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Markets lack a price signal for nuclear investment

The nuclear industry should work with policymakers on the design of market mechanisms that can produce a clear price signal to attract investors to this low-carbon form of electricity, Jostein Kristensen, partner with economics consultancy firm Oxera, told participants in World Nuclear Association’s Strategic eForum last week. Markets currently do not reflect the value of nuclear power as a sustainable and reliable source of energy in the fight against climate change, he said.

Speaking on the high-level panel Driving investment towards nuclear projects on 10 September, Kristensen described three challenges facing the industry.

Firstly, “inconsistent commitment” by governments towards nuclear generating technologies can make investment conditions very uncertain and result in not achieving economies of scale for the nuclear generation sector. This means the ability to bring costs down over the long term is “a chance that might be missed”, he said.

Secondly, nuclear generation is a “long-lived asset” that also has some long-term liabilities, which are likely to require some risk transfer from the private sector to the public sector, particularly as regards waste management and disposal. Establishing these kinds of regulatory arrangements and contractual arrangements can be difficult to achieve sometimes and also quite time consuming, he said.

Thirdly, market arrangements that are put in place for the pricing of electricity do not necessarily reflect the true underlying costs and benefits of different technologies, or at least their costs and benefits to the overall system, he said. These include grid and balancing costs, and ensuring there is enough backup generation. “All of these things together imply that the value for money of nuclear generation, as compared to other competing generation technologies, may not be fully reflected in market prices,” he said.

The role of policymakers to improve this situation is crucial, he said. “It’s vital that the nuclear industry provides a clear and credible case for nuclear generation benefits to the systems in which the nuclear plants operate over the long run.”

He added: “One of the key things that can be done would be to ensure that the nuclear sector pulls together and provides the mechanisms, and develops the procedures and arrangements that will enable the sector to reduce costs and to reduce also the risk of cost overruns in the long term. Achieving that ultimately requires cooperation with governments, particularly in relation to financing arrangements. The financing considerations will be the key area for the nuclear sector to improve upon in future.”

Financing models

Kristensen described the various ways nuclear new build projects may be financed.

The traditional approach has involved participation with government thought public ownership of nuclear power plants, he said. Seeing such infrastructure as a strategic asset in the current context of decarbonisation is challenging, he said, because it may seem hard to justify state involvement in nuclear new build when the cost of other low-carbon generation technologies, notably renewables, is falling rapidly while the perception is that costs in the nuclear sector are not. A challenge to public finance in some countries comes from recent experience of macroeconomic developments connected with financial crises, he said, and the coronavirus pandemic has introduced “an entirely new dimension” to the consideration of macroeconomic risks.

A second “tried-and-tested” model is for utilities to finance nuclear plants, but competition in electricity markets has “weighed down on the balance sheet capacity” of some of those companies in the last 10-15 years, he said. And, like governments, some are increasingly focused on decarbonisation through renewables. The result is the nuclear industry is less likely to see as much investment coming forth with this model in future, he said.

A third model, which is very often used for energy infrastructure more generally, he said, is having long-term contracts between generators and their customers, but it is sometimes “difficult to reconcile” having a relatively small number of very large energy-intensive users with very long-term contracts for the offtake of power from nuclear generating plants, with liberalised market arrangements. In addition, contract disputes can be hard to resolve and as such might not be an attractive basis for future investment.

Another model is based around government support mechanisms enabling private finance to come forward, such as feed-in tariffs and contracts-for-difference, but the construction risk is still by and large borne by the developer, he said. Inconsistency in government commitment to nuclear generation means that such incentives are changed or not repeated, and so it can be difficult to rely on the support schemes being in place in the way they were originally envisaged long term, he said. Market arrangements can also change “very dramatically”, which can have an impact on the business case of new build as well.

The regulated asset base (RAB) model has “great potential”, he said, because there are lots of infrastructure investors or pension funds seeking to place their money in long-term assets. They have “a more patient attitude” towards the capital allocation and are very familiar with this model in other sectors.

“The key consideration here though is that, again, the risk transfer is something that in this context needs to be developed more or less from scratch. I’m not aware of any particular instances where the RAB model has been used directly, at least not in the recent past, but particularly in the UK context where this is being actively discussed, the arrangements need to be developed and this can take time, but I think the upside potential is quite considerable,” he said.

“One of the key challenges here is perhaps the polar opposite one of the feed-in tariffs and the contract-for-difference model which is that in the RAB model the energy user will be partly funding potentially the construction of the plant before it is completed. And I think that is something that, as a point of risk transfer, and risk allocation efficiency, needs to be worked out. Provided this can be overcome then, certainly, the RAB model is one that potentially can do a lot of good in bringing forward investment in certain markets at certain times, and particularly where there is a culture of using regulation in the infrastructure sector over time as there is in the UK.”

Clear signal

Asked whether electricity markets give a clear signal to investors in low-carbon generation, Kristensen said: “On balance, the short answer is, no.”

“What we do have in a number of countries are taxes on, or incentives for, different kinds of technologies, activities or fuels, and while that’s helpful, very often there is potentially quite a lot of variation in the effective carbon price built into them. That means you don’t get the right kind of competition between different fuel types or technologies that you would if you had an overarching market-wide price signal,” he said.

The European Union’s Emissions Trading Scheme provides a carbon price and different countries have a similar kind of cap-and-trade system that provide a uniform market price. These could perhaps in the future they be expected to cover more more segments of the economy and infrastructures, and therefore would provide a useful carbon price signal for investment in low-carbon generation, he said.

Unfortunately prices based on these mechanisms don’t necessarily reflect the long-term risks and costs of climate change, and there are policy-related reasons for this, he said. “Obviously, in some countries where you have very high carbon prices or carbon taxes, that can then affect the price of electricity and other services to consumers and industries and producers of various goods and services, and reduce the overall competitiveness of the economy relative to other neighbouring countries that don’t have such price signals.”

It is going to require international coordination to “shield” those consumers, producers and industries that are “within the zone” of effective carbon prices from inefficient or unfair competition outside where their competitors don’t have the same incentives, he said.

Market arrangements simply don’t internalise the costs that different infrastructures impose on the system and therefore the electricity or other infrastructure services may not be priced correctly, he said.

To have a clear signal, more robust market arrangements are needed, particularly for pricing carbon, he said. For as long as those are absent, other supporting policies will be needed, he said, such as the carbon border taxes being discussed as part of the European Green Deal.


Source: World Nuclear News