NEA proposes new approach to back-end funding

18 June 2021

The current approaches to assessing financial adequacy for decommissioning and radioactive waste management - which are based on the linear discounting of estimated future costs - should be complemented with a broader "circular" approach, a new OECD Nuclear Energy Agency (NEA) report proposes. This approach, it says, reflects that changes of different kinds will play out between today's decisions and future funding needs.

OECD-NEA Director-General William Magwood speaking in today's launch of the study

The study - Ensuring the Adequacy of Funding Arrangements for Decommissioning and Radioactive Waste Management - consists of a conceptual framework, 12 country case studies on funding arrangements prepared in collaboration with NEA countries, and some best policy guidelines. It focuses on the interdependency of costs and funding requirements on the one hand and changes in nuclear policy, such as long-term operation or premature shutdowns, as well as technological progress, on the other.

"We are at the threshold of a new consideration across the world to use nuclear energy to deal with the threat of climate change, along with other energy forms," NEA Director General William Magwood said today during a webinar to launch the study. "This is a time of great uncertainty because we have new technologies that are being introduced. We have the idea of building new nuclear plants. But in order to proceed along those lines, we have to show that we know how to deal with the back-end of our fuel cycle, with decommissioning and radioactive waste. The fact that there is some uncertainty in the minds of the public and some policymakers about this is the reason this report was created."

Four reasons

The NEA says now is a good time to discuss the adequacy of funding for decommissioning and radioactive waste for at least four reasons: as the nuclear power fleet ages, many units will approach the end of their original operating licences in the coming years, with prospects for long-term operation varying widely across NEA countries; changes in the macroeconomic environment are questioning many of the assumptions on which, until recently, discussions about funding were predicated; changes in funding arrangements are already under way in a number of NEA countries; and decommissioning and, in particular, radioactive waste management remain highly sensitive issues in policy debates.

In the current linear approach, all elements of the system are based on the discounted value of the estimated future costs of a specific technical solution. "While the linear framework with its unidirectional causality from estimated costs to current assets is too simple, it remains, as long as stakeholders are aware of its limitations, a useful starting point," according to the study. "The challenge is to maintain the robustness of funding systems at a moment where a number of framework conditions are changing significantly, including macroeconomic framework conditions, energy policy making, societal preferences or the structure of electricity markets."

The NEA says current funding systems in NEA countries are adequate. "Nevertheless, there are challenges as decommissioning and radioactive waste management programmes move to implementation and societal preferences evolve over time. The very long-term nature of the solutions, in particular for radioactive waste disposal can also create challenges."

Circular approach

The report proposes a circular decision-making framework, in which all elements of the system can vary, while continuing to feed into each other. The adequacy of funding is assessed by considering whether decision-making processes are capable of taking into account changes in key parameters in a manner that is sufficiently robust and sophisticated to align and realign them in different constellations. Such key parameters will include the envisioned technical solution and its costs, constituted assets and rates of return, as well as the lifetimes of nuclear power plants and evolving societal preferences.

"The essence of the circular approach is that a necessary evolution of the system can be triggered by any given element of the system. This could be a change in economic framework conditions, a political decision to shorten or extend the operating lifetimes of nuclear power plants, a new technological or legal option for radioactive waste management or new societal pressures to accelerate or delay the implementation of waste management solutions. By its very nature the circular approach is adaptive and iterative."

The study explores the theme of incentive compatibility in the sense that funding arrangements should be cost-effective in the long term to make them more politically and socially sustainable in different OECD countries. "Clearly, there is a wide range of solutions as national circumstances differ greatly both in economic and technical terms with respect to the historical allocation of responsibilities and social preferences," it says.

Law and Economics

The NEA says the report has drawn inspiration from a branch of economics referred to as Law and Economics, which links general economic notions of efficiency and cost minimisation in a flexible and non-dogmatic manner to the working of institutions and the allocation of legal responsibilities. It is often concerned with the optimal allocation of responsibilities, the alignment of incentives and risk management.

This approach suggests that financially, socially and politically sustainable funding arrangements will need to be built on two fundamental guiding thoughts. First, the parties that are best capable of managing the costs and risks related to decommissioning and radioactive waste management should also ultimately be the ones responsible for funding. Secondly, decommissioning and even more so waste management concern commitments that stretch out far into the future for decades, possibly centuries. "It is obvious that economic, political and technical framework conditions both on the asset and on the cost side will change over these periods," the study says.

"As long as commitments for disbursement are far away, maintaining a narrative of stable parameters can be a useful intermediate step to set up funding systems. However, as soon as real disbursements loom, the accuracy of estimates can no longer be taken for granted. In other words, funding frameworks will increasingly need to integrate the conscious and explicit management of change in a sustainable rhythm."

The NEA notes that funding systems are already regularly reviewed to check whether they satisfy particular financial requirements. However, it says long-term sustainability also demands periodic reviews of the technical options and their likely costs, liability allocation and institutional arrangements.

Many existing frameworks in NEA countries already respect these two guiding principles to varying degrees, the study says. "The adequacy of financing for decommissioning and radioactive waste management is a major issue that receives significant policy attention. The case studies show that sophisticated and by and large well-funded systems are in place and that much good work is being accomplished, although frequently in an ad hoc and implicit manner, rather than in a systematic and explicit one."

Researched and written by World Nuclear News