Saturday, June 25, 2011

Small Modular Reactors and the Economics of Nuclear

My colleague (and member of my dissertation committee) Dr. David McNelis had an excellent Op-Ed in the Raleigh News and Observer yesterday touting the safety and economics advantages of small modular reactors (SMRs). A snippet:
In contrast to a conventional nuclear plant, SMRs could be added one at a time in a cluster of modules, as the need for electricity rises. The cluster's costs would be paid for over time, softening the financial impact.

The modules could be factory assembled and be delivered by rail to an existing nuclear plant site. In such a configuration, one SMR could be taken out of service for maintenance or repair without affecting operation of the other units.

Most SMRs would be situated beneath the ground to provide better security. Typically they would operate for many years - possibly decades - without refueling and produce far less waste than conventional reactors.

Significantly, almost all of the SMR development is being done with private financing. Companies are using their own resources to develop the small reactors, without government support from mandates or subsidies of the sort that renewable energy sources now require.
As the kids say, do read the whole thing.

SMRs are an interesting, potentially game-changing addition to the nuclear energy market in my opinion, namely due to their ability to overcome one of the chief barriers to the rapid deployment of nuclear energy units right now: high capital costs.

Prohibitively high capital costs (most new reactors are starting with price tags around $4 billion or so) present utilities with a double-whammy of sorts: first in that raising so much capital is in itself a difficult undertaking, particularly compared to the total capitalization of the types of utilities making these investments. (This is where the typical rhetoric about "betting the farm" comes into play, despite the fact that the low fuel and operating costs and very high capacity factors make nuclear units veritable cash cows once electricity begins to flow. Ultimately, such investments require tying up a large portion of an individual utility's assets for several years before any money is generated.) Second, due to the large amounts of money involved and generally long construction times, utilities get hammered on costs by paying interest upon interest; in other words, interest accrues on money they borrow from the moment construction begins, meaning that the "cost of money" is a rather significant factor in nuclear construction. Finally, given both the large amounts of money and extended timelines involved, investors will thus typically demand a "risk premium" - similar to the kind of interest rate premium an ordinary borrower without stellar credit would have to pay on bank loans an credit cards. This too can significantly raise the cost of capital for building new units.

Each of these factors thus conspires to keep many smaller players out of the market. Instead, many have sought to invest in smaller, more scalable alternatives such as natural gas, which has nearly the opposite economics of nuclear: low capital costs (i.e., each unit is of a relatively small capacity and can be built quickly) and relatively high fuel costs as a fraction of the cost of electricity. (While nuclear's fuel cost for electricity is around 10%, natural gas can be around 70-80%). Nor has the price of natural gas ever been historically stable (at least in the last 15 years).

Unless, of course, this is your definition of "historically stable." (Source: EIA)
SMRs have the potential to change the economics of the game by several means. First, many proposed SMR designs are engineered to be mass-produced and pre-fabricated in factories, rather than built on-site. This could tremendously push down prices while also shortening construction times, thus ameliorating what is currently one of nuclear's biggest weaknesses at the moment.

Meanwhile, the "small" in SMRs also may have potentially positive implications for both cost and safety: SMRs can be potentially built into the ground, using the surrounding earth as containment, due to their relatively small size. Given the lower total power and nuclear material within the reactor, it can be said to have a lower overall "radiological footprint," meaning simplified safety planning.

Finally, the "right-size" power of SMR capacity may allow them to be sold in a greater number of markets - places both where a new full-sized reactor is too big for the needs of a community (for example, Fort Calhoun, north of Omaha, is the smallest reactor in the U.S. nuclear fleet, clocking in at only 500 MW; compare this to currently proposed new reactor designs, which begin in the neighborhood of 1000-1100 MW). Likewise, the smaller size means that for utilities only looking to incrementally expand capacity, small reactors may prove to be competitive with alternatives such as natural gas turbines.

One point which I think nuclear advocates tend to allow themselves to be blindsided to at times is in the fact  that above all else, it is economics which will ultimately determine the future of the nation's electricity portfolio. Factors like politics certainly come into play (particularly such issues as energy portfolio mandates, etc.), and likewise factors such as safety can never be understated. Nor should public acceptance ever be ignored, much as it has to the industry's peril in the past. However, those ultimately committing the funds to expand energy sources are the utilities, many of whom answer either directly to shareholders or to ratepayers. In this regard, they have an obligation in either sense to produce power as profitably or affordably as possible.

Thus, the decision for utilities will always ultimately come down to economics, something that nuclear advocates cannot simply ignore. I don't necessarily doubt the assertions of fellow advocates such as Rod Adams, who assert that fossil fuels have a strong interest to defend in continuing to sell their products. (Although I will say that I also don't necessarily buy the idea that those who argue natural gas is currently more economical based on short-term factors are necessarily on the fossil fuel dole, either.) But the fact remains - for nuclear to succeed, it must be able to compete, head to head, dollar for dollar.

Nuclear energy has tremendous advantages to offer, in that is clean, abundant, and easily the most energy-dense source we have available at our disposal. Yet at the end of the day, decisions over energy investments do not necessarily come down to these factors: they come down to economics, and often (regrettably) economic return over the short-term. This may be where SMRs ultimately change the game for nuclear, then - namely, by bringing the advantages of nuclear to bear in a more economically attractive package.