Nuclear Power is more
profitable t h a n
when funding model is correct. Produced by Nuclear Africa (Pty) Ltd for general public information.
by D r D a w i d S e r f o n t e i n Nuclear plants are more capital intensive than most other power plants. However, they last for 60 years, compared to only 25 years for wind turbines. They also produce power as much as 90% of the time, compared to much less than 30% for wind turbines. So if you fund nuclear plants with the cheap loans that are currently available to Eskom, then nuclear plants will produce reliable, clean power cheaper than coal, wind, and solar. The New Generation III nuclear reactors are also much more efficient and are some of the safest machines on the planet.
The Department of Energy of the South African Government recently released both its Draft 2012 Integrated Energy Planning Report (IEP); and its Integrated Resource Plan For Electricity (IRP) 2010-2030: Update Report 2013 (IRP Update), for public consultation. Both the IEP and IRP Update lay excellent foundations for South Africa’s energy future as they include a comprehensive set of data and sophisticated computer modelling tools. There are however, a number of serious flaws in both reports, which have skewed their results to the point that their implementation would impact very negatively on South Africa’s energy security and on its economy. In both government reports one of the potential scenarios recommends that the planned construction programme for 9600 Megawatts of new nuclear power plants be delayed and/or scaled down. However the flaws in these reports cause a massive overestimation of the cost of nuclear power and underestimations of the cost of coal, wind and solar power. It is evident that when all the external costs (i.e. the cost of damage to the environment and the costs of human diseases and deaths, which are especially high for coal power plants), are taken into account, together with the intermittency costs of wind and solar PV, it becomes clear that nuclear will produce power cheaper than all of these sources. Only hydro power is cheaper, but unfortunately very few viable hydro sites are available locally; and importing large amounts of hydro power over the borders of many countries may leave South Africa very vulnerable to political insecurity. Therefore, when modelled with a correct set of assumptions, the results indicate that the nuclear construction program should neither be delayed nor scaled down, but should rather be given priority.
Dr Dawid Serfontein is a Nuclear Engineer in the School of Mechanical and Nuclear Engineering at North-West University. Visiting the Cheetah Rehabilitation Centre.
The main flaws that skewed the results of the IEP and IRP Update are: an unrealistically high discount rate/cost of capital has been assumed; the intermittency costs of wind and PV solar have not been taken into account; “time of day” electricity selling prices have not been taken into account; imported CO2 emissions from coal plants in Botswana have not been taken into account; external costs were not internalised for shale-gas, coal and nuclear; and unrealistically high cost reductions related to learning rates have been used for Concentrated Solar Power with thermal storage (CSP). 1
Nuclear Power is safe, clean, economic and sustainable
Furthermore the risk to both security of future energy supplies and the national security considerations of importing a considerable amount of South Africa’s energy, have not been taken into account.
What the results show:
These flaws caused future energy mixes, proposed by the IEP and IRP Update, to contain unrealistically high percentages of coal, PV solar, CSP, imported gas, imported coal power and imported petrol and diesel. The flipside was unrealistically low percentages of nuclear, wind and gas power.
Modelling calculations A set of modelling results are presented here in an attempt to show how of some of these flaws were skewed in the DOE results, and further to suggest how the DOE results may be adjusted to produce corrected features in the final versions of the IEP and IRP Update reports of the DOE. Some of the concepts required to understand the modelling assumptions, such as discount rates; funding models; the relationship between sufficient power supply and economic growth; the external costs of nuclear accidents, or coal smoke; intermittency costs of renewables; differences of opinion on global warming and global climate ; are fundamentals.
Modelling assumptions
Figure 1: Levellised cost of electricity (in 2010 Rand) for nuclear and coal as a function of the post-tax real WACC% for both the Expected and Pessimistic Case for both coal and nuclear.
In Figure 2 the % return received by Government on its capital investment, excluding taxes, is compared for the Expected Coal case and the Pessimistic Nuclear case. The Pessimistic Nuclear case was selected as a conservative measure.
The presented calculations focus on a detailed comparison of the profitability of nuclear vs. coal power. For a detailed list of the input assumptions used for the computer models, see NIASA’s review of the IRP Update. See References. The following are the most important assumptions: Definition: The Levellised Cost of Electricity (LCOE), i.e. the average generation cost, excluding transmission and distribution costs, over the whole life of the plant, measured in constant 2010 Rand/kWh, was calculated as a function of the real Weighted Average Cost of Capital (WACC%), as shown in Figure 1. The WACC% is the combination of the real % interest Eskom must pay on the loans for a plant, and the real % profit which Government, as the owner of Eskom, demands from Eskom. In this case it was assumed that Government invests 100% of the capital as equity and therefore the WACC% is the % rate of return (i.e. the % profit) demanded by Government. The LCOE is the average cost of all the units of electricity (kWh) produced by the plant over its entire lifetime. New Generation III Nuclear: • Expected case: The Overnight capital cost was assumed = $5,500/kW-installed • Pessimistic case: Overnight cost = $7,000/kW-installed. New Pulverised Coal: Overnight capital cost is about half that of nuclear. • Expected case: The only external cost is assumed to be = R120/ton CO2 carbon tax. • Pessimistic case: Full external costs, including health costs. 2
Figure 2: Rate of return % on capital, as a function of electricity selling price (= generation cost).
Figure 3: Nominal return on capital, for 1 kW installed capacity, as a function of electricity selling price.
Nuclear Power is safe, clean, economic and sustainable
For Figure 3 the nominal return on Government’s investment was calculated as = Capital cost of the plant x Return% on investment.
High Temperature Gas Reactor Fuel Ball manufactured in South Africa.
The real picture emerges
Figure 1 shows that the LCOE for nuclear is substantially lower than for coal, provided that the real post-tax WACC% remains below about 4%. The amazing fact is that, for low WACC%, the LCOE of nuclear remains lower than that of coal, even if the Overnight cost of nuclear was to increase to the much maligned $7,000/kW. In his input to the National Planning Commission, Prof. Anton Eberhard argued that if the nuclear Overnight cost were to increase to $7,000/kW-installed, this would make nuclear uneconomical. This fear was subsequently echoed by the National Development Plan and by many others, most notably the IEP and IRP Update. All these studies used high real WACC% or high real discount rates, typically between 8% and 11.3% in the case of the IEP. Figure 1 clearly demonstrates the one weakness of nuclear: if your WACC% (or discount rate) really is this high, the LCOE will shoot up dramatically to much higher than that of coal (and even higher than PV solar). This extreme sensitivity to the WACC% is caused by the fact that the capital cost of a nuclear plant is about twice that of a coal plant. However, since NERSA (Ref NERSA 2013: Table 8) limited the post-tax WACC% that Government may demand from Eskom to 3.7%, these high WACC percentages and discount rates are unrealistic and out of line with Government’s established policies. Therefore the negative results presented by Prof. Eberhard, the IEP and the IRP Update were not as such caused by the high Overnight cost of $7,000/kW, but rather by the unrealistically high real WACC% and/or discount rates they used. This result, i.e. that the LCOE is much more sensitive to the WACC% than to the Overnight cost, also shows that the $6,500/ kW-installed cap on the Overnight cost for nuclear, proposed in the IRP Update, is largely meaningless and should rather be replaced by a cap on the LCOE. This cap should then be applied to all the power sources, rather than only to single out nuclear. Since the LCOE of nuclear is lower than most other sources, nuclear will then pass this LCOE cap with flying colours.
Since it is widely accepted that coal power is normally cheaper than wind and solar power, especially if you add the intermittency costs of these renewables, the result that nuclear power will be cheaper than coal also implies that nuclear will be cheaper than wind and PV solar. From the IRP Update it is clear that only hydro-power can supply clean reliable and dispatcheable power cheaper than these low nuclear costs, and therefore hydro-power capacity should obviously be expanded substantially. Unfortunately South Africa is a very dry country and thus large amounts of cheap hydro-power can only be imported over the borders of several neighbouring countries, which may leave South Africa very politically vulnerable. Figure 2 displays the same data as Figure 1, but arranges it differently by comparing the % rate of return that the State will realise on its investment for the Pessimistic nuclear case ($7,000/kW-installed) to that of the Expected coal case, as a function of a wide range of electricity selling prices at the gate of the plant, i.e. excluding transmission and distribution costs. Nuclear produces much higher % rates of return when the electricity selling price is lower than about R0.82/kWh and vice versa. Figure 3 shows the same data as Figure 2, but now replaces the % rate of return with the nominal return/kW-installed capacity. Amazingly nuclear now greatly outperforms coal for all values of the electricity selling price. The reason for this is that the Total Capital Required (TCR) for 1 kW of nuclear capacity is about twice that of coal. A nuclear plant that produces 1 kW at the same % rate of return for Government as does a coal plant, will actually supply Government with a nominal return on its investment that is about twice as large as that of the coal plant.
Relationship between sufficient power supply and economic growth The reduction in demand for power, initiated by Eskom’s power buy-back program, and the associated reduction in electricity intensity of the economy, was viewed in the IRP Update as an acceptable outcome, which may help SA to get through any power shortages. This reduction in demand was also used as one of the main motivations for delaying the nuclear new-build program, or seriously scaling it down. However, the electricity intensive primary and secondary economic sectors primarily supply jobs to the poor, while the much less electricity intensive tertiary activities supply work to the more well-to-do professions, such as engineers, lawyers, computer programmers etc. Therefore starving our economy of cheap power will not hurt the tertiary sector as much as it will cause the downscaling of primary and secondary activities, such as mining and heavy manufacturing. This will hit the poor especially hard. Therefore, the primary and secondary activities should be strongly supported. The reduction in demand should thus be mitigated by supplying plentiful and affordable electricity to the market. A large nuclear fleet can play a key role in a programme of economic growth. 3
Nuclear Power is safe, clean, economic and sustainable
Apples with apples
Correct Path
Therefore, comparing % rates of return does not compare apples with apples, and inherently skews the playing field in favour of coal. By replacing % returns with nominal returns, it is clear that even the Pessimistic Nuclear Case, with its $7,000/kW-installed overnight cost, will in most cases supply more than twice the nominal return to Government than the Expected Coal Case.
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A number of serious flaws in the Draft IEP and IRP Update have been pointed out, and ways to correct these have been suggested. Practically speaking, correcting these will be easy since they require only simple modifications to the model input assumptions. Therefore it is to be expected that the final versions of the DOE documents will be productive and illuminating.
When the electricity selling price drops below R0.75/kWh, the ratio by which nuclear outperforms coal skyrockets to infinity, as the nominal profit of coal drops to zero! To this has to be added the fact that the nuclear plant will keep on doing this for ten years longer than the coal plant, which results in an increase in the cumulative nominal return over the full plant life, even more.
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When all appropriate factors have been included in the modelling assumptions, the results will indicate that nuclear produces the cheapest power of all the readily available sources. This reality then implies the following construction strategy:
While it has to be borne in mind that Government will have to invest about twice the amount of capital in order to realise these benefits, nuclear is obviously the best option for Government to be able to maximise its revenue from Eskom’s monopoly on the South African power market. Due to this monopoly, Government’s investment risk will be virtually zero and thus it will be able to cheaply borrow the required capital.
Vision to consider A better way for Government to view electricity generation, is to take the position that rather than maximising the profit from Eskom’s electricity sales, it would be better to try to stimulate the economy by supplying abundant cheap power to industry. In view South Africa’s abundant mineral resources, which are frequently exported in unbeneficiated form, such as our massive exports of iron ore, it would be more productive to add value locally and to then export beneficiated products. So let us assume that Government were to be willing to supply the new build electricity at cost price, i.e. Government would be willing to accept a zero return on its new build investment. Figure 3 then tells an even more fascinating story: nuclear already becomes profitable at R0.45/kWh, while coal will run at a loss until the price is increased to R0.71/kWh. Break-even coal power thus costs a whopping 58% more than breakeven nuclear power!
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Make long term construction commitments to supply the minimum expected base-load demand with nuclear plants. Peakers, such as hydro and gas turbines should then be added in order to supply the demand peaks.
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As and when unexpected demand increases appear imminent, the other plant types, with their shorter lead times, can then be rolled out quickly in order to supply this excess demand. Nuclear then forms the cheap base-load foundation upon which the other technologies are added.
Related documents DOE. 2011. Integrated Resource Plan for Electricity 2010-2030 (IRP 2010-2030). Revision 2, Final report, 25 March 2011. Department of Energy of the Republic of South Africa. DOE. 2013a. Draft 2012 Integrated Energy Planning Report. (IEP). Department of Energy of the Republic of South Africa. http://www.energy.gov.za/files/iep-publications.html (Accessed: Dec. 2013). DOE. 2013d. Integrated Resource Plan For Electricity (IRP) 2010-2030: Update Report 2013. Department of Energy of the Republic of South Africa, 21 November 2013. www.doeirp.co.za/content/IRP2010_updatea.pdf (Accessed: Jan. 2014). NIASA. 2013. Review of: Draft 2012 Integrated Energy Planning Report (IEP), released by the South African Department of Energy. December 2013. Available from the Nuclear Industry Association of South Africa (NIASA) http://www.niasa.co.za/main.html NIASA. 2014. Review of: INTEGRATED RESOURCE PLAN FOR ELECTRICITY (IRP) 2010-2030 UPDATE REPORT 2013, released by the South African Department of Energy. December 2013. Available from the Nuclear Industry Association of South Africa (NIASA) http://www.niasa.co.za/main.html
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