Speaker: Didier Beutier

Today, with the rising prices of energy, the increasingly pressing climate change challenge and a new security of supply environment, it is becoming necessary for Europe to assess which energy policies will provide electricity to consumers at the best possible price while ensuring its accessibility and sustainability.

The price of electricity is essential to the consumers and citizens’ purchasing power, as well as to the energy intensive businesses’ competitiveness and employment.

The European Commission adopted on the 8 March 2006 its Green Paper on a strategy for a sustainable, competitive and secure European energy policy. One of its proposals is to analyse the advantages and drawbacks of all energy sources with a standard methodology.

The purpose of this event is therefore to contribute from an economic point of view to the reflection on this idea by making a comparative analysis of the cost competitiveness of the various energy sources for electricity production.

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Elements guiding the choice of energy mix

Electricity Supply = Energy Source + Conversion + Transport + Distribution

Two complementary cost assessments are required

• The private point of view (as measured by the producer):
  • Total cost = Generation cost = Capital cost + Operating & Maintenance + Fuel procurement
  • Taxes to be included
  • Interest rate = private financing rate depending on project risk assessment
• The social point of view (as measured by public authority):
  • Total cost = social cost = generation cost + external costs
  • No tax to be included in the generation cost (the net cash expenditure is zero for the State)
  • Interest rate = long term, low risk (= public bonds)

Cost assessment is one step within a decision process

The social point of view will support public decisionmaking, i.e. energy policy, environmental policy, market regulation design…

The private point of view will determine effective decisions of investment.

The preferred option from social point of view will not be implemented if it is not also the lowest cost option from the private point of view!

The purpose of optimal market regulation is to achieve coincidence between social preference and private preference…

(1) Cost assessed according to public point of view (France, 2003)

"Social Power Generation Costs" without tax, with externalities and with 3% discount rate

(2) Cost assessed according to private point of view (France, 2003)

Generation costs with taxes, without externalities and with 11% D.R.

Decommissioning does not fundamentally alter nuclear competitiveness

Decommissioning does not fundamentally alter nuclear competitiveness

Waste management costs are included in nuclear kWh

• Low Level Waste LLW
  • Current operational on-line management: from effluent treatment and facility maintenance down to final LLW disposal
• High Level Waste HLW
• Current R&D on HLW and TRU disposal concept
• Future HLW and TRU disposal (estimated = provision)
• Residual external cost = probability of impact from the repository = as negligible as required by the regulator
• Future Dismantling Waste
  • Future management of waste from the dismantling of facilities (estimated = provision)

Total cost in France : 10% of life cycle costs (without time discounting); 4% of levelised discounted cost (at 8% rate), i.e. 1.5 €/MWh.

Nuclear Waste Volumes are small in the EU 25, in spite of 32% of nuclear electricity

CO2 emissions estimated by Life Cycle Analysis (WEC, 2004)

External Cost Figures for Electricity Generation in the EU for Existing Technologies (Eurocents per kWh)

Electricity price from windmills in France

Feed-in prices (82 €/MWh during 10 years at least) imposed by government decree warrant a high return on investment, higher than 20% after tax until 2006 and even higher than 30% now on for on-shore cases of average performance.

Such return on investment for risk-free projects (sales are guaranteed over the whole installation lifetime) is completely off market standards.

The French Commission for energy regulation (CRE) has produced a negative advice as to such price levels, not justified by external cost difference from nuclear energy.

A high burden on average electricity price is threatening when the share of renewables becomes significant.

This is an example of strong public intervention into the markets, for the sake of sustainable development.

Breaking the vicious circle: risk perception is translated into high cost of capital

It has often been argued that a risk premium should be applied to nuclear projects, in view of perceived “higher risks”. That has built up a vicious circle: the more the project is perceived as risky, the more it becomes expensive in capital by the WACC effect, the more it is perceived as risky and so on…

Substantial evidence is available against that argument: excellent past performance of nuclear projects in Europe, specific trust building features of 3rd generation technology, market price dynamics in favour of nuclear plants.

Renewable energies would suffer from the same vicious circle if they were not heavily subsidized.

A more balanced perception of risks is emerging

Soaring international fuel prices diversely affect generating costs

Based on costs of supply from Russia or from Middle East, the gas price in Europe could remain around 3.6 €/GJ… but it will more likely remain bound to oil, up to 5 €/GJ !

Future Coal Projects will also require higher capital investment

New technologies such as IGCC (Integrated Gasification and Combined Cycle) and others are developed to ensure:

• Higher fuel efficiency (supercritical steam, IGCC)
• Flexibility with respect to fuel quality (fluidised bed, IGCC)
• Minimal CO2 emission (Carbon capture and sequestration)
• Minimal air pollution (SO2, NOX, Hg…)

Leading to OVN construction costs in Western Europe around 1500€/kWe (+ cost of CO2 transport and sequestration).

Higher investment cost than in the past is required to liberate coal technology from regulatory risk and carbon price risk.

Huge investments are also required along the gas supply chain… abroad

Fixed capital cost reaches 48% of total lifecycle generation cost when condition for secure fuel supply is truly reflected.

In the cost breakdown of Gas CCGT, huge transport investments are hidden in gas procurement price (Source: French DGEMP 2003 study/AREVA).

Review of the costs in the UK: PB POWER « Powering the Nation », March 2006

Range of costs – « Main » technologies – D.R. = 10% :

Two nuclear units have been decided in the EU, both EPR 1600 MW :

• In Finland, by TVO company
  • Licence granted in February 2005
  • Construction started in 2005
  • To be commissioned in 2010
  • Main driving factor: industrial consumers need for low and stable electricity price
• In France, by EDF company
  • Decided in 2004
  • Project launched on May 2006
  • To be commissioned in 2012
  • Main driving factor : electricity company long term strategy

Long term view is required

Higher investment is accepted in view of future added benefits:

• Higher Net Present Value on a longer lifetime
• Higher unit capacity per project
• Long term fuel price security
• Avoidance of GHG emissions
• Lower external costs
• Reduced external dependence
• Knowledge build-up

They become substantial beyond a decade of operation.

Making the Link with Energy Policy

Combining Market Design and Energy Policy

Electricity Markets are essentially reactive and oriented to short term profit margins. Market signal may not be sufficient to trigger new investments. A strong energy policy is needed to overcome these drawbacks and provide incentives for new investments.

A significant share of nuclear power in generation capacity provides an effective hedge against the volatility of fossil fuel prices. The trend will be reinforced when the environmental cost associated with carbon dioxide emissions is fully internalised in the trading system.

In Europe high incentives are given to reward investments in renewables. They have been justified by the avoided external costs. Resulting cost is high for the consumer. Nuclear energy avoids external costs with better net cost efficiency .

Application of comparative cost assessment to energy policy

Ensuring secure, reliable and low cost of supply of electricity depends on the effective implementation of an integrated competitive market, as asserted in the Green Paper…

But it depends even more on the achievement of optimal energy mix in power generation, as shown by current consequences of high gas price and CO2 price on electricity wholesale markets.

Both public and private approaches to cost assessment should be taken into account, in order to achieve practical coherence between energy, environment and competition policies.

Anticipated replacement of operating coal plants: nuclear would be 3 times cheaper than gas per ton of avoided CO2

* Ref OECD 2005 **amortised *** gas price assumed at 5 €/GJ

Fossil Fuel Dependency: challenging future

Public supports to energy sources in EU 15 (2001, including on budget and off budget supports)

Obviously in contradiction with external costs differences. Is this the best possible allocation of our resources to prepare the future? (figures in € billion, Source: European Environmental Agency, Technical Report 1- 2004) :

• Coal : 13
• Oil and Gas : 8,5
• RES : 5,3
• Fission : 2,2

WETO 2050 scenario suggests “less carbonized” EU energy supply

Europe 2050 :

• Total : 2.6 Gtoe = 11% of world
• RES + Nuclear: 1 Gtoe = 40% of total

The 3 objectives of Energy Policy

1. Security of EU energy supply

• How to reduce the tendency to the increase of energy dependence from 50% today to 70% by 2030?
• Coal, nuclear and renewables OK, minimise gas

2. Reduction of greenhouse gases and pollutant emissions – Kyoto and post-Kyoto

• How to achieve the (-8%) greenhouse gas emissions target and beyond, at reasonable cost?
• Nuclear and renewables OK, minimise coal

3. Increased competitiveness of EU industry

• How to ensure a high economic development within the sustainable development strategy?
• Minimise electricity average price: Nuclear OK

EU, Japan: Countries that are deprived of hydrocarbon resources…but not of advanced technologies