Both presidential candidates regard nuclear energy as an important cure for all the major challenges we currently confront. Sen. John McCain has even declared that if he is elected he will build 45 new reactors in America by 2030 in order to make America energy independent—a goal that Shikha Dalmia, a senior analyst at Reason Foundation, notes is neither achievable nor desirable, in this edition of the Reason Roundtable.
There is a great degree of disagreement as to whether nuclear energy can sustain itself in the market without government involvement. America has added little nuclear capacity over the last few decades. Is this because regulatory obstacles and political opposition has made private investors wary of investing in nuclear energy? Or is it because the high upfront capital costs make nuclear energy much too risky an investment for private investors? "Can the industry offer energy consumers sufficient value to stand on its own without shaking down taxpayers or receiving immunity from liability for future hazards?" asks Dalmia.
William Tucker, author of Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America's Long Energy Odyssey, believes it can. "The current problem with nuclear is not its underlying economics but the current political climate in the U.S. that is hostile to nuclear and doesn't offer a level playing field," he notes. But Jerry Taylor, senior fellow at the Cato Institute disagrees. He believes that government policies have offered nuclear energy unwarranted help in the form of subsidies, tax breaks and other government guarantees. Those who believe in nuclear energy, he counsels, should adopt a policy of tough love. "Welfare, after all, breeds sloth in both individual and corporate recipients."
Shikha Dalmia: Going Nuclear—But Not for Energy Independence
Nuclear energy is receiving renewed attention this election season, thanks to the battle-cry of energy independence that both presidential candidates have raised. Our contributors to this edition of the Reason Roundtable consider whether nuclear energy is the right answer—but let me begin by pointing out why energy independence is the wrong cause.
Every president since Richard Nixon has muttered direly about the need to make America "energy independent." But this old and tired saw has assumed new importance now because both Barack Obama and John McCain are offering it as the weapon of choice to vanquish all the alleged threats we currently confront —terrorism, recession and, not to forget, global warming.
In the last debate, both candidates pledged to end America's reliance on Middle Eastern and Venezuelan oil within 10 years (Canadian oil supposedly is OK)—a nonsensical goal since oil is a fungible commodity with a single global market. Both candidates also claim that replacing oil with alternative fuels will create "millions of jobs" and, once again, put America on the road to riches. "We can't keep on borrowing from the Chinese and sending money to Saudi Arabia (to pay for oil)," Sen. Obama thunders on the stump (a formulation more admirable for its pithy syntax than grasp of economics.)
But the fact of the matter is that energy independence is neither feasible nor desirable. Indeed, when Nixon originally took up this crusade in the wake of the oil embargo, America imported a third of its oil. Now it imports 60 percent. Why? Because imported oil is cheaper than indigenous oil. Trying to fight this reality won't create jobs or restore America's economy, it'll do the opposite.
Third World countries in Latin America and Asia learned this lesson the hard way when, in their zeal for economic self-sufficiency, they embraced a something called the import-substitution approach half a century ago. The idea was to discourage imports of key industrial products such as factory equipment and machinery through trade barriers and encourage their domestic production through massive subsidies. The upshot, however, was neither self-sufficiency nor prosperity. Rather, import-substitution raised production costs, making Third World goods uncompetitive in the global markets and prohibitively expensive at home, consigning these countries to decades and decades of economic stagnation that has not yet been fully reversed. Delinking America from global energy markets will wreak similar economic havoc.
But will energy independence make America more secure by depriving terrorist nations of petro dollars? Not really. Indeed, insofar as America, the single biggest oil consumer, spurns Middle Eastern oil, it will only make it that much cheaper—and therefore more attractive than the alternatives—for everyone else, including India, China and other energy-hungry emerging markets. The result might well be a new geo-political alignment with countries dependent on Middle Eastern oil in one camp—and "energy-independent" America in the other. This is not a recipe for defunding terrorism. Rather, it is a way of giving Middle Eastern countries even less of a stake in our well being and making them less interested in helping our struggle against terrorism.
Energy independence therefore offers no rationale for building 45 new reactors in America by 2030 as John McCain wants. That, however, doesn't mean that there is no case for nuclear power—or, for that matter, other alternatives to oil. Oil prices are inherently volatile, making it hard for businesses and manufacturers to reliably plan ahead. What's more, a diversified fuel supply that is not too dependent on any one source would increase economic security. And to the extent that such fuels supplement existing oil supplies, they would bring down overall energy costs and boost economic growth.
In an economy unencumbered by barriers to entry or distorted by other government policies, the market of course would be constantly searching for the most viable alternatives. But that is far from the case in America where a complicated web of government subsidies, taxes and trade barriers has severely crimped some fuels while artificially boosting others. So the question before the current Reason Roundtable is whether nuclear energy would be economically viable if it were neither helped nor hindered by government policies. Can the industry offer energy consumers sufficient value to stand on its own without shaking down taxpayers or receiving immunity from liability for future hazards?
Nuclear, to be sure, has many advantages over other alternatives currently on the table: It is plentiful, clean, and, in the long run, cheaper than other fuel sources. What's more, unlike wind and solar, it is capable of generating a steady supply of energy without disruptions due to the weather. Yet nuclear's share of the American energy market has effectively remained stagnant at about 19% for the last many decades. France, by contrast, gets about 80% of its energy from nuclear.
Is this because of an overly cumbersome regulatory process and political opposition to nuclear plants? Or are potential investors daunted by the prospect of nuclear's heavy upfront capital costs?
William Tucker, an award-winning journalist and author of Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America's Long Energy Odyssey, believes that nuclear's challenges in America are not economic—they are political. Existing nuclear power plants are raking in $1 million a day, he points out, something that has, ironically enough, triggered calls for a windfall profit tax on these plants. Yet few new nuclear plants are being built in America right now. "Both Wall Street and the utilities fear that, as soon as the first proposal comes out of the box, environmental and opposition groups will gang-tackle it, exploiting the public's fear about safety and nuclear 'waste,'" he explains.
Jerry Taylor, a senior fellow at the CATO Institute, however, disagrees. He points out that the high upfront cost of building safe and reliable plants have raised both the opportunity and risk costs of nuclear, making it unattractive for potential investors. Only in countries where government has stepped in has nuclear flourished. "Those who favor nuclear power should adopt a policy of tough love," he counsels. "Getting this industry off the government dole would finally force it to innovate or die—at least in the United States."
Shikha Dalmia is a senior analyst at Reason Foundation. An archive of her work is available here.
William Tucker: Politics—Not Economics—Is Hampering Nuclear Energy
"Nuclear has gone from too cheap to meter to too expensive to matter," exults anti-nuclear guru Amory Lovins. "It is so hopelessly uneconomic that one doesn't need to debate whether it's clean or safe." Given that there hasn't been a new reactor built from the ground up in the United States for 30 years, who would disagree?
In the Energy Policy Act of 2005, Congress offered a 1.8-cent per kilowatt-hour production tax credit to the first 6,000 megawatts of new nuclear construction. Also added was "regulatory insurance" designed to protect new projects if they become ensnared in the licensing morass that stretched construction times out to 15 years in the 1980s. Yet, despite all this government prompting, investors do not seem very confident about undertaking the risks.
The day after presidential candidate John McCain announced his determination to build 45 new reactors by 2030, Admiral Frank "Skip" Bowman, director of the Atomic Energy Institute, wrote an op-ed in the New York Post begging for money:
Our nation will need something similar to the Clean Energy Bank concept being considered by some in Congress. This would be a government corporation providing loan guarantees and other forms of financial support to ensure capital for deploying clean-electricity technology.
All this would suggest that nuclear power is a failed enterprise, surviving off government subsides. There is only one trend that runs counter to this. In 2006, when the Northeast was experiencing a winter run-up in natural gas prices, Connecticut Attorney General Richard Blumenthal wrote the following manifesto for the Hartford Courant:
[W]e need a windfall profits tax aimed at generators who have reaped outlandish and undeserved profits through irrational market rules. In 2006, the nuclear Millstone II and III generators in Waterford will have profits of $274 million and $419 million respectively, while the coal-fired Bridgeport Harbor plant will enjoy profits of $113 million . . . The generators using low-cost coal and nuclear fuel reap these same high prices and enjoy ever-ballooning profit margins.
So how is it that nuclear can be too expensive to matter and at the same time making so such money that it merits a windfall profits tax? To understand this mystery, you have to recognize the hurdles nuclear power faces.
The idea that nuclear is inherently uneconomical is incorrect. Most of the nation's 104 nuclear reactors are now making profits in the range of $1 million a day. One reason is that nuclear plants are immune to the price increases that bedevil fossil fuels. Even when uranium underwent a speculative boom in 2008, with prices rising from $16 to $135 a pound before dropping back to $60, reactors were only marginally affected. "Uranium costs represent only about 10 percent of the costs of nuclear electricity as opposed to 77 percent with coal and 95 percent for natural gas," Jim Slider, director of planning and analysis at the Nuclear Energy Institute, notes.
What's more, operating and safety snags that long dogged the industry have been overcome so that the nation's entire nuclear fleet now operates at a capacity factor of 90 percent—a figure undreamed of a decade ago. Fossil fuel plants, by contrast, operate at a capacity factor of 60 percent and windmills and solar collectors are lucky to produce at 30 percent. The superior efficiencies of nuclear compared to both conventional and alternative fuels are the result of a re-organization within the industry in 1997 when "merchant" companies started buying up reactors from utilities. Entergy, Exelon, Progress Energy, Florida Power and Light, and several others became specialists in operating reactors, raising their performance to unprecedented heights. In the old days, for instance, refueling could take two months and employees often regarded it as a vacation. Now, special teams tour the country performing refueling in three weeks, choreographing them years in advance. These merchant companies are now making so much money that they want to build new nuclear plants—which is why there are nine applications before the Nuclear Regulatory Commission (NRC) with two dozen more waiting in the wings.
Indeed, no one disputes that nuclear offers big cost advantages and returns over conventional fuels in the long run due to their low operation and maintenance costs. The problem is getting over the initial investment hump, given Wall Street's reluctance to invest in nuclear. A new reactor costs between $5 and $7 billion, probably the biggest private undertaking in the world. As Thomas Friedman puts it in his new book, Hot, Flat and Crowded:
To build a new nuclear plant costs a minimum of $7 billion today, and would take probably eight years from conception to completion. Most CEOs have about eight years in office, and there are not a lot of utility CEOs who would bet $7 billion—which might be more than half the company's market cap—on one nuclear project.
Nevertheless, a 2003 MIT study, "The Future of Nuclear Power," found that while nuclear electricity sold for 6.7 cents per kilowatt-hour (kWe-hr) compared to 4.2 cents for coal and 3.8 cents for natural gas, a $50-per-ton tax on carbon emissions would push coal and gas prices to 5.4 cents and 6.1 cents respectively while leaving nuclear unaffected. Both coal and gas prices have since increased by 25 percent. A 2006 study by the French government found that nuclear and gas now cost exactly the same—4.6 cents (Euro) per kWe-hr—without a carbon tax.
The problem then is much less economics than politics. Both Wall Street and the utilities fear that, as soon as the first proposal comes out of the box, environmental and opposition groups will gang-tackle it, exploiting the public's fear about safety and nuclear "waste." Once again completion times will extend 10 years and beyond and costs will rise to $15 billion. In fact opposition groups are already challenging new proposals even before they reach the NRC licensing stage. "We're still in a situation where pretty much everybody wants to be second," notes Roger W. Gale, a former Energy Department official and now a utility consultant.
This is unfortunate because, as far as "nuclear waste" is concerned, the problem could readily be solved by reprocessing. Almost 100 percent of the material in a spent nuclear fuel rod can be recycled for additional fuel or industrial and medical isotopes. The problem is that America banned nuclear reprocessing in the 1970s under the illusion that it would somehow prevent nuclear weapons from proliferating around the world. Several countries have since built nuclear weaponry and it had nothing to do with plutonium from American reactors.
The French now have complete nuclear reprocessing and get one-third of their reactor fuel from spent rods. Other isotopes are extracted for commercial sale. The remaining "waste" is all stored beneath the floor of a single room in La Hague—25 years worth of producing 75 percent of France's electricity.
The fate of the Yucca Mountain Nuclear Repository—which has been entirely funded by the industry through taxes on every kilo watt of energy generated over the last 20 years—is evidence of the power of opponents to derail nuclear. Thanks to them, the government has been hampered in completing the site on schedule and it will likely never become operational because of environmental opposition. Indeed, Exelon Corporation, which owns the largest fleet of reactors in the country, won a $300 million settlement from the Department of Energy for its failure on Yucca.
Now nuclear utilities have pioneered "dry cask storage," an on-site system that is good for at least 100 years. Because of nuclear's great "energy density"—the energy generated from a given volume, mass, or collection area—the waste generated by nuclear is vanishingly small. Three years worth of spent rods from a 1000-MW reactor can be stored in a cask four times the size of a telephone booth. But Greenpeace and the Nader organizations—who remain beguiled by the idea that an industrial economy can be run on so-called "renewable" energy—exploit NIMBY (Not in My Backyard) fears to oppose nuclear plants housing on-site disposal. This has injected uncertainty and made nuclear power too risky to justify the high up-front investment.
Some free market advocates bring up the Price Anderson Act that caps the liability of the industry in case of accidents to question its viability. They maintain that if the industry had to buy full insurance, it would make nuclear power uneconomical compared to other fuels. But the fact of the matter is that caps on liability are in no way unique to nuclear. The coal mining industry also benefited from liability caps against black lung disease. Major hydroelectric dams around the country carry no liability insurance because they are all federally or municipally owned and exempted by sovereign immunity. If anything, the nuclear industry carries far more insurance than any other industry. Under Price-Anderson, every reactor in the country can be assessed $100 million for an accident by another reactor. That puts total coverage for any accident at $10 billion. As the industry says: "We are all hostages to each other." That's despite the fact that coal kills 30,000 people a year according to Environmental Protection Agency estimates, whereas Chernobyl—a bizarre foul-up that will never happen again—claimed only 60 lives directly attributable to the disaster.
The current problem with nuclear is not its underlying economics but the current political climate in the U.S. that is hostile to nuclear and doesn't offer a level playing field. Coal is familiar and politically entrenched and so people don't question the danger it poses. Solar and renewables are showered with subsidies and mandates because they have won popular favor even though they are very low density energy sources.
The real solution then to making nuclear energy economically feasible may lie in changing the popular perception of nuclear as forbidding and dangerous. People should consider nuclear as natural as the ground beneath their feet (hence I have titled my forthcoming book Terrestrial Energy). The slow breakdown of uranium atoms is what heats the core of the earth to temperatures hotter than the surface of the sun. When we build a nuclear reactor, we are only reproducing this process in an isolated environment. Yet it is so powerful that its environmental impact is 2 million times smaller than fossil fuels or the various forms of renewable energy. If powering the world with virtually no environmental impact can't be made economical, what can be?
William Tucker is an award-winning journalist whose book, Terrestrial Energy: How Nuclear Power Will Lead the Green Revolution and End America's Long Energy Odyssey, has just been published by Bartleby Press.
Jerry Taylor: Nuclear Energy: Risky Business
Nuclear energy is to the Right what solar energy is to the Left: Religious devotion in practice, a wonderful technology in theory, but an economic white elephant in fact (some crossovers on both sides notwithstanding). When the day comes that the electricity from solar or nuclear power plants is worth more than the costs associated with generating it, I will be as happy as the next Greenpeace member (in the case of the former) or MIT graduate (in the case of the latter) to support either technology. But that day is not on the horizon and government policies can't accelerate the economic clock.
Many free market advocates support nuclear because it costs less to generate nuclear power than it does to generate electricity from any other source (save, perhaps, hydroelectric power), thanks to nuclear's low operation and maintenance costs. However, someone has to first pay for—and build—these plants and the rub is that nuclear has very high, upfront construction costs ranging from $6-9 billion. By contrast, gas plants cost only a few hundred million dollars to build and coal a couple of billion depending upon the capacity and type of plant.
This raises the opportunity and risk costs of nuclear, making it unattractive to investors. Capital-intensive power facilities take longer to build, which means that investors have to defer returns for longer than if they had invested elsewhere. What's more, electricity markets have a very peculiar pricing mechanism that makers it harder for nuclear to maximize returns compared to gas-powered or other plants. In essence, there are two electricity markets: a market for base-load power (electricity sold 24-hours a day) and a market for peak power (electricity sold as needed during peak demand periods like hot summer days). Much of the demand for new power—and thus much of the profit available to investors today—is found in the peak market. But nuclear power plant construction costs are so high that it would take a very, very long time for nuclear facilities to pay for themselves if they only operated during high demand periods. Hence, nuclear power plants are only profitable in base-load markets. Gas-fired power plants, on the other hand, can be profitable in either market because not only are their upfront costs low but it is much easier to turn them off or on unlike nuclear.
Nuclear's high up-front costs don't just mean delayed profits, it also makes nuclear a more risky investment, especially since 20 states have scrapped policies that used to allow investors to charge rates that would guarantee their money back. This means that investors in new nuclear power plants are making a multi-billion dollar bet on disciplined construction schedules, accurate cost estimates, and the future economic health of the region. Bet wrong on any of the above and the company may well go bankrupt. Bet wrong on a gas-fired power plant, on the other hand, and corporate life will go on because there is less to lose given that the construction costs associated with gas-fired power plants are a small fraction of those associated with nuclear plants.
One metric that reflects this difference is the "levelized" cost—the price that must be received by owners to cover fixed and variable costs while returning profits to investors. This cost is substantially higher for nuclear than coal-fired electricity. Tufts economist Gilbert Metcalf, for instance, has calculated that, under current law, the levelized cost of nuclear power in the United States is 4.31¢ per kilowatt hour (kWh). Coal-fired electricity, on the other hand, cost 3.53¢ per kWh and "clean" coal cost 3.55¢.
But even these nuclear estimates are almost certainly too low. That's because Metcalf uses an "overnight cost" (construction costs minus financing costs) figure of $2,014 per installed kilowatt (kW) which is much too low. The Energy Information Administration (EIA) puts this cost at $2,475 per kW at present—although even this figure is suspicious because it relies on a world-wide average for nuclear power plant construction—including the grossly unreliable estimates from state-managed economies. The Standard & Poor's overnight cost estimate of $4,000 is likely the most reliable because it is based on nuclear plant construction costs in economies where labor and material costs are very similar to those found in the United States. Industry analyst Jim Harding, who uses overnight cost figures similar to Standard & Poor's, puts the levelized costs for new nuclear power generation at 12-15c per kWh right now.
Investors are also wary of nuclear plants because of the construction delays and cost over-runs that have historically plagued the industry. For instance, the Areva/Siemens nuclear power plant being built for TVO in Finland—the first nuclear power plant to be built in a relatively free energy market in decades—once scheduled to be operational within 54 months, is now two years behind schedule and 60% over budget. Nor have these construction delays had anything to do with regulatory obstruction or organized public opposition.
If nuclear power plants are so uneconomical, how then to explain the blizzard of permit applications for the construction and operation of new nuclear power plants that the Nuclear Regulatory Commission has received? Easy: These applications cost little and oblige utilities to do nothing. Industry analysts maintain that federal approvals will not translate into actual plants without a federal promise to private equity markets that, in case of default by power plants, the taxpayer will make good on the full sum of all bad nuclear loans.
Nuclear supporters often counter that construction costs would be a lot lower if regulators didn't impose insanely demanding safety standards, byzantine and time-consuming permitting processes, or endless public hearings, any one of which could result in the plant being stopped in its tracks. Investors would also be more likely to invest, we're told, if there were a high-level waste repository in place or more political support for nuclear power.
I would love to tell that story. I do, after all, work at the Cato Institute, and blaming government for economic problems is what keeps me in business. But what stops me is the fact that those complaints are not echoed by the nuclear power industry itself.
On the contrary, the industry in the early 1990s asked for—and got—exactly the sort of safety regulations, permit review process, and public comment regime now in place. Both public and political support for nuclear power is running so high than even a majority of Democrats in Congress are happy to not just tolerate nuclear power, but lavish even more subsidies upon it. And while Yucca Mountain may not be open now or ever, everyone seems reasonably content with the current on-site waste storage regime.
Indeed, if government were the reason why investors were saying "no" to their loan applications, I would expect that industry officials would be the first to say so. But they do not.
There's another good reason why the industry is not protesting government intervention these days—the industry would not exist without it. Take away the 1.8¢ per kWh production tax credit available to the first 6,000 megawatts of new nuclear generation built prior to 2021, for instance, and Metcalf calculates that the levelized cost of new nuclear power plants jumps by 30 percent. Replace accelerated depreciation tax rules with regular depreciation rules and costs jump another 9 percent. Even zero taxation on nuclear power would increase costs by 6 percent because right now nuclear power enjoys a negative effective tax rate. Indeed, this jump by itself would make nuclear much more expensive than conventional coal, "clean" coal, and natural gas. Finally, repealing the $18 billion in federal loan guarantees recently promised the industry and eliminating regulations that relieve nuclear plant owners of the responsibility to pay third-parties to accept the risks associated with waste disposal would dampen market interest in nuclear power even further.
But the final nail in the coffin for the industry would be if the federal cap on the liability that nuclear power plant owners face in case of accidents (the Price-Anderson Act) were to be lifted.
Given all of this, how do France, India, China, and Russia build cost-effective nuclear power plants? They don't. Government officials in those countries, not private investors, decide what is built. Either these governments build expensive plants and shove them down the market's throat—or they build shoddy plants and hope for the best.
Conservatives project nuclear power as the solution to greenhouse gas emissions. But they should resist that argument. If we slapped a carbon tax on the economy to "internalize" the costs associated with greenhouse gas emissions—the ideal way to address emissions if we find such policies necessary—then the "right" carbon tax would likely be about $2 per ton of emissions according to a survey of the academic literature by climate economist Richard Tol. That's not enough to make nuclear energy competitive against coal or natural gas according to calculations performed by the Electric Power Research Institute. In any case, if nuclear offers a cost-effective way to reduce greenhouse gas emissions, it should have to prove it by competing against alternatives in some future carbon-constrained market.
There's nothing new about today's rhetoric about the supposed "nuclear renaissance." Back in 1954, GE maintained: "In five years—certainly within 10—a number of them (nuclear plants) will be operating at about the same cost as those using coal. They will be privately financed, built without government subsidy." Now, 54 years later, the talk of "renaissance" is back—as are promises about the imminent economic competitiveness of nuclear.
Those who favor nuclear power should adopt a policy of tough love. Getting this industry off the government dole would finally force it to innovate or die—at least in the United States. Welfare, after all, breeds sloth in both individual and corporate recipients. The Left's distrust of nuclear power is not a sufficient rationale for the Right's embrace of the same.
Jerry Taylor is a senior fellow at the Cato Institute.
Editor's Note: This roundtable originally appeared at Reason.org.