nuclear power economics: electricity markets, policy goals ... · maintaining high levels of...

© 2018 Organisation for Economic Co-operation and Development

Dr. Sama Bilbao y Leon Head of the Division of Nuclear Technology Development and Economics

Nuclear Energy Agency (NEA)

World Nuclear Spotlight Poland Warsaw, Poland, 20-21 November, 2018

Nuclear Power Economics: Electricity Markets, Policy Goals and Economic

Realities


NEA: A forum for co-operation Helping Governments Address Global Challenges

• To assist its member countries in maintaining and further developing, through international co-operation, the scientific, technological and legal bases required for a safe, environmentally sound and economical use of nuclear energy for peaceful purposes.

• To provide authoritative assessments and to forge common

understandings on key issues as input to government decisions on nuclear energy policy and to broader OECD policy analyses in areas such as energy and the sustainable development of low-carbon economies.


Some recent NEA publications on nuclear energy economics

© 2018 Organisation for Economic Co-operation and Development 4

• A complete reconfiguration of the electricity generation system is needed by 2050. • Rise of nuclear is accompanied by a complete phase-out of coal and oil, a drastic decrease

of gas, development of CCUS and a massive increase of renewable energies. • Colossal investments for the energy sector: 40 trillion USD + 35 in energy efficiency • Implications for nuclear power plants operations and overall competitiveness?

Global electricity production and technology shares in the IEA 2DS

Source: IEA, ETP2016 17% fossil fuels 67% renewables 16% nuclear

68% fossil fuels 22% renewables 11% nuclear

533 gCO2/kWh 40 gCO2/kWh


• Low carbon electricity to play a key role in future energy markets – Electrification of transportation – Electrification of the industrial sector – Electrification of buildings (heating/cooling)

• New narrative: Decarbonization of electricity markets

– All fuels and all technologies – Energy efficiency – Carbon capture utilization and sequestration (CCUS) – Storage – Nuclear power – Yet, renewables (Wind and Solar) are expected to lead

• New challenges

– Need for improved infrastructures to ensure interconnectivity – Need flexibility - interconnectivity is not enough – Need market mechanisms/signals to invest in new flexibilities & capacity – Large level of coordination in policy and regulation

Electricity as the centerpiece of future energy markets

Graphic: Courtesy of EPRI


Full Costs of Electricity

Accounting for full costs informs public debate but cannot substitute for it. Social and political discussions will give different weights to different variables in different countries

Plant-level production costs at market prices

Grid-level costs of the electricity

system

Social and environmental costs of emissions, land-

use, climate change, security of supply,

etc.


Plant-level Costs


New nuclear cost competitiveness

0

20

40

60

80

100

120

140

OCGT CCGT Coal Nuclear Wind - Onshore Solar

Leve

lised

Cos

t of E

lect

ricity

gen

erat

ion

(USD

/MW

h)

Investment O&M Fixed O&M Variable Fuel Carbon

• All low-carbon technologies are very capital intensive

• The cost of capital and the financial schemes used are critical factors

• Predictable construction schedule through effective project management and robust supply chain is indispensable Levelised Cost for Plants Built in 2020

Source: NEA


Plant-level Production Costs

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20

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60

80

100

120

140

160

NuclearNuclearCoalNuclearCCGT

3% 7% 10%

CoalCoal

LCO

E (U

SD/M

Wh

)

Median

CCGT CCGT

0

50

100

150

200

250

300

350

400

3% 7% 10%

Resi

dent

ial P

V

Com

mer

cial

PV

Larg

e, g

roun

d-m

ount

ed P

V

Ons

hore

win

d

Offs

hore

win

d

Resi

dent

ial P

V

Com

mer

cial

PV

Larg

e, g

roun

d-m

ount

ed P

V

Ons

hore

win

d

Offs

hore

win

d

Resi

dent

ial P

V

Com

mer

cial

PV

Larg

e, g

roun

d-m

ount

ed P

V

Ons

hore

win

d

Offs

hore

win

d

o Large regional differences are observed. o Nuclear is the lowest cost options for all countries at 3% discount rate; median cost

of nuclear is slightly lower than coal or gas at 7%, but is higher at 10% o VRE cost reduction have been impressive and they are no longer cost outliers.

Further (significant) cost reductions are expected.

Dispatchable Generation

Source: EGC (IEA/NEA, 2015)

Variable Generation


Sanmen units 1 and 2 (Image: SNPTC) Barakah unit 2 (Image: ENEC)

Taishan 1 (Image: CGN) Novovoronezh II-2 (Image: Rosatom) 10


Social and Environmental Costs


Social and Environmental Costs of Electricity

• Air pollution • Water pollution • Climate change • Land use • Water use • Loss of biodiversity

• Energy security • Education • Employment • Economic development • Spin-off technology and industrial

development


The un-internalised social costs of electricity provision remain large Even if large uncertainties remain, the vast majority of studies converge: The un-internalised social & environmental costs of coal and biomass are larger than those of oil and gas, which are larger than social costs of nuclear, hydroelectricity and renewables.

Air pollution, climate change and system costs are the largest social costs o Largest impacts do not receive high attention in public debate and policy-making. o Climate change risks receives much attention but little concrete action! o High concerns about resource depletion and nuclear accidents, where verifiable impacts

are comparatively low.

To internalise social costs a number of effective measures exist: o Prices, taxes and subsidies, markets for emissions. o Norms, standards and regulation. o Information, measurement, allocating responsibilities and use rights.

Recreate momentum for systematic research on full costs of electricity.

Act effectively where benefits of internalisation are larger than the cost.

Policy implications to internalise social costs


Grid-level System Costs


Three Main System Effects

15

Source: L. Hirth

• System effects are technology- and country-specific, and depend on penetration level. • Crucially important is the time horizon, when assessing economical cost/benefits and

impacts on existing generators from introducing new capacity. • The costs of grid-level system effects remain difficult to assess and can be understood

and quantified only by comparing two systems.

Profile costs Balancing costs Transmission and distribution costs


Grid-level system costs

Grid-level System Costs for a grid with 10% and 30% of Variable Renewable Generation Source: OECD/NEA


Total costs of generation, including all system costs

o Estimate of total cost of electricity provision, including other components of system costs from literature (T&D, connection and balancing).

• Left: total costs of electricity provision (Billion USD/year) • Right: system costs calculated per unit of electricity generated by VRE.

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10

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40

50

60

Reference No Intc No Intc, no hydro

10% VRE 30% VRE 50% VRE 75% VRE

Syst

em c

ost

s (U

SD/M

Wh

VR

E)

Profile Costs Connection Costs Balancing Costs T&D Costs

0

10

20

30

40

50

60

70

Reference No Intc No Intc, nohydro

Base Case 10% VRE 30% VRE 50% VRE 75% VRE

Tota

l Co

sts

of

elec

tric

ity

gen

erat

ion

(B

illio

n U

SD/y

ear)

Generation Costs Profile Costs Connection Costs Balancing Costs T&D Costs


Total costs of generation

o The cost of generation increases with the share of VRE deployed in the system. o The most efficient policy measure to achieve carbon emission targets is the adoption of a

carbon tax, without selecting specific technologies.

0

20

40

60

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140

Reference No Intc No Intc, no hyd

Base Case 10% VRE 30% VRE 50% VRE 75% VRE Low Cost VRE

Gene

ratio

n Co

sts (

USD/

MW

h)

+17% +35%

+73%

-3%


Towards a more capital intensive generation mix

o A low-carbon generation mix is inevitably more capital intensive than current mix. o The choice of low-carbon technology has impact on the ratio fixed/variable costs. o Ratio fixed to variable costs has an impact on the financial risk faced by investors and on the structure

and volatility of electricity prices

0%

20%

40%

60%

80%

100%

Current OECD Base Case 10% VRE 30% VRE 50% VRE 75% VRE

Gene

ratio

n co

st str

uctu

re (%

of l

ifetil

me c

osts

)Investments Fixed O&M Variable

Low-carbon scenarios


Policy Implications I

20

Radically decarbonising the electricity sector 50 gCO2/kWh in a cost-effective manner while maintaining high levels of security of electricity supply requires specific policy measures. This is primarily due to the high capital intensity of all low carbon solutions for electric power generation. The NEA System Costs study has identified five pillars of a relevant policy framework:

1) Carbon Pricing Carbon pricing is an indispensable complement of decarbonising electricity supply. a) Carbon taxes are economically efficient and provide price certainty but will increase the cost

of electricity supply. b) Emissions trading is an attractive alternative but makes for uncertain prices.

2) Competitive Short-term Markets a) Energy-only markets (EOM) proven to be effective for the cost-efficient dispatch of

generators. b) However, they are providing an inadequate framework for generating sufficient investment in

new generation capacity. c) Hours with zero or even negative prices are not a sign of malfunction but an indicator that

there is excess electricity production in the system (and misaligned incentives).


Policy Implications II

21

3) Frameworks for long-term investment in low-carbon technologies Capital-intensive low-carbon generation capacity requires special financing frameworks providing certainty to investors. These may include regulated tariffs, contracts for difference (CFD), feed-in tariffs (FIT), feed-in premium s (FIP) or direct capital costs support (e.g. through loan guarantees). This gives huge new responsibilities to regulators and network operators. They will have to pay attention, in particular, to the system value of different options, as market prices and investment decisions are correlated only when using FIPs or direct capital support.

4) Adequate provision of capacity, flexibility and infrastructures for transmission and distribution

Low carbon electricity systems, especially with VRE, require added flexibility resources. The latter include dispatchable generation capacity for high demand-hours, storage and demand response. All flexibility resources require tightly meshed and robust transmission and distribution networks. NB: All flexibility resources also have high ratios of fixed to variable costs, which again poses the question of appropriate financing mechanisms.

5) Internalising system costs System costs such as profile costs, balancing cost as well as grid connection and extension costs accrue frequently outside the cost perimeter of the plant that generates them. Appropriate rules (exposure to market prices, balancing obligations, connection costs) can however totally or partially internalise them and avoid over-investment in high cost options.


Thank you for your attention

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