Global Energy Considerations & The Role of Nuclear – Think Smaller, Think Modular?
Steve Robertson, Douglas-Westwood
The considerations concerning the future energy mix are of utmost importance for nations. Whether you take the view of the energy analysts or the academic statisticians, the message is the same: Low energy costs = economic prosperity (i.e. higher GDP growth, lower unemployment) and vice versa.
Cost is not the only consideration. Safety, predictability and reliability for base-load, over-coming limitations in the grid infrastructure, and local content / job creation are also important. Furthermore, history tells us that risk associated with over-reliance on a single source can very easily translate into painful consequences, so diversity in the energy mix is also inherently desirable. Notwithstanding, our analysis of 124 countries shows that at present 47% rely on one prime energy source for 90% of their electricity production. Many countries are under-diversified.
The growth in uptake of renewable energy in many regions has opened the door to a wider energy mix. Some renewable technologies offer an advantage in terms of security of energy supplies. However, renewables also have their downsides. A surge in biofuels development, driven by high oil prices, was blamed for high food prices in 2007, with the painful implication that policy drivers for biofuels will lead to food shortages and mass unrest in the developing world.
In the last six months renewable energy has again come under attack in the UK (which will be the largest market for offshore wind over the next five years) with lobbyists arguing both that onshore wind was too heavily subsidised and highly profitable, and offshore wind was too expensive and was responsible for a sharp rise in household energy bills. Any hope that offshore wind will become significantly cheaper as the industry matures and projects increase in scale is not supported by the data. In fact, costs are on a long-term uptrend with little hope for a material reversal in the medium term.
Supporters of renewable energy will argue that many of the energy sources we rely on are finite in supply and will be subject to ever-increasing costs that will bring them in-line, or above the level of renewables. Such thinking is not without foundation. For example, the oil industry is mature leading to high prices resulting from an ever-increasing demand and constrained supply, with new supply coming from high cost areas such as deepwater offshore.
The rising cost of traditional fuels is exacerbated by aging infrastructure, most notably in the US and Europe. . In Europe many coal and hydro power plants are more than 30 years old and are life expired. About a third of the coal and gas power capacities are older than 20 years but only 15% are 10 years or younger. There are estimates that approximately 267 GW of generating capacity should be replaced through 2025
Natural gas is far more abundant than oil and at present and would appear to be the ‘fuel of the century’ based upon its abundance and the lower overnight capital cost of building the plant. It is not a dense energy source, making it costly to transport. As a result, it is not a globally traded commodity in the same was way as oil. Natural gas prices can vary dramatically by region.. Pricing structures vary from spot sales to long-term agreements with price formulae index-linked to another commodity (often oil). Some parts of the world, such as the USA are so over-supplied with natural gas that prices are at lows of near $2/mmbtu, whilst in Japan the Fukushima incident and subsequent shut-in of nuclear capacity has led to an increase in demand for natural gas that has forced priced up to near-record highs of $18/mmbtu.
While some countries have, post Fukushima, decided against nuclear in the energy mix, others continue to enjoy a ‘nuclear renaissance’ at least in terms of government approval. Nuclear offers reliable base-load at predictable cost. Some have ambitions to add vast, new nuclear energy capacity. India, for example, anticipates increasing its nuclear capacity from 6.8GW in 2011 to 399GW in 2050, and has set a target of 25% of electricity coming from nuclear energy by 2050 as part of its energy security policy.
Perhaps an even-bigger headache than Fukushima for the nuclear industry is the challenge of how to finance large-scale projects where the construction cost can run well into tens of billions of dollars. Trends in project financing throughout the European sovereign debt crisis have been ugly – higher costs of borrowing, lower leverage (lower debt:equity ratios) and institutions committing smaller sums into each project meaning more complex ‘club deals’ and processes. Utilities have been reluctant in some cases to take on projects that, even for the larger utilities, have such an impact on the balance sheet that they would lead to downgrades by ratings agencies.
An interesting niche emerging in the nuclear industry is the development of small-scale modular reactors (SMRs). These units would offer utilities a number of benefits, including short lead-times (the vision is that the modules would be built off-site in factories to a common approved design and shipped by rail, truck or barge), scalability (incrementally add capacity to a site with much greater ease), the option to fuel for life and/or built-in storage for life of the plant, simple & safe plant design which includes passive cooling and a more-straightforward financing process.
In addition to providing base-load power generation to meet additional demand and replace life-expired plant, smaller unit sizes also negate the problems of grid connection in areas where the network might not be able to handle several GW being added in a single location. Likewise, rural/remote areas and islands offer an opportunity as does essential services and government applications such as desalination, military, hospitals and the like. Captive power for industrial applications is a potential option that would expand the customer base beyond government and utilities.
The main geographic focus for SMRs at present is the US. The US Department for Energy (DOE) has received three bids for funds to be allocated to SMR projects which could be developed, licensed by the Nuclear Regulatory Commission and be commercially operational by 2022. The DOE has stated that up to two technologies will be supported. The cost-share agreements will cover a five year period and equates to $900m of investment, at least half of which will be privately funded.
Whilst the US is likely to see the first installed units, a recent Douglas-Westwood study for a customer active in the industry highlighted that outside of the US there are undoubtedly many applications for SMRs that have yet to be fully explored, including countries where the nuclear regulation and permitting structures do not yet exist. These will be longer-term plays, but with significant potential post 2025.
With no end in sight for the European sovereign debt crisis and an emerging problem in terms of replacement capacity for European economies, SMRs might be prove to be one useful approach for creating a balanced portfolio of affordable, reliable and low carbon power for the future.
 Kopits, S. “Oil: What price can America afford?” Douglas-Westwood June 2009
 Carruth et al. “Unemployment Equilibria and Input Prices:Theory and Evidence from the United States” January 1998
 Blas, J & Wiggins, J “Surge in biofuels pushes up food prices” Financial Times July 15 2007