wildlife losses, resource depletion or degradation, warming and associated unforeseeable or at least not easily predictable natural catastrophes. Discourse on human health is revolving around pollution, most prominently air and water pollution. The golden thread regarding the implications of power generation across different technologies is that there are direct and indirect effects of electricity generation projects.

Energy technologies bear short-, mid- and long-term effects. One’s perspective inescapably shapes the perception of magnitude and time. It is not the intention of this article to provide a thorough cross-technological cost-benefit analysis for or against nuclear. Debates about nuclear power usually involve the following non-exhaustive list of arguments such as enhanced energy security due to security of supply, energy portfolio diversification, few greenhouse gas (GHG) emissions, and generation flexibility due to base load power plants on the one side. On the other side, environmental safety risks in connection with radiation, proliferation and terrorist attack risks, unattractive economics due to large upfront costs (especially for private investors) or technological lock-in feature against nuclear energy. Nuclear technology, like many other energy technologies, is a double-edged sword when it comes to short- and long-term effects.

In Brussels, security of supply and portfolio diversification have received enormous attention, especially in the wake of the Ukraine crisis. In 2014, the EU has published its ‘European Energy Security Strategy’ along with an in-depth study, which calls on member states to reduce their energy dependence. In the context of nuclear power, the dependence mostly concerns the electricity sector. So how do Hungary, the United Kingdom differ and what is the EU average in all of this?

Electricity generation in the EU, Hungary and The UK

electricity
Source: OECD/IEA (2011, 2012 and 2014). Energy Policies of IEA Countries. Author’s note: The ‘Renewables’ category comprises shares of biofuels and waste, hydro, wind, solar and geothermal.

While the electricity portfolios of the UK and Hungary are arguably homogenous depending on oil and renewables, they differ considerably regarding the remaining exhaustible aggregated resource groups: the main discrepancy regards the place of natural gas and nuclear. The UK and Hungary are on seemingly different sides of the spectrum when it comes to nuclear (UK à 42%, HU à 16%) and natural gas (UK à 31%, HU à 46%). For nuclear power derived electricity, Hungary seems to be much more the culprit than the UK when checked against the EU average. Hungary’s dependence on nuclear energy for electricity generation is considerable with well over 40%. Conversely, the UK is extremely dependent on natural gas for power generation, more than twice as much than EU average

Total Primary Energy Supply in the EU, Hungary and The UK

TPES
Source: OECD/IEA (2011, 2012 and 2014). Energy Policies of IEA Countries. Author’s note: The ‘Renewables’ category comprises shares of biofuels and waste, hydro, wind, solar and geothermal.

Another disaggregated view at the energy portfolios of the UK and Hungary, this time focusing on their total primary energy supply (TPES) performances, reveals that they have equally high stakes in natural gas. What is interesting in connection with high shares of natural gas is that the UK has become popularly known for its so-called ‘dash for gas’. Dash for gas, in simply terms, relates to the commercialization and deregulation of the British energy – particularly the electricity – sector. This policy was heavily criticized in United Nations circles (BBC 2014) and remains a point of contention in climate change abatement discourse. In conjunction with the question over private versus public investment in energy technologies, the fact that natural gas made its mark is also due to (more) profitable short-term revenue streams which have made it a much more convenient hedge for generators. Vis-à-vis nuclear, this is particularly evident as long-term investment attractiveness has never favored its uptake.

Should economics and resource diversification be the overriding priorities for power generation? What about other priorities like the environment which are currently discussed at the 2015 Paris Climate Conference? States universally agree that energy policy has to undergo stringent reviews on a global scale, but ultimately the question is what will happen at the state level to limit anthropogenic impacts on our planet.

Bill Gates recently raised attention in his interview with the Atlantic (http://www.theatlantic.com/magazine/archive/2015/11/we-need-an-energy-miracle/407881/) arguing that the “[…] private sector is in general inept.” Gates, who owns the nuclear energy company ‘TerraPower’, referred to the sector’s inability to respond appropriately to the dangers of climate change. It is interesting to contextualize Gates’ view in the status quo of the global nuclear industry. Nuclear power has become an incredibly unattractive investment in the industrialized world, but not in emerging and less market-driven economies like China. Public sectors are responding differently to nuclear technology and rising energy demand, population, urbanization and economic growth are easily mistaken to define investment decisions.

For climate activists but policy makers alike the question should be what nuclear contribution to climate change abatement can be. This discourse should be held in industrialized and industrializing countries alike. The role of the EC in seriously questioning the validity of very costly energy projects is commendable and should not be discontinued, because nuclear, like no other energy technology, is just good. It comes with a plethora of negative aspects that need to be carefully weighed. For nuclear relies on an exhaustive resource, the long-term question must be: Is it still necessary?

Bibliography:

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Published by

Fabian Stricker

MSc applicant at UCL, UK. BA in Political Sciences from the University of Vienna, AUT. Founded the 'Nuclear Politics Study Program' alongside nuclearpolitix, its blog. Inaugurated the 2014 program with my friends and colleagues Clemens Binder and Dominik Rastinger from 12-16 May 2014. I thank them for their valuable support and guiding vision throughout this project.

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