Politically feasible carbon pricing is not likely to provide the long-term revenue needed to support existing or new nuclear power projects. Instead, project-specific activities should be undertaken to keep existing nuclear in operation and to drive investment in new nuclear power plants - with the cost of these activities recovered as a cost of controlling carbon, writes Edward Kee.
Economic analyses of nuclear power projects reflect carbon price revenue, but only as a low-probability upside scenario for equity investors. The benefits, timing, level and certainty of carbon prices will need to change if nuclear power project investors and lenders are to consider carbon price revenue as a key part of project economics.
Carbon prices provide no direct benefit to nuclear power, but increase the cost of fossil fuel electricity in ways that may result in indirect benefits for nuclear power. Higher costs for combustion-based electricity due to carbon prices will make nuclear electricity appear more competitive for traditional electric utilities.
Carbon prices will increase system marginal prices in electricity markets that will increase electricity costs for consumers and increase revenue for nuclear power plants. Increased nuclear power revenue will not be associated with increased carbon tax revenue, complicating plans for a revenue-neutral carbon tax scheme and raising the potential of windfall profit taxes on nuclear (as, for example, in Finland). When electricity market prices are low or negative, carbon prices will provide no benefit to nuclear power plants.
The timing of carbon prices is in doubt. After more than a decade of discussion, there is no carbon tax in the USA and the proposed Clean Power Plan provides no benefits for existing nuclear plants. Despite COP21 "commitments" to reduce carbon, little real action to put meaningful prices on carbon has been taken.
The level of carbon taxes is also important. Carbon prices at the estimated social cost of global warming caused by carbon emissions would mean a carbon tax of $100 per tonne (or higher) today, increasing to about $1000 per tonne by mid-century. Carbon prices at these levels would likely have a negative impact on the economy. The typical approach to controlling carbon is to start small (a high cap in a cap & trade regime or a low carbon tax) to provide marginal incentives without a negative impact on the economy. A World Bank report (the 2015 update of State and Trends of Carbon Pricing) shows that carbon prices are mostly at or below $20 a tonne.
Carbon taxes are uncertain. Nuclear power plant investments require revenue adequacy and certainty for at least the initial 30 years of project operation after the ten-year development and construction period. There is doubt that carbon prices at the level needed for a nuclear power project will be in place for 40 years (or more) into the future. Carbon price regimes are driven by governments. Governments change and government positions change (for example, in Australia), adding uncertainty for any carbon pricing regime over the time frames needed for a nuclear power plant.
Carbon prices are likely to be too indirect, too late, too low, and too uncertain to provide real financial support for nuclear power projects. Providing direct benefits to existing and new nuclear power plants would be much more effective than economy-wide, technology-neutral, and politically feasible carbon pricing regimes. The nuclear power industry requires project-specific actions to provide the sufficient and certain revenue needed to keep existing nuclear power plants in operation and to support the development of new nuclear power plants.
This approach would involve project-level actions to keep nuclear power plants operating or to build new nuclear power plants with costs of these actions recovered as a cost of reducing carbon.
The UK is an example of this approach. It has a legally-binding requirement to lower carbon emissions. Existing carbon control measures, including a carbon price floor and the emissions trading scheme, do not provide the revenue sufficiency and certainty needed for new nuclear power investment in the UK. To get new nuclear power projects built there, the Electricity Market Reform program provided focused incentives for new nuclear power. The cost of Hinkley Point C or other new nuclear project incentives (such as, the difference between the Contract for Difference strike price and the market price of power) is a cost to control carbon that will be recovered from retail utilities in the UK.
Another example is US states taking action to save threatened merchant nuclear plants. This includes the proposed Illinois low carbon portfolio standard, the proposed New York clean energy standard, an Iowa PPA extension for the Duane Arnold nuclear plant, and an Ohio power contract for the Davis Besse nuclear plant. These state programs are focused on avoiding the loss of the zero-carbon electricity from economically-threatened merchant nuclear plants. The cost of these programs, if they are implemented, should be considered as a cost of controlling carbon emissions.
In US states with a traditional utility structure (that is, without electricity reform), new nuclear power projects (such as, the Vogtle and Summer units now under construction) may not be the lowest electricity cost option, but provide benefits including zero-carbon electricity. Some of the premium paid for these new nuclear projects should be considered as the cost of controlling carbon emissions.
Taking this approach even further would be to provide nuclear power with subsidies similar to those provided for renewable generation. These would be focused on preventing early retirement of nuclear power plants and on supporting new ones as a part of moving toward a zero-carbon electricity sector. The market fails to provide support for nuclear power, so nuclear power subsidy programs should be supported by the same market failure logic used to justify current support for renewable energy. Subsidies for nuclear power (such as power contracts and tax credits) should be recovered as a cost of reducing carbon emissions from the electricity sector.
The current carbon pricing approaches are not likely to do much for the nuclear power industry. These approaches should be replaced by project-specific actions to keep existing nuclear power plants in operation and to get new nuclear power plants built. The cost of this nuclear power project support should be recovered as a cost of controlling carbon. We might even call this a carbon tax.
Edward Kee is the CEO of Nuclear Economics Consulting Group. Kee gave a presentation titled The Impact of Carbon Pricing at the IFNEC Financing Nuclear Power Plant session in Paris on 12 May.