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The No 1 Gold Stock for 2019

Japan's Non Nuclear Energy Nightmare

Politics / Nuclear Power Feb 25, 2014 - 05:34 PM GMT

By: Andrew_McKillop

Politics

No Nuclear – No Future

The draft of Japan's new Basic Energy Plan, made public on Tuesday, calls nuclear power an “important baseload electricity source”, effectively reversing or heavily diluting the 2012 datsu genpatsu – “escape from nuclear” – decision, or outline decision made by Naoto Kan the more left-leaning predecessor of Shinzo Abe. Naoto Kan's escape plan, however, gave no specific timelines to close all of Japan’s atomic power plants, only saying this would happen “over the next several decades”, in stark contrast with Angela Merkel's political decision of May 2011 to close all German nuclear power plants (NPPs) by January 1st, 2022.


At the time of her 2011 decision, nuclear power provided about 17.7% of German total electricity supply. By 2013, renewables covered about 26.5% of total German electricity supply. On a “prima facie basis”, therefore, Japan can relatively easily replace all its nuclear generation within a relatively short period of time but the economic, financial, industrial, technical – and political - challenges make this a future that Japan “can't contemplate”.

Mr Abe supports efforts by Japan’s electric utilities to restart “about a dozen” of Japan’s remaining 50 still-usable reactors, all of which are presently shut down for safety reviews. The new Basic Plan, likely to be approved by Mr Abe’s cabinet by end-March, is hailed by Japan's utilities as able to “open the door to a broader nuclear revival”, possibly including the construction of new reactors. Above all it kicks the can of NPP dismantling and safestor site decontamination down the road. While Japanese public opinion remains opposed in the majority to restarting nuclear power, the costs of a full and formal “escape from nuclear” are too extreme. Using the French general accounting office (Cour des Comptes) outline cost analysis published in early 2012 for dismantling and safestor of France's 63 large civil NPPs, this would run “at about 3.8 billion euros (over $5 bn) per reactor”, and take decades.
For Japan's 50 undamaged NPPs, excluding its ruined Fukushima reactors, the total bill would be at least $275 billion. Adding the bill for Fukushima's six reactors, presently estimated at anywhere up to $175 billion over 15 – 25 years by analysts such as PWC – Japan could face a total “escape from nuclear” price tag north of $500 billion, of course excluding investment and start up costs for replacement power systems. Even for Shinzo's “Abenomics” this is a frightening prospect!

Overblown Nuclear Energy Assets

According to the US Energy Information Administration, nuclear generation in Japan covered about 26% of its power supply prior to the 2011 earthquake and was (the US EIA claims) one of the country's least expensive forms of power supply. According to Turkey's Hurriyet Daily, 18 February 2014, however, the global share of nuclear energy in the world’s power generation declined steadily from a historic peak of 17% in 1993 to about 10% in 2012, pushing down nuclear power’s share of global commercial primary energy production to 4.5%, a level last seen in 1984.

This 4.5% share for nuclear power in world primary energy, and its 10% role in world electricity supply, showed that about 45% of primary energy is used for power production – but electricity rarely covers more than 20% of final energy demand in the advanced industrial countries. Its role is usually below 5% in emerging and developing countries. This “45% in-20% out” relationship is finally due to inescapable thermal limits of energy conversion for producing electricity – about a half of which is used, finally, for producing heat in homes, offices and factories!

The so-called “dependence on nuclear power” that is often bandied around by politicians and of course by the nuclear lobby therefore only concerns a small, or very small – or even symbolic part of world final energy supply. For nuclear weapons, of course, the story is different. Building nuclear weapons obligatorily needs plutonium-brewing nuclear reactors. Meeting national energy needs does not, also shown by only 31 countries utilising at least 1 nuclear power reactor, as of January 2014 (according to Euronuclear), compared with the total of 192 member nation states of the U.N. as of early 2014.

In other words, 161 countries, today, do not use nuclear power.

Japan has replaced the loss of its nuclear power with generation from imported LNG (natural gas), low-sulfur crude oil, fuel oil and coal, and a very small but growing supply from the so-called “new renewables” (wind and solar power). The US EIA in late 2013 said fuel import cost increases have resulted in Japan's top 10 utility companies losing over $30 billion in the past two years, and that Japan's total spending on fuel imports in 2012 was $250 billion, accounting for about 33% of total imports by value.

Nuclear Debt and Power Prices

The European energy transition plan seeks the near-total backing out of fossil-based power generation by around 2045, but fossil uranium-fuelled NPPs are given “special treatment” by several key governments, especially French and British. Accumulated debt and NPP dismantling costs in the nuclear part of the power sector is the key unstated reason.

Japan, like Europe and the US faces severe national banking, financial and monetary stress following the 2008 global financial and economic crisis. Certainly in Europe, the growing financial crisis of the utility sector can be easily seen as a subset of the national and continental financial-economic crises and within the utility power sector, nuclear energy brings the highest levels of financial stress. Financing “new build” NPPs is effectively impossible without extreme high power prices and state-backing from start to finish – the private sector will not touch NPPs without ironclad guarantees.

Like the European banks, the power sector remains vulnerable to another financial crisis. As in the banking sector, capital buffers are too small, state-level creditor bail-ins, except for nuclear power are usually too small and come too late, and emergency resolution mechanisms as well as massive power price rises are the default result. State bailouts to the power sector have 'traditionally' mainly and firstly concerned nuclear power. In Europe, the UK is currently and officially pursuing both an extreme high cost “new build nuclear” program, and at the same time, the construction of the world's largest and most expensive offshore windfarms. With no surprise at all UK power prices, which are already high even by European standards, can only increase much faster than general price inflation as measured by national CPI.

Extreme high power prices are guaranteed by the UK government to the builders of new NPPs in the UK, and to be sure to the developers and operators of offshore windfarms. Called the “energy strike price of contracts for difference”, for nuclear electricity, this guarantees extreme-high electricity prices and therefore revenues for NPP builders and operators - which include no British builders due to the rampant deindustrialization of the UK. Similarly, all major mill equipment and offshore technology for the UK's proposed offshore windfarms will be foreign-built, when or if the already “troubled and controversial” offshore windfarm program is executed.

The first two “tranches” of new-build NPPs in the UK will be built by France's EDF, which is among the most-indebted stock exchange traded corporations in Europe.  EDF, sourcing 84% of its power production from nuclear energy, covering roughly 75% of French electricity supply (and about 24% of final energy demand) in 2013, has a corporate debt load approaching 40 billion euros. This debt can only grow, because EDF's debt at present excludes future nuclear plant decommissioning and safestor costs for the 63 large civil NPPs owned by EDF, the only owner-operator of NPPs in France. Using the outline dismantling-safestor cost estimates for NPPs of the French general accounting office in 2012, this would theoretically cost EDF close to 240 billion euros over the period 2025-2045, but at present there is no corporate accounting of this future debt.

What is certain is that power price hikes to claw the cash to start decommissioning funding are now widespread across 'Nuclear Europe', in those EU28 countries with sizeable numbers of NPPs. This round of power price hikes is unsurprisingly led by the most nuclear-committed country in Europe, France. With total support from the “socialist” French government of Pres. Hollande, which firmly limits state sector pay rises to 1% a year, EDF from 2013 is hiking power prices 10% each year for the next 3 years. Massive power price hikes in France are above all designed to enable the constitution of a fund for NPP decommissioning.

Making Nuclear Exit More Unthinkable

Europe's fossil energy exit plan, which almost exclusively concerns power generation, grid transport, distribution and power storage has to date already engendered a multiplying set of diseconomies, across the energy sector and through the economy. My argument is these are mainly due to the financialization of the power sector, like other economic sectors, and are not primarily due to the EU's energy transition program goals. This caused by the clash mix of mainly short-term for-profit corporate aims and ambitions of the “legacy power producers”, and longer term uncosted or vaguely costed goals for secure, low pollution power enshrined in national energy policy. Due to power sector financialization and regulatory change, and also due to “legacy technology” issues, the net result is critical and major uncertainty – ans investors hate uncertainty.

Adding the nuclear wild card of basically unknown future costs, especially due to dismantling and safestor, and the extreme high costs of new build NPPs making the private sector boycott atomic power, future national energy planning and management becomes a nightmare. Notably in Germany, but also in other EU28 member states, the thrust of energy transition goals plus regulatory and legal requirements for “unbundling”, and the precedence of renewable energy-source electricity above fossil energy-source electricity, uncertainty regarding carbon permit prices, the role of FITs (feed-in tariffs), declining or stagnant electric power consumption, large infrastructure spending needs (for example on grid systems) has led to a poisoned cocktail for power. The utility sector is destabilized.

The knock-on to the financial standing of utility companies has been significant. In 2008, Europe's top-20 market traded electric power companies bundled into European utility indices like Stoxx Europe 600 Utilities, the Bloomberg European Utilities Index and the MSCI European Utilities Index had a combined market value of more than 1000 billion euros. In late 2013, the combined “market cap” of these electric power majors in Europe was about 500 billion euros. As a no confidence vote in the power sector, this is a powerful sign.

Japanese Energy Meltdown

Europe's utility sector financial meltdown since about 2008-2010 is in many ways unprecedented. Only the post-2008 banking crisis is comparable by market cap losses, potential needs for state bailouts, and high risks for the European economy going forward. Japan's utilities have faced the same wipeout since 2011, and in the same way as in Europe, “energy transition” is easily and often singled out as a key troublemaking factor.

The nuclear lobby in Europe can hope that nuclear power may “re-enter by the back door” as in Japan, when rather than if the energy transition targets voted in Dec 2008 by the European parliament are diluted or abandoned. When (rather than if) these EU energy transition goals are abandoned ,or at least diluted, supporters of restarting nuclear power in Japan can claim additional credibility for their own proposals, but this in no way “solves the problem”.

The extreme costs of new build nuclear are a symptom of the rapid-rising capital intensity of energy and power systems, especially in the developed countries - but this stepwise cost rise has happened at the same time that Europe's utility sector, like Japan's, has so intensely financialized itself that it is unable to react to changing energy policy and resource signals. Overall and in these two cases, Japan's  power sector suffered a near-fatal knockout by earthquake and tsunami in March 2011. In Europe, the knock out was voted by the parliament in December 2008.

Europe's so-called “20-20-20” goals set in Dec 2008 for the year 2020 stipulate a 20% reduction in European CO2 emissions and a 20% reduction in energy per unit GDP, relative to 1990 levels, and a 20% renewable energy contribution in the European energy mix by 2020. These goals can be called ambitious, and so on, but much more important in my view, the already-emerging dilution and stretching of EU energy transition goals is due to dysfunctionality in the economic and financial system, as well as what we can call “legacy technology issues”.

As in Japan, further “upstream” in European energy, all types of energy including electricity are on a very, very slow growth path, while some types continue to decline – notably natural gas demand. Sales revenues for energy producers can therefore only rationally increase through unit price rises for energy. Where this revenue growth is not available, utility power producers can be forced to radically cut investment and employment, further hindering any possibility of making a success out of energy transition needing very capital-intensive, big ticket investments. When increases in energy prices are nodded-through by governments, this only tends to further reduce energy demand growth, a classic negative feedback process. Finance-sector expectations in the energy sector are we can note “traditionally” based on and related to “the growth paradigm” meaning that when the prospect of growth is kicked away, the will to invest collapses.

Pricing Electricity out of The Energy Mix

As noted above and worldwide, electricity is a small, sometimes extreme-minority “player” in the energy mix. Even among advanced-industrial states (also called “postindustrial” due to outsourcing and  deindustrialization) such as the European states and Japan, electricity rarely covers more than 20% of total national energy. For the EU28, using Eurostat data, the average role of electricity in final European energy demand through 2007-2012 was exactly 20.00%. Only in exceptional cases such as France, basically due to decades of bolstering its all-nuclear power ambitions, do we find electricity covering more of final energy demand (about 24% for France).

Extreme price rises in the electrical minority sector of the energy economy can however only operate for a certain time, before further depressing electricity's role in the energy economy and incurring such clear or manifest system-wide economic losses that any policy of high electricity prices will be terminated. When or if the “full life cycle costs” of nuclear power are counted, including all upstream and downstream costs, uranium mining including mine development and infrastructures, NPP costs through the full lifetime of plants, related facilities, fuel reprocessing and waste treatment, plant decommissioning, and so on, the obligatory need for high electricity prices when nuclear power is chosen, becomes starkly clear.

To be sure this fact is actively disputed by the nuclear lobby, but Japan is well placed to understand the real costs of nuclear power. 

The problem is that in Europe, unlike Japan (although the difference is shrinking), electricity prices are already among the highest in the world. One striking example using Eurostat data for present (late 2013) average household supply prices in Europe's leading country for energy transition, Germany, is about 25.3 euro cents per kilowatthour (late 2013). This prices German household power at around 404 euros or 544 US dollars per barrel equivalent of energy at early 2014 USD/EUR exchange rates.

 As we know, oil prices at 100 US dollars per barrel are communicated by the media (if not by the major brokers and bankers operating oil and energy markets, such as Goldman Sachs, JP Morgan, Barclays, Soc Gen and Deutsche Bank) as being “very high”. Europe's industrialists repeatedly warn what extreme-high electricity prices mean for the “competitiveness” of European industry – a slogan now also heavily utilized by European politicians. With little surprise, the same arguments are used in Japan by the local nuclear lobby, but nuclear power prices are only low when all upstream and end-of-cycle downstream costs are screened out of sight, and paid for by the state.

What Japan could learn from Europe's Troubled Transition

Only for the moment is Europe's “green magic” working, that is green power is being ramped up and the lights are still on, even if consumers and users are grumbling about how expensive electricity is getting. The claim by green political parties that this itself is a proof that other politicians and the public are over-worried about the risks of energy transition is very easy to challenge.

When or if national, or even semi-continental power grid and supply brownouts and blackouts regularly occur, and when - not if - electricity prices go on rising, we can be certain that open and naked political handwringing and soul-searching will occur, even in the most government-friendly media. The power sector may well be a handy whipping boy for politicians and the media – they either overinvested, or invested badly, and were not sufficiently “pro-active” in Europe's green power adventure, and so on, but this boils down to a political problem which has to be faced. Nuclear power will of course be wheeled back on stage as the “only reliable solution”.

Japan can avoid these roundabouts and circuses by for example treating the removal and substitution of its nuclear generating capacity as a separate and definite goal, and take all needed steps to prevent the actual results of European energy transition. These are notably that power sector companies are shedding capacity, and at best making very low levels of  new industrial investment, because their corporate finances are so weak and the power demand and energy policy outlook is so uncertain.

Japan must strive to prevent the emergence of a context where the utilities have every corporate financial reason to not invest, and to divest. Japan must avoid the de facto result in Europe of the utilities making a so-called “strategic retreat from their core business” of producing and distributing power which is not in any way – except the most disruptive - being offset and succeeded by smaller new entrants.

The needs cannot be met by “conventional” means. Alternatives need to be put on the table and they will certainly include political and policy alternatives.

Also very similar to the European situation, where governments are saddled with astronomic sovereign debts and very slow economic growth, Japan may decide the state should get a return from the public money used to bail out the power sector – unlike the public funds repeatedly used to bail out the “bad banks”.

In other words, as in Europe, Japan has an option of renationalising the power sector with the aim of making it a source of government revenue – not additional debt, earning money for the state's shareholders – the taxpayers and voters. This will of course generate howls from “free marketeer liberals”, whose pantomine liberalization of the power sector is one of the major causes of its dyfunctionality in Europe. Swift and decisive government action in Japan, as in Europe, could defuze and expedite the layer cake of crises that has so rapidly and dangerously built up in the anarchically privatized-deregulated power sector.

Creating new national energy companies with public investor subscription may be a popular success given the existing and growing problems for maintaining public support to energy transition.

Other options include increased and highly rational energy decentralization, for example using the model of German's stadtwerke or municipal energy, water and heat providers enjoying a high level of public confidence. Renewable energy is above all decentralized, therefore its production, supply, pricing and management should also be decentralized. Specifically for the power sector, dedicated new sovereign wealth funds might be created, or existing ones oriented to this sector. In-company supply and industrial self-generation has in any case moved ahead rapidly in Europe – and will almost certainly grow in Japan due to high or rising power prices and declining reliability of supply. This process should be formalised and structured through the right combination of public-private policies, rather than being allowed, by “laisser faire”, to cause further power sector disruption and larger and further earnings losses for power utilities and power transport-distribution companies.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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