TODAY’S STUDY: THE NEW, HIGHER COST OF NUCLEAR

Nuclear Safety and Nuclear Economics: Historically, Accidents Dim the Prospcects for Nuclear Reactor Construction; Fukushima Will Have a major Impact
Mark Cooper, December 2011 (Institute for Energy and the Environment, Vermont Law School)

SUMMARY

History has shown that each major nuclear accident has caused a re-examination of the risks of nuclear power leading to more stringent safety requirement and higher costs. The failures that led to the ongoing catastrophe at Fukushima are being scrutinized in the United States and other countries. An analysis of the current re-evaluations of nuclear power and a comparison with the substance and economic impact of past, post-accident reviews provides important insights into the prospects of new nuclear reactor construction in the decade after Fukushima.

• Before Fukushima, the mythical “nuclear renaissance” had already proven to be a bubble with the air rapidly leaking out of it. Fukushima will make it even more difficult to inflate.

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Economics

Fukushima is magnifying the economic problems that the “nuclear renaissance” faced, which are the very problems that have plagued nuclear power throughout its history. Nuclear power has always suffered from high cost and continuous cost escalation, high risk and uncertainty. With long lead-times and large sunk costs, nuclear is a risky investment in an environment filled with ambiguities. That is the reason that the “nuclear renaissance” never got started.

The nuclear reactor disaster at Fukushima will increase the cost and further undermine the economic viability of nuclear power in any country that conducts such a review.

• The Japanese government has recently estimated that the cost of power from nuclear reactors will be 50 percent higher than estimated seven years ago.

• This increase is consistent with the impact of past accidents.

Safety risks render the nuclear industry uninsurable in commercial markets. Fukushima reminds the financial markets that the liability of a major accident will instantaneously bankrupt the utility owner, absent the socialization of costs.

• The cost of the Fukushima accident has been estimated as high as $250 billion and rising, which essentially bankrupted Tokyo Electric Power Co., the fourth largest utility in the world.

• Estimates of the cost of a severe accident in the U.S. are in this range or higher.

• Although the bailout of nuclear power cushions the blow, it also constrains the growth of profit, which makes the sector less attractive to investors.

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Safety

Fukushima has stimulated vigorous reviews around the world in part because it is severe (the worst accident affecting a nuclear reactor in a market economy) and in part because it occurred in a nation that was assumed to have a high standard of safety and superb technical expertise. Although the technical challenges are different with each accident, the challenges perceived by those responsible for nuclear safety in the wake of the Fukushima accident are quite substantial and reflect general historic themes.

• faulty design,

• insufficient backup systems,

• human error,

• inadequate contingency plans, and

• poor communications.

Even more striking are the persistent institutional failures revealed by a comparison between the post-accident evaluations of TMI and Fukushima, including

• Failure of voluntary, self-regulation;

• Denial of the reality of risk;

• Lack of safety culture;

• Lack of a comprehensive, consistent regulatory framework;

• The challenge of continuous change and the failure to resolve outstanding safety issues;

• Failure to require existing reactors to add safety measures because of cost; and,

• Complexity, confusion and chaos in the response to a severe accident.

With the global nuclear safety institutions expressing strong concerns, particularly the advanced industrial nuclear nations, and the aftermath of Fukushima likely to command attention for years as the extent of the damage and the challenge of decommissioning unfold, the issues are likely to continue to have traction.

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Policy

The reviews stimulated by accidents are not limited to safety issues. In the wake of Fukushima re-evaluations of energy options and nuclear risks and economics have substantially dimmed the prospects for construction of new nuclear reactors.

• Major policy reviews by governments have led several nations to decide to scale back or abandon their commitments to nuclear power (including important large industrial national like Japan, Germany);

• Financial institutions have conducted extensive reassessments of the economic prospects of nuclear power and concluded that the costs will rise;

• Utilities with nuclear plans in several national have continued to be downgraded by the rating agencies, and

• Several major firms have abandoned the sector altogether or been forced to scale back their activities.

As all stakeholders re-examine all aspect of energy policy, the risks of nuclear reactors increase and the attractiveness of nuclear power compared to other options decreases.

From a big picture perspective, Fukushima has had and is likely to continue to have an electrifying impact on the development of nuclear power because it combines the most powerful message from TMI on cost escalation with the most powerful message from Chernobyl on the risk of nuclear reactors in a nation where it was not supposed to happen. And, it has taken place in an environment where information and images flow instantaneously around the world, so the public sees the drama and trauma of losing control of a nuclear reaction in real time…

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ACCIDENT REVIEWS REVEAL CHRONIC INSTITUTIONAL FAILURES

Fukushima reveals a lack of safety consciousness

Each reactor accident is different and entails specific system failures that allowed the accident to occur and spin out of control, but there are common technical themes: faulty design, insufficient backup systems, human error, inadequate contingency plans, and poor communications. The list is particularly long in the case of Fukushima. However, perhaps more striking than the technical issues raised by Fukushima, are the persistent institutional failures revealed by a comparison between the post-accident evaluations of TMI and Fukushima. 11 For decades, the nuclear industry has been plagued by:

• Failure of voluntary, self-regulation;12

• Denial of the reality of risk;13

• Lack of safety culture;14

• Lack of a comprehensive, consistent regulatory framework;15

• The challenge of continuous change and the need to retrofit existing reactors;16

• Failure to resolve important outstanding safety issues;17

• Failure to require existing reactors to add safety measures because of cost;18 and,

• Complexity, confusion and chaos in the response to a severe accident.19

With the global nuclear safety institutions expressing strong concerns (particularly those within the advanced industrial nuclear nations), and the aftermath of Fukushima likely to command attention for years to come as the extent of the damage and the challenge of clean-up and decommissioning unfold,20 the safety and cost issues are likely to continue to have traction.

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SAFETY RISKS RENDER THE NUCLEAR INDUSTRY UNINSURABLE IN COMMERCIAL MARKETS

Fukushima reminds the financial markets that the liability of a major accident will instantaneously bankrupt the utility owner, absent the socialization of costs.

The cost of the Fukushima accident has been estimated as high as $250 billion,22 and will likely continue to increase. Tokyo Electric Power Co., the fourth largest utility in the world, was essentially bankrupted instantaneously by the accident.23 Even though the financial bailout of the nuclear power cushions the blow, it constrains future profit prospects, making the sector less attractive to investors.24

The cost of Chernobyl thus far is well over $700 billion.25 A comprehensive assessment of the potential cost of major accidents in the U.S. was made soon after Three Mile Island.26 Adjusting the estimate from that study for inflation, population growth and the increase in property value would put the average cost of a severe accident above $400 billion, with an accident at the reactors closest to the largest population centers running as high as $1.5 trillion.27 Thus, although major accidents are frequently portrayed as human and environmental catastrophes, reactor accidents are also potential economic catastrophes.

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The numbers are so large they are difficult to put in perspective for analysts, not to mention the public. For example, studies commissioned by the World Health Organization estimate that there were an average of 350 natural disasters per year in the first decade of the 21st century with total damages for all disasters of about $100 billion per year.28 By this measure, a single, severe nuclear accident can impose costs that are larger than the costs of thousands of natural disasters that take place over many years.

The massive consequences of a major accident place an intensive spotlight on a fundamental reality of nuclear power. It is uninsurable in normal financial markets. Fifty years ago, as the commercial nuclear industry was starting up in the U.S., two of the largest vendors of nuclear reactors made it clear that they would not build any reactors if they were not shielded from the liability of a nuclear accident. General Electric (GE) said it would not proceed “with a cloud of bankruptcy hanging over its head.29

Since the risks of nuclear reactors appeared to be uninsurable in the marketplace, Congress enacted a limit on liability as a form of “infant industry” protection to foster the nascent commercial nuclear industry's growth.30 Thus, Congress socialized the cost of nuclear accidents with enactment of the Price-Anderson Act. However, the infant never outgrew the need for the subsidy. Recent analyses and the accident at Fukushima support the conclusion that nuclear reactors continue to be virtually uninsurable via the private insurance market…

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THE “NUCLEAR RENAISSANCE” HAD FIZZLED BEFORE FUKUSHIMA BECAUSE OF HIGH COSTS

Fukushima will add risk and cost to make nuclear power even less attractive.

The increase in risk associated with the post-accident reviews and the history of cost escalation, before and after accidents will make investors and governments look less favorably on nuclear power. This inclination is compounded by the fact that the cost of new nuclear reactors was highly uncertain before Fukushima (as shown in Exhibit 5).

Since the first estimates were put forward by nuclear "Enthusiasts" in an effort to create the impression of a “nuclear renaissance,” cost estimates have increased dramatically and the numbers that were originally hyped to kick off the “renaissance” proved to be far too low. Although the Enthusiasts have since raised their cost projections somewhat, Wall Street analysts still use construction cost projections that are at least 50 percent higher.

Fukushima will magnify the economic problems that the “nuclear renaissance” faced, which are the very problems that that have plagued nuclear power throughout its history. Nuclear power has always suffered from high cost and continuous cost escalation, high risk and uncertainty. With long lead-times and large sunk costs, nuclear is a very risky investment in an environment filled with ambiguities and competitive alternatives. Thus, new reactors are the antithesis of prudent investment.42 That is the reason that the “nuclear renaissance” never materialized. Hype and speculation of dozens of projects quickly gave way to a handful that became increasingly dependent on massive public subsidies to move forward. Before Fukushima, the Energy Information Administration, which had been one of the early Enthusiasts, had already conceded that only four reactors would be built over the next two decades.43 After Fukushima, even that number is in doubt.

From a big picture perspective, Fukushima has had and is likely to continue to have an electrifying impact because it combines the most powerful message from TMI on cost escalation with the most powerful message from Chernobyl on the risk of nuclear reactors in a nation where it was not supposed to happen. And, it has taken place in an environment where information and images flow instantaneously around the world, so the public sees the drama and trauma of losing control of a nuclear reaction in real time…