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On the Sunny Side of the Nuclear Street

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
February 3rd, 2011

This note is a preview of the keynote address I want to present at the 2011 international conference of the International Association of Energy Economists (IAEE), which takes place in sunny Stockholm this coming June. This assumes that I will be invited to present a keynote address, or allowed to give any sort of address, or for that matter will be permitted to just wander through the corridors of the magnificent building in which those noble proceedings will take place.

Should exclusion be my fate however, I doubt whether I will complain, because some of this preview has already been published in Concordiam, which is a journal sponsored by the George C. Marshall European Center of Security Studies, that in some ways might be described as an organization dedicated to keeping the spirit of the Cold War alive. Therefore, if any pique emerges because I elect to make my thoughts available to a wider audience, and I return to the United States in the near future, it might be arranged for me to give a charismatic lecture to a distinguished seminar at the Guantanamo Detainment Center.

I fear that even with permission from the conference bosses to take part in the Stockholm gig, it is not certain that I will receive the exposure and ovation I desire and almost certainly deserve. For example, I intend to insist that in the medium to long run, nuclear is the optimal source of base-load electric power because it is the most reliable and, surprisingly, the most flexible. I will also make a few choice remarks about the curse known as the deregulation of electricity, because the gentleman who is masterminding this conference and at least one of the sponsors are in various ways responsible for the ruinous electric prices now being experienced in Sweden.

THE BASIC ARGUMENT

In talks that I presented at the University of Siena (Italy) and the University of Paris, I took the liberty of explaining why a peaking of the world oil supply was certain, and conceivably sooner rather than later. In the course of those expositions I also made clear that when the price of oil could touch one hundred and forty-seven dollars a barrel (= $147/b) in 2008, and experts claim that a price in excess of $100/b is possible in the near future, it seems appropriate to keep in mind that even if a peak never takes place, a flattening of the global oil output curve will have an unpleasant psychological as well as economical significance, and the resulting macroeconomic stresses in all except a few very lucky countries could mean output and employment dislocations at least as great as those following the oil price upsurge of 2008.

The question now becomes what does this have to do with nuclear energy, and the short answer is everything. In both a real and abstract sense oil is a benchmark for the world energy economy, and so rational world immediate and perhaps dramatic steps would be taken to reduce the vulnerability of industrial countries to periodic sustained increases in the price of oil. The claim here is that additional nuclear is the most economical source of the extra energy needed to provide a supplement to the non-nuclear energy diversity on which the future prosperity of industrial countries must be built.

Diversity is a controversial concept, because it can mean radically different things to different individuals. In a brilliant and easily read article, Richard Rhodes and Denis Beller (2000) say the following: "Because diversity and redundancy are important for safety and security, renewable energy sources ought to retain a place in the energy economy of the century to come". By itself, this statement is enough to warm the heart of every environmentalist between Stockholm and the Capetown Navy Yard.

But they continue by insisting that "…nuclear power should be central. Nuclear power is environmentally safe, practical and affordable. It is not the problem - it is one of the solutions."

One of the solutions! I wonder what Mr Axelsson, the director of the Swedish Naturvårdverket (which in the lingo of George Orwell resembles an indoor welfare scheme) will have to say about that assertion if he pays a visit to the lecture room in which I am giving my keynote song and dance. (Note: Naturvårdverket = Environmental Protection Agency.)

Axelsson once published an article in a Stockholm morning paper which included some mathematics that would have been graded unsatisfactory in a first-year remedial class at Boston Public. He was attempting to show the economic advantages of liquidating the Swedish nuclear sector and replacing it with wind turbines, although he must know that the cost of electricity, which in Sweden is determined by nuclear and hydro, has been among the lowest in the world, while the cost (and price) of power in Denmark - perhaps the promised land of wind energy - is among the highest. What he might or might not know is that while Swedish managers and engineers are sometimes capable of singing the praises of wind and solar in public, in private they have roughly the same opinion of them as I do: a certain amount of these items may be justified, but only as appendages to a more reliable source of power.

The attempt to introduce wind and solar on a large scale in many countries or regions of countries hardly deserves to be called insane. As things are fortunately turning out, the anti-nuclear booster club is unexpectedly loosing its authority in one of its most important strongholds, by which I mean Holland. That one-time standard bearer of libertarianism and political correctness now has a government which ridicules the subsidies required to keep windmills turning, and proposes to address the nuclear option.

Moreover, since the capacity factor for wind in Sweden is at most 25 percent, an expensive backup for wind will have to be made available. Fortunately, none is available, planned for, discussed formally in learned seminars or informally in discourse that can be sweetened by Abba-like music, and so I feel comfortable in stating that any calculation in Sweden showing wind as having any sort of a cost advantage over nuclear will eventually be characterized as preposterous.

A FINAL COMMENT

In a long and complicated article in the Energy Journal (2006), 5 important energy researchers present an argument for nuclear power as a hedge against uncertain fossil fuel and carbon prices. That article also contains some helpful information about the cost of nuclear power during the years 2005-2006, or perhaps slightly before. Some unexpected increases may have taken place since that time, where I am thinking in particular of ex-ante and large ex-post costs associated with the European Pressurized Reactor (EPR) that is being constructed in Finland, and which in terms of capacity (= 1600 megawatts) is the largest reactor in the world.

The trouble in Finland is really quite simple. It is a 'one-of-a-kind' - or 'custom built' - reactor. In a decade or so reactors of that size, and larger, will almost certainly be standardized, largely put together (i.e. assembled) in factories, and should cost much less. The final cost of the present reactor might come to 8 billion dollars (mostly resulting from the construction/installation time being 8 years), and as I was informed recently, the firm in charge of delivery/installation - Areva, of France - will have to "eat" 3 billion of that amount. There might also be some cultural problems due to the project's multinational 'general staff'..

Madame Lauvergeon, the director of Areva, is clearly not pleased with these developments, but although she has not commented in detail on any contretemps that may have surfaced during the Finnish venture, she has expressed some apprehension about the reported ability of Chinese firms to put a 1000 megawatt reactor in operation from 'ground break' to 'grid power' in less than 5 years (and its 'life' would be 60 years - or in my opinion more). According to estimates in my new energy economics textbook (2011), the 'overnight cost' of these reactors could be as low as 1500 dollars per kilowatt. If true this means that the 'workshop of the world' has found still another niche which can help the Chinese government to realize its goal of directing the most competitive economy in the world.

Something of particular interest to me in the Energy Journal article mentioned above was the following statement. "The Finnish experience shows that if well-informed electricity-intensive end users with long time horizons are willing to sign long-term contracts, then nuclear new build can be a realistic option in liberalized markets". This is almost - but not quite completely - correct, and as a result I have exchanged opinions with one of the authors of that article, politely explaining to him in scholarly language that "liberalized" (i.e. restructured) electric markets are 'offbeat' or 'goofy' or 'wacko' or 'off-the-wall' and without a foundation in conventional (or non-voodoo) economic logic.

What I did not make clear to that gentleman was that his ride on the electric deregulation gravy train is essentially over as a result of skyrocketing electric prices virtually everywhere. Moreover, as energy economics researchers might eventually find out, when electric generating facilities of 1600 MW capacities, or larger, become a rule rather than an exception, the kind of electricity prices that a Swedish blogger in the important forum Seeking Alpha called ruinous will finally be removed by economic logic from the clutches of people whose mentality is similar to those ladies and gentlemen that former governor of California Gray Davis called "out of the state criminals".

References

Banks, Ferdinand E. (2011). Energy and Economic Theory. London and Singapore: World Scientific.
_____.(2009). 'Some Energy Myths for the 21th Century'. (Conference paper). Roques, Fabien and William J Nuttall, David Newbery, Richard de Neufville, Stephen Connors, (2006), 'Nuclear           power: a hedge against uncertain gas and carbon prices. The Energy Journal (No. 4).

Professor Ferdinand E. Banks
February 3rd, 2011
ferdinand.banks@telia.com