Nuclear phase-out and the energy transition

Belgium finally has a new government. This time it took Belgian politicians 494 days to find the compromise that allowed parties to join a coalition. On the energy front, this government plans to shut down nuclear power plants – again… Belgium is still producing around 50% of its electricity with its 7 nuclear power stations. To convince the green parties to join the new coalition government, promises had to be made to shut those down. This caused a conservative party in the North of the country (that didn’t join the coalition) to warn people that this new government will turn the lights off. Discussions about the role of nuclear in our power production are held all across the globe. Each country has its specifics, but this is basically the line-up:

• On the one hand, many green parties have their roots in anti-nuclear protests during the 1970s and 1980s. Some of those, such as the new Belgian minister of energy Tinne Van der Straeten, are so anti-nuclear that they are willing to consider carbon-emitting gas-fired power stations to replace carbon-free nuclear. They are reinforced by renewable energy enthusiasts that are afraid that nuclear energy will create unfair competition and thereby hinder the further expansion of wind and solar.
• On the other hand, there is a broad coalition of conservatives and science geeks that believe nuclear energy is the future.

Public opinion is split, as can be seen in this March 2019 Gallup opinion poll in the US:

• 49% of Americans favour the use of nuclear energy; 49% oppose
• 47% of Americans believe nuclear power plants are safe
• 65% of Republicans, 42% of Democrats favour the use of nuclear energy

(Observation: I really wonder who that 2 percent of Americans are that believe nuclear power stations are unsafe but still favour their use. Another observation: again you can see how there is also a dividing line between left and right in politics on this issue.)

Nuclear power has been discussed ever since I began to observe energy markets (25 years now). It’s recently been reinvigorated because of the role that nuclear energy can have in the energy transition. Renewable energy is of course at the heart of this transition. It’s all about increasing the share of power produced with mostly wind and solar. Carbon-free, zero variable costs and – thanks to rapid technological development – increasingly cheap in terms of investment costs. On top of that, the switch to more solar and wind power is moving our markets towards a decentralized model. This fits well with other elements of that energy transition such as electrification, as well as of mobility and the move towards smarter energy.

However, solar and wind have one big drawback, their production is not constant. You only have electricity when the sun is shining and/or the wind is blowing. Recently, California was confronted with this drawback when it had to organize rolling black-outs. And earlier this year, during the lockdown, we were confronted with the flipside of this issue. As demand was low, some countries with high percentages of renewable capacity saw excess volumes pushing spot prices into negative territory. This intermittency challenge has different dimensions:

• My most clever remark ever in these blogs: the sun doesn’t shine during the night, meaning you don’t have your solar power production available during the night. This is of course a period of lower consumption and the availability of solar power fortunately coincides with increased usage of electricity for cooling purposes.
• On a system-wide basis, weather variations cause constant, short-term drops and increases in power production. At any moment there can be a few hours or days during which you don’t have your wind and/or solar power production available. Fortunately, a cloudy day is often also a windy day, meaning that a system that has both solar and wind will find some degree of balance thanks to that mix. But a cloudy day without wind is a major challenge for systems with a lot of wind and solar.
• Passing clouds and the ever-varying wind speeds cause continuous variations on a local level in terms of production. Even if these are evened out on a system-wide basis, this variability poses challenges from a net management point of view.
• An intermittency challenge that is often overlooked is seasonal variation. There’s more solar energy available during the summer months (what a clever remark again), but wind is also blowing harder during the North-West-European autumn than during summer. Again, wind and solar have different patterns here due to which they can make up for some of each other’s shortcomings.

Criticism is often formulated by isolating one technology or highlighting one particular challenge. However, both from a physical and economical point of view, to say anything reasonable about electricity systems you need to look at them from a holistic point of view. The MWs don’t care where they go to or where they come from, that’s how electricity transportation works. It’s all about keeping balance on the wires, pumping in every MW that is withdrawn, instantly and – if enough transport capacity is available – regardless of where electricity is injected or extracted or what technology it was produced with. This gives us a lot of different options to solve the intermittency issues of increased renewables.

In his book Power after Carbon, Peter Fox-Penner gives a good insight into what a well-balanced carbon-free system could look like. In isolation, they all have their merits and shortcomings. Focusing on those shortcomings, it looks like intermittency can never be solved, but by looking at all of them together, you realize that the shortcomings of one technology can be solved by the merits of another. And it doesn’t look impossible to build a well-functioning system of 100% carbon-free energy in the next decades. (This is another flaw frequently observed in the reasoning of both renewable critics and fanatics. They reason as if we need to move to 100% carbon-free tomorrow. Therefore, their view on technologies is static, whereas many of the technologies below are still on the steep part of the curve in terms of improving technological capability and dropping investment costs.)

As you can see, nuclear energy gets a role in this holistic view. I’ve always witnessed how many people pollute the energy debate by their eagerness to pick winners and losers. The preference for one technology can have an almost emotional dimension with some individuals. Personally, having looked at energy from a risk management point of view for over 15 years, I believe that diversification is the best strategy to deal with the energy transition’s challenges. It’s not about what technology will win, it’s about how to be clever in adapting the mix of technologies. And how you phase out nuclear will indeed have a huge impact, both from a carbon reduction and from a cost for the end-user point of view.

Before sharing my thoughts on how to do that, I first want to talk cost and debunk the myth of cheap nuclear power. Like any asset, the cost of running power production assets should be split up in fixed and variable costs. Variable costs are mostly the fuel cost, whereas fixed costs are the investment costs. Some of the assets in the table above have a relatively low ratio of fixed costs to the overall costs. Traditionally we think about (decarbonized) fossil fuel plants. They can be used to supply flexible demand. Shutting them down when no power is needed means you are eliminating the variable fuel cost so that you can keep cost low. Assets like pumped storage, heat storage, hydro reservoirs, hydrogen production or electrochemical batteries have similar properties, with variable costs being the cost of charging them with the energy that is to be unloaded at a later stage. Demand response even has zero fixed costs. There is only the (variable) opportunity cost of not using the asset that is switched off. As renewable energy starts to reach double-figure percentages of the overall power production, further success for decarbonization starts to depend heavily on the switch to carbon-neutral flexibility instead of fossil-fuel fired power stations. And failure to uphold flexibility can cause systemic risk, as we’ve seen last summer in California.

Nuclear and renewable energy sources share, as a common characteristic, the fact that they are on the other side of this spectrum with almost exclusively fixed costs. This means you want to run them every hour that you can so that you generate cash to pay back your investment and because you don’t save any money on variable cost when you shut them down. Nuclear power stations will therefore produce a very stable, 8000 hours per year stream of baseload power. Renewable will produce an overall stable but continuously intermittent stream of power, 850 or 2000 hours per year, for example, as is the case for respectively solar and on-shore wind in my country. Solar panels and wind turbines will produce more or less the same amount of MWhs every year, but you never know upfront during which hours they will do this.

Now, here’s the myth-buster: nuclear energy is far from cheap. Yes, it has very low variable cost. Albeit expensive, a tiny chunk of uranium produces lots and lots of power. But in terms of fixed costs, renewable has won the cost game and is now far cheaper than nuclear. Of course, there isn’t one single cost for any technology, these costs vary continuously from project to project, but recent developments give some insight:

• Nuclear. Have a look at Hinkley Point. The UK wanted to build a new nuclear power station. To attract EDF to build it, they had to promise them a guaranteed price of 92,5 GBP/MWh in 2012 value, indexed. That’s already 110,05 GBP or 121,04 Euros/MWh in 2019 value. Even at these prices, project developers are reluctant to take the risk, taking into account the massive cost overruns of recent projects such as Flamenville. Again, there isn’t something like the cost of nuclear, but if you have a look at what happened with recent projects, you can clearly see this 120 Euro/MWh as an indicator of how expensive it has become to build new nuclear power stations in Europe or the US. Nuclear fans will point out that a lot of this extra cost comes from increased safety demands. True, but they are a reality that I don´t think will be turned down again.
• Renewables. Here, we can find cost indicators in the so-called Power Purchase Agreements or PPAs. These are fixed price agreements signed by project developers with end consumers to get financing. Their level represents the cost at which investors are ready to make the investment. Recently, we see them come out at price levels below 40 Euros/MWh (solar projects in Spain).
  

Moreover, the trends are clear. Investment costs for (newly built) nuclear keep on rising whereas those of renewables are falling, and much more rapidly than any analyst ever predicted. Therefore, I consider recently announced plans to investigate investment in new nuclear power stations in, for example, the Netherlands or Poland to be ill-advised. These are based on (conservative) ideology rather than economic analysis. Nuclear is now two, three or even four times more expensive than renewables. The nuclear proponents will point out that these costs of renewables don’t consider the cost for making the adjustments to the system that are necessary to deal with the intermittency challenges. My point here is: for every Euro spent on new MWhs produced with renewables instead of spent on nuclear, you now have one, two or even three Euros left over for those investments in the system. That’s a lot of money. And where will these cost evolutions lead over the next decade, the period that will be necessary to plan, permit and build those new power stations? Aren’t we at risk of finding out that in ten years the new nuclear MWhs cost ten times more money than renewables? Looking at the trends, investing in new nuclear has a high risk of turning into disastrous over-spending of public money.

Going back to the initial discussion on nuclear phase-out in Belgium, this is of course a totally different story. Here, the investment has been made already and keeping existing nuclear power stations open for a longer time or making some small investments to revamp them will lead to having cheap, carbon-free electricity available for a longer time.

In terms of decarbonization, this is obviously a wiser choice than building new gas-fired power stations for which the carbon capture, usage and storage technologies aren’t yet available. On the other hand, there’s also some truth in the warning of renewable energy proponents that too much nuclear power production capacity in a system can slow down the development of more renewable energy. Too much nuclear and renewable will mean that there are simply too many hours during which both of them together are producing more electricity than is needed. And as technically it’s hard to shut down a nuclear power plant, this could mean that wind turbines get turned off, which is a disaster for their economics. It would therefore be wise to gently start decreasing nuclear capacity at a certain point in time.

This is a contentious debate in Belgium because it´s one of just a handful of countries that have come to depend so heavily on nuclear energy. Only France, Slovakia, Ukraine and Hungary have a higher percentage of their electricity produced with nuclear, and this is a worldwide ranking. This means that, on the one hand, it’s more effort to replace those with other carbon-free resources, but also that there is a higher risk of competition with renewables from nuclear. One benefit is that Belgium has a very high degree of interconnection with the rest of Europe. We could replace the phased-out of nuclear with renewable energy produced in other parts of Europe. However, phasing out too fast would indeed mean that we need to build or re-open gas-fired power stations. That would be a replication of Germany’s rushed nuclear phase-out, which was often criticized as resulting in extra climate change as the nuclear MWhs were replaced with coal-fired energy. Now, the tables have been turned as Germany reduces its carbon footprint thanks to continued expansion of renewables, but for a few years, there was an unnecessary accumulation of carbon dioxide. You can really ask this question to Frau Merkel in this sense, was it really necessary to rush this phase-out?

In the next years, the new Belgian government will be around the table again to discuss the phase-out. Let’s hope that they do this based on a holistic, system-wide, pan-European and economic point of view and not just ideology.