Jumping to conclusions

by Andrew Teller

There isn’t a day without the publication of a document purporting to demonstrate that nuclear energy is not worth it. The latest one I came across was penned by a Mr Craig Severance, CPA ¹, under the title “Business Risks and Costs of New Nuclear Power”. It was posted on the Internet on 7 Jan 2009 and can be easily found, should you wish to see it, by feeding your favourite search engine with the keywords “Craig Severance” and “Business risks”.

This 37-page-long paper claims to show that the cost of the electricity that will come from new nuclear power plants will be in the 25 – 30 cent/kWh range. Not only is this three times as much as the current U.S. electricity rates but also twice as high as the highest nuclear kWh costs quoted elsewhere. How does the author proceed? His starting point is another report: Lazard’s Levelized cost of energy analysis, version 2.0, published in June 2008 (also available on the Internet). This report provides an update of the kWh cost of all the energy sources currently considered for electricity generation. Lazard’s estimate for nuclear electricity is in the 10 – 13 cents/kWh range (2007 USD). Mr. Severance then takes different assumptions for the evaluation of future nuclear projects. He introduces in particular a construction cost escalation factor of 8 – 9% per year, a 3% inflation rate and a sizeable interest rate that I have not been able to link to his input data. The net result is a kWh cost between 25 and 30 cents. Since the author was happy to rely on the figures provided in Lazard’s analysis for all other energy sources, he felt entitled to conclude that future nuclear energy will be more expensive than electricity from virtually any other source.

As could be expected, the document has received positive reviews from anti-nuclear websites (those that like its conclusions) and critical ones from the pro-nuclear nuclear (those that do not like them). An example of the latter type of review is provided by the Nuclear Energy Institute, also to be found on the Internet with the above keywords. Promoters of nuclear energy would be tempted to identify all the assumptions in the said publication that look questionable in order to show that its conclusions are invalid. Since this would end up in an endless battle over figures, I decided to try another approach.

When developing an assessment methodology, it is always advisable to test it on various cases to get a better feel for what it is up to. Such precaution is even more necessary when the results obtained are noticeably different from those previously obtained. The said paper focussing on nuclear energy only, I decided to find out what it could lead to if applied to wind energy. It then became immediately apparent that Mr. Severance was using Lazard’s results out of context. The figures for renewable (meaning here interruptible) energies he took onboard are valid for a marginal addition of installed capacity, i.e. for an addition that does not substantially alter the global fleet’s capacity of matching supply to demand. But when one advocates foregoing the nuclear option in favour of a massive introduction of interruptible production means, this procedure is not valid any more. One must take the fact into account that nuclear power plants are available 90% of the time while for wind mills it is about 30%. For good measure, one might as well also include in the comparison the life duration of the energy sources: 60 years for nuclear and 20 years for wind machines. Furthermore, one must acknowledge the fact that wind farms take longer to build than individual wind machines: a 1000 MW nuclear power plant is equivalent to 500 wind machines of 2MW. Inflation and cost escalation will therefore also impact the bottom line of a wind farm project, albeit at a constant rate. Finally, the construction cost escalation factor applied to nuclear applies even more to wind since the latter’s consumption of steel and concrete are roughly 11 and 4.5 times as high as for the former’s.

When all the above factors are integrated in the analysis, one comes to the conclusion that wind might well end up again being more expensive than nuclear. The only firm deduction from Mr. Severance’s paper is that, if inflation and construction costs do indeed increase at the rate assumed in it, electricity coming on line in 2018 will much more expensive than today’s, whatever its origin.

One might wonder why major elements affecting the outcome of comparisons between energy sources are so often ignored by non-technical researchers². This question actually leads to interesting developments, which will be the topic of this column in the next issue.

¹ Certified Professional Accountant