On April 26, 1986, the meltdown of the Chernobyl nuclear power plant in Ukraine marked one of the worst-ever accidents in the history of the energy industry. The catastrophe seemed to confirm the worst expectations of the environmental movement, which had always warned against the ecological risks of nuclear power.
Thirty years later, the nuclear industry is facing a meltdown of a different kind: an economic meltdown.
“New nuclear – the economics say no” was the headline of a 2009 analyst report published by Citigroup. The bankers had taken a closer look at the financial viability of the proposed construction of nuclear power plants in the UK and concluded that five risks make it very difficult to invest profitably in nuclear: planning, construction, power price, operational and decommissioning risk.
They went on to conclude that each of the middle three of these risks alone would be enough to “bring even the largest utility company to its knees financially”.
Two years after the report was published, Citi’s claim was empirically validated. The meltdown in three reactors of the Fukushima Daichi nuclear power plant in Japan led to widespread contamination.
The event marked a human and environmental tragedy, but the magnitude of the financial loss – estimates of which range from $250 billion (CHF242 billion) to $500 billion – also forced the operating company, Tepco, into the largest government bail-out in Japanese economic history.
In some countries, the disaster led to a sharp rethinking of nuclear policy. Switzerland is a case in point.
Before Fukushima, the Swiss utility industry requested permission to build up to three new nuclear reactors. After the accident, the government shelved those plans.
Safety concerns were one factor, but economics have played a role, too. After all, insurance coverage of Swiss nuclear power plants is limited to less than CHF2 billion, a tiny fraction of the costs of the Fukushima or Chernobyl accidents.
And unlike the North of Japan or rural Ukraine, the surroundings of nuclear sites in Switzerland are densely populated. The country’s financial hub, Zurich, is just 30km from two of the oldest nuclear power plants in the world, Beznau I and II.
Leaving the risk of a large accident aside, what are the prospects of profitably operating new nuclear power plants under normal conditions? The UK experience suggests not very bright. The government’s call for tenders for a new nuclear power plant at Hinkley Point ended up with just one bidder: state-owned Electricité de France (EDF).
Such exclusivity does not come for free to British electricity consumers. EDF’s offer to build the plant was conditional on receiving a guaranteed price for the electricity produced. The government reacted with a subsidy that resembles feed-in tariffs used in many countries to promote investment in renewable energy.
While the level of feed-in tariffs has been reduced for wind and solar in countries like Germany and Switzerland to reflect technology learning curves, the price guarantee for nuclear locks in the opposite trend.
Starting at £0.0925/kWh (CHF0.13/kWh), being guaranteed for 35 years (almost twice as long as renewable feed-in tariffs) and indexed to inflation, the agreement is set to make nuclear power two to three times as expensive for the UK consumer as solar and wind over the lifetime of the plant.
Despite those remarkably favourable conditions, state-owned EDF was still not prepared to shoulder the project on its own, and brought in Chinese state-owned investors. As if he would agree with Citibank’s 2009 analysis, however, EDF’s Chief Financial Officer Thomas Piquemal resigned in March 2016 over concerns that the investment in Hinkley Point C could threaten financial stability of the company.
If financing new nuclear is not a straightforward proposition, what about just operating existing nuclear power plants a little longer?
For quite some time, the idea of sticking to the status quo has had political and economic appeal to governments and utility industry professionals.
One reason is the fat tail of the lifecycle cost distribution of nuclear power. Once a reactor has reached the end of its lifetime, the cost for decommissioning and storing nuclear waste for hundreds to thousands of years have to be borne. Utilities have a mandate to make provisions for this, but whether the funds will actually suffice remains to be seen.
When electricity prices were high, delaying the end of the lifetime was almost a licence to print more money from written-off assets. Notwithstanding the increased risk and repair cost of running ageing power plants, the decline in European wholesale power prices has made this argument less valid in recent years.
In Switzerland, a board member of nuclear power operator Axpo recently stated that, in the current price environment, nuclear operators lose money with every kilowatthour that they produce.
The fat tail of the cost distribution is a feature that nuclear power shares with other non-renewable energies – a painful lesson that Swedish utility Vattenfall had to learn when trying to sell its German coal-fired power generation assets.
The company saw its expectations for achieving a €2 billion (CHF2.2 billion) sales price tumble to potentially negative enterprise value amid concerns of potential buyers that decommissioning lignite mines and the requirement to buy carbon emission allowances would eliminate the firm’s basis to operate these assets profitably in the future.
The positive business case for non-renewable energies seems to come to an end. Thirty years after Chernobyl and five years after Fukushima, the economic meltdown of nuclear power should be a wake-up call for investors and governments. It’s time to invest in a cleaner energy future.
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