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Still Another Know-It-All Handout on the Economics of Nuclear Energy

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
March 18th, 2014

"Wir Spielen mit dem Feuer" (We're playing with fire), is Peter Ramsauer's opinion of Germany's Nuclear Retreat. More will be said about this later, but first some numbers that you should always have at your fingertips. If predictions based on present trends can be accepted, global energy use will increase by at least 50 percent in the next 50 years. In addition - if we confine ourselves to 'statics' - then according to Professor Terry Klieg, 15 percent of the electricity that is generated today in the world is accounted for by nuclear, 66 percent by fossil fuels, 17 percent by hydro, and 2 percent by renewables (which might be too low an estimate). If it is too low, then some minor adjustments are in order, though it is very unlikely that on the global level, at the present time, renewables exceed 4 or 5 percent.

What we need to deal with is not statics but 'dynamics', and I begin by saying that globally there is no evidence whatsoever that the percent of electricity being generated by nuclear is declining, despite lies and misunderstandings to the contrary. I also want to claim that about mid-century, Japan and Germany could be the most nuclear intensive countries in the world, regardless of their present hesitation to employ nuclear, and also the likelihood of an increased efficiency for renewables. For instance, something that will not happen is the percentage of renewables reaching the absurd proportion that the European Union's Energy Directorate regards as desirable for the next decade, and if the 'WAR ON POLLUTION' just declared by the Chinese government becomes a 'World War' (on pollution), the role of nuclear will escalate.

According to the Japanese government, there were no casualties at Fukushima that can be attributed to nuclear failure, which was also claimed by the Swedish diplomat and nuclear expert Hans Blix; and according to the U.S. government, no fatalities at all were registered at Three-Mile Island, although that incident was either a full meltdown or as close to a full meltdown as it is possible to come. As for Chernobyl, the casualty count supplied by the Russian government is not something I repeat because it may be wrong. Finally, there are more than 400 reactors in operation today, and a prediction I accept is that there will be more than 500 in a decade or sooner!

Now for some information supplied by perhaps the most articulate nuclear executive, Malcolm Rawlingson (in Energy Pulse), but which is unlikely to register with economists who lack the ability to apply elementary economic theory to the real world. The firm Atomic Energy of Canada (AECL), together with the Chinese, have constructed two large CANDU reactors at Qinshan (China), both under budget, and each in under 4 years. The conclusion drawn by Rawlingson (and myself I might add) is that this achievement demonstrates what is possible with nuclear technology, and in fact would be common practice in e.g. the U.S. today if decision makers in that country abandoned show-business and learned how to think. My research and lectures in the future will focus on popularizing the construction period of 4 years, and my students must always be prepared to explain the economic significance of construction periods for me and their colleagues whenever they are in my classroom, and that includes putting the relevant algebra on the white or black board.

In citing 4 years (and using the expression under budget once more), I feel the way I felt almost every day after I returned to engineering school after a beautiful 3 year holiday in the American army, and while luxuriating in the memory of how I failed everything my first year (and was labelled hopeless and expelled by the Dean of Engineering), I breezed through the remainder of my engineering education. Congratulations Fred, because that win taught me everything that I needed to know about my future relationship with mathematics, just as the 4 year construction time at Qinshan tells me everything I need to know about nuclear, and would tell everybody else if they were not influenced by the wrong people and/or the wrong publications.

What about the other construction periods that we hear so much about. Ex ante (or before the fact) construction periods of 5 years were mentioned for the 1,600 Megawatt reactor in Finland constructed by the French firm Areva, who signed a contract for a similar reactor at Flamanville (in France). Ex Post, (or after the fact) both of those projects seem to involve at least 8 years instead of the intended 5, while 5 years is still the often mentioned construction period for 4 reactors in the United Arab Emirates (UAE) that are to be constructed by a South Korean firm. The first is on time and on budget. At the Singapore Energy Week a few years ago, an English gentleman who apparently has a financial interest in solar suddenly fell into a 'tizzy' when exposed to my optimistic opinions about the present construction periods for large reactors, and how the technological improvements on reactors (particularly higher temperatures and closing the fuel cycle) will greatly increase their value, and also the value of renewables by increasing the overall reliability of the electric supply.

He grandly informed me that "they" said the construction period for reactors was 10 years. That sort of thing doesn't surprise me any longer, because the two reactors at Hinkley Point in the UK will reputedly cost almost 10 billion dollars each, and since they may not be on line for a decade after construction starts, deserve to be called the most expensive reactors on the face of the earth. Once I would have laughed at the idea of a nuclear facility taking this long to construct, but 10 years covers more than construction - it also covers incidentals like planning, obtaining licenses and loan guarantees, and most important the willingness of governments in the U.S. and many other countries to fight the 'energy wars' with one hand behind their backs! I can also provide an observation by Charles D. Ferguson, president of the Federation of American Scientists, "Depending on reactor design, financing charges, the regulatory process and construction time, the cost of a nuclear facility ranges from 4 billion to 9 billion dollars."

You should make it your business to comprehend that the most pertinent issue for owners and/or managers of nuclear facilities is not the cost of a reactor, but the part that cost plays in an inter-temporal profit maximizing exercise of the type described in the best microeconomics textbook - Microeconomic Theory; A Mathematical Approach - by James Henderson and Richard E. Quandt (1980). Moving from 'ground break' to grid power in 4 years is a superb economic achievement, because it means that recouping the investment cost of the facility begins after 4 years instead of 5 or 6 or 9 or whatever, It also suggests - to me at least - that it is only a matter of time before large reactors can be constructed in 3 years, especially in China and Russia.

Malcolm Rawlingson noted that China put 11 reactors on line in 2013 alone, and there are 30 under construction in that country. The prediction of a total of 100 Chinese reactors constructed in this century has also been bandied about, and needs to be taken seriously, because the energy those reactors can provide will be used to improve the already impressive competitiveness of the Chinese economy, which among other things means financing their demand for foreign energy resources. In addition, Chinese households now pay only a third of the unit price for electricity as is paid in Germany.

Rawlingson also dislikes the term 'nuclear waste', which as he points out is not waste but "a huge source of power for the future, since most fuel bundles burn only a very small amount of the fissile U-235 isotope, which means that a very large amount of energy is still to be found in what has erroneously come to be known as 'waste'." Of course, there will be plenty of fuel for reactors when U-238 can be optimally exploited.

PROOF

Proof is the title of a trashy film (and stage play) in which a professor - apparently at the University of Chicago, and in the final days of his life - reaches the conclusion that he can supply proofs for some goofy mathematical play-acting that might remind friends and neighbours of his long-lost genius, assuming of course that he can publish this delusory garble in the kind of (mostly unread) 'learned' journals that supply both meaning and dimension to the lives of many academics.

By way of contrast, I neither want nor need a proof of what nuclear has to offer, and if I did I would begin in Germany, where reactors are being turned off at the request of Chancellor Merkel. Here I use some information from a brilliant article (in Swedish) by Björn Lomborg (2014), although the only difference between his observations, and those employed by Yours Truly in my lectures are some numerical results. The next time I teach I will extend his remarks though by harping on the insistence by 139 executives and insiders that Ms Merkel's Energiewende is destructive for German industry, although just as important is Lomborg's contention that household electricity prices in Germany are almost 48% above the European average, despite the enormous subsidies paid by to prevent price rises.

This is what is known in the U.S. as a 'double whammy', since the main impact of this price increase is against low income families, who in one way or another are severely inconvenienced by the German subsidy farce. In reality though we might have a triple whammy, since according to Bill Payne in Energy Pulse (2014), "in the real world the Germans are at 23% renewables and have massive grid stability problems." I am sure that he is correct about the stability/instability issue, although 23% sounds to me like something dreamed up by economists and 'strategists' who believe that that the noble presence of large amounts of renewables on German soil might compensate German ratepayers for the embarrassment of being made fools of by the political process,

A more important observation comes from Jeffrey Michel, an MIT graduate who is an important energy economist in Germany. He says that "not even 10 percent of the transmission lines have been built in Germany that would be required to replace nuclear power by offshore wind generation - mathematically if not with the same reliability." I can add something to this. The same economists and strategists referred to above have likely informed Ms Merkel that the way to offset a deficit in domestic electric power is not to rely on wind turbines in the Baltic or the sun shining over the Reeperbahn, but to utilize nuclear and fossil fuel equipment in neighbouring countries.

The ostensible purpose of the Energiewende was not just to save German citizens from clear and present dangers posed by earthquakes and tsunamis of the type that have not been experienced in that country since the Stone Age, or earlier, but to reduce pollution and demonstrate that nuclear is unnecessary for maintaining the standard of living. Where pollution is concerned, proportionally more coal is now burned in Germany than was the case in the hey-days of the German Democratic Republic (= East Germany). Moreover, the (unspoken) judgment that importing electricity from surrounding countries could offset the relative inefficiency of 'green investments' in Germany was inaccurate, and instead has resulted in the appearance of the kind of 'energy poverty' experienced by many households in the UK, and for which the former Conservative prime minister Sir John Major has blamed the present UK government.

Once again the matter of proof surfaces, and along with emphasizing a 4 year construction period for nuclear in China, you can add the following for what happens when nuclear capacity decreases, but an attempt is made to maintain the national product. Although the largest importer of liquefied natural gas (LNG) in the world, Japan is now importing even more LNG, and has also increased its imports of coal and oil in order to generate the energy lost due to shutting down its reactors. What they are doing is replacing nuclear by fossil fuels and not renewables, because unlike Germany they already realize that attempting to replace nuclear by renewables is madness.

Moreover, the Japanese trade deficit in 2013 was the largest in recent memory, and according to an estimate cited by Nick Cunningham, the cost Japan pays for keeping its reactors turned off is 96 million dollars per day. If social costs are included it is more, although I see no reason to claim that this amount is ruinous. Instead I would like to point out that an extra 96 million dollars per day, invested in obtaining more highly skilled graduates from secondary schools specializing in technical subjects, makes a lot of economic sense for a country like Japan - and other countries as well.

A CONCLUSION

The graph of lignite usage per capita reveals that Greece burns more of this fuel than anywhere else on earth. Being among the EU countries with the greatest amounts of sunshine is no guarantee that solar energy will be used to produce electricity. The reverse seems to be true, that inexpensive abundance will generally be retained.

- Jeffrey Michel

Jeffrey Michel has a problem with lignite, and so might you if you also lived in Germany, and understood as he does that it can be very nasty stuff. Moreover, in addition to already burning a lot of it in Germany, it is more likely that the amount used will increase rather than decrease, even though increasing numbers of environmentalists have started concluding that nuclear might be a better option, and increasing numbers of reports are appearing which state that the German economy could go completely off the rails if the new energy arrangements in that country are not dumped.

I perhaps should also note that German power companies generating electricity with natural gas are losing money because of the manner in which the subsidy farce works, and this is very bad news because a (fast-start) 'backup' is essential for wind and solar due their lack of reliability. I used the expression 'energy poverty' above, which in the case of Germany means that tens of thousands of persons could not pay their energy bills this winter, and apparently had their electricity shut off. Jeffrey Michel has also treated this subject. He confirms that the price of electricity for households in Germany is only exceeded by Denmark and Hawaii. Thanks to the curse of electric deregulation that price is also high in Sweden, and thanks to German imports of electricity it will soon be higher - unless the Swedes smarten up and begin taxing electric exports.

The matter of instability will bother some of my future students, but it simply means that the availability and strength of wind and solar power are unpredictable, and having to deal with e.g. frequent overloads is technically and economically unpleasant. Moreover in theory - and perhaps in fact - some producers might have to be paid not to produce.

I also claimed that the nuclear intensity in Germany and Japan could be the highest in the world at mid-century. The reason is that they have started to receive a lesson in what a nuclear retreat is all about - i.e. what it means - and if they now find this lesson difficult to comprehend, it will become clearer in the future because of what that retreat will eventually mean for the incomes, welfare and lifestyles of many families.

REFERENCES

Abraham, Claude and Andre Thomas (1970). Microéconomie: Decisions Optimales dans l'entreprise et dans la nation. Dordrecht (Holland): D. Reidel.

Amaha, Eriko and Stephanie Wilson. 'Japan's Tepco submits new business plan to boost LNG imports'. Platts.

Banks, Ferdinand E. (2014). Energy and Economic Theory. Singapore, London and New York: World Scientific (forthcoming).

______. 2007. The Political Economy of World Energy. London, New York and Singapore: World Scientific.

Henderson, James M. and Richard E. Quandt (1980). Microeconomics Theory: A Mathematical Approach. Tokyo and New York: McGraw Hill.

Lomborg, Bjorn (2014). 'Tysklands avskrackande energipolitiska exempel.' Svenska Dagbladet. (Sondag, 9 March).

Michel, Jeffrey (2014). Haushaltsstrompreise in Deutschland, 2013. Stencil.

Khaleel, Shehu (2012). 'Post Fushima disaster: the fate of nuclear energy'. Energy Pulse (March 20),

Mittal, Lakshmi (2014). 'Rewrite energy policy and reindustrialize Europe'. The Financial Times (Tuesday, January 21st).

Sovacool, Benjamin K. (2010). 'Questioning a nuclear renaissance'. Lee Kwan Yew School of Public Policy (Singapore


Professor Ferdinand E. Banks
ferdinand.banks@telia.com
March 18th, 2014