Energy Economics - fiddling with figures

An article by Rachel Morison relayed by Bloomberg notes that, due mainly to gas price rises, ‘wholesale electricity prices have pushed above 100 pounds ($139) per megawatt-hour for the first time since 2008. That’s higher than the guaranteed rate the government agreed Electricite de France SA would get for the power produced from the Hinkley Point C nuclear plant being built in southwest England’. So Hinkley is no longer an expensive energy option!

However, it’s a bit more complicated than that. The £92.5/MWh Contract for a Difference (CfD) strike price that Hinkley was given in 2013 is inflation index linked, so it would now be around £112/MWh, well above the £105/MWh the Bloomberg article quotes as the current market price. And no doubt inflation will push the Hinkley price even higher by the time it is running, in 2026 perhaps, while market prices may fall, as cheaper renewables spread. 

EDF did at one time talk about being able to reduce costs with a second EPR project at Sizewell, based on the experience gained from Hinkley, with a projected overall strike price of £89.5/MWh (in 2012 prices). That would convert to about £101.9/MWh in today's money, says Bloomberg, well below current market prices (£105). But that’s speculative-  who knows what the inflation index will be?  In any case, Sizewell C will probably be funded not by a CfD but under a RAB consumer tax approach (see below), not least since off-shore wind projects are doing so much better under the CfD system- and would wipe out nuclear if it was using a CfD. As the Bloomberg article notes ‘in the most recent auction in 2019, developers of offshore sites agreed to prices as low as 39.65 pounds a megawatt hour, adjusted for inflation’. i.e. 40% of Sizewell’s current-money cost. Subsequently we are likely to see even cheaper floating wind projects, with even higher load factors, well over the 63% claimed are possible from the best non-floating types.   So despite the fancy number crunching in the Bloomberg article, nuclear still looks to be in trouble.

Mind you, such low prices for renewables can lead to problems. Under the CfD system, generators have to pay back the difference (to consumers) if their generation costs are lower than the market price. And longer term, a report from Scottish and Southern Electricity noted that, the huge expansion of increasingly low cost wind power was likely to push wholesale electricity prices so low on windy days that most wind farms would be unable to cover their operating costs from selling power. Odd things competitive markets- with this so-called ‘market cannibalization’ being a perverse result of economic success. The nuclear industry is not exactly faced with that problem- its faced with high costs and an uncertain financial future. 

It is sometimes claimed that future nuclear technology will be cheaper, but so far that has not been the case. Certainty the vast costs over-runs (3-4 times original estimates) and very long completion delays (both over 10 years and counting) experienced by the first two European Pressurised Reactors (in Finland and France) hardy gives confidence for the future e.g. for the Hinkley variant, which is already over-budget and late. £22-23 bn is the current estimate. The only EPR successfully completed so far, in China, has just had to be closed for tests after fuel cladding-related radiation leakage problems. 

Uncertainties about the future like this are perhaps why the nuclear industry is keen on RAB, the Resource Asset Based financing approach, which allows it to raise capital for new projects by charging current consumers more for power from existing plants now - they take the risk of failure, unasked! New types of hybrid state and private funding may also emerge for some new higher risk projects e.g. for Small Modular Reactors like that being developed by Rolls Royce, and some claim that mass produced SMRs will be eventually cheap. It seems very unlikely, but we shall see. For example, will there be enough publicly acceptable sites for installing the large number units needed to make mass production viable?

Meantime, efforts will no doubt continue to disguise the high generation cost of nuclear. That it is high is certainly clear from the basic Levelised Cost of Energy figures from Lazard, which has nuclear in the range $129-198/MWh as against wind in the range $26-54/MWh and PV solar £24-38/MWh. However, although it might seem hard to compensate for that with even the most creative arithmetic, LCOEs are not the same as CfD strike prices. And some say grid balancing systems for high levels of variable renewables may add significantly to total system costs, depending on how it is done. In addition, load factors for offshore wind are improving, depending on location, load factors for on-shore wind, and for PV solar especially, can be low, much lower than for nuclear. 

The nuclear lobby also claims that nuclear power is ‘low carbon’, with good carbon-reduction cost-effectiveness. That’s a bit controversial, given that, unlike wind and solar, nuclear plants use a fuel the production of which is carbon intensive. Certainly the energy return on energy invested ratio (EROEI) for nuclear (15:1 at best and falling as available uranium ore grade quality decreases) is lower than for any renewable (solar up to 20:1, wind up to 50:1 or more, and rising), but when other material costs are added in, sometimes different cost/energy ratios can emerge, with some material-use estimates being more favourable to nuclear. Though needless to say, like EROEI comparisons, these are all very contentious areas of analysis, depending, for example, on assumptions about system boundaries and backup/balancing requirements. New technologies are emerging in all areas, including nuclear and also for grid balancing, so current total cost assessments and comparisons may not be useful guide to future system costs. 

Optimistically you might say renewables are bound to come out on top, given that they use relatively simple technology to extract power from natural energy flows. So, as lower cost renewables win out, energy costs should fall, even when balancing costs are added.  Indeed, some balancing technologies can reduce system cost by matching energy supply and demand more efficiently.  More cynically, you might say that the bottom line is that, given that it was cheap to use dirty fuel, energy will cost more as we switch to other options. Indeed, some say that will be inevitable, whatever route is taken. But surely the type of energy extraction and its eco-impacts will vary with each route- and that will impact on costs? 

Well, we may see…though be warned, energy and environmental economics can be very  contentious, as witness the rival claims of the Climate Change Committee and the Global Warming Policy Forum over the cost of the transition, leading to a dispute over data which recently entered a new legal phase.