Newsletter : Nuclear power, decarbonization, and the markets

As the dire need for more, much more, low-carbon power finally starts to sink into the minds of people and impact the grids of world economies, a wealth of scenarios, prospective plans and ambitious projections as to the fundamental nature and the sheer volume of energy production arise from all sides.

The Voices very much plan on having their say, and taking their turn in this conversation as well.
 
It would be our first shot proposing a “vision”, leaving behind the safe and reassuring shores of demonstrable facts. Faithful to our principles however, we promise you three things:
 
We won’t confuse objectives to reach and means to attain them.
 
We will decisively give simultaneous priority to people and nature, a stable climate being a condition for the well-being both.
 
We will do so with humility, grounding our projections on facts and, as the author of the text below, on what previous experiences have taught us. We don’t plan on taking chances or experimenting with the future. Call us pragmatic, even dull, but we intend to deliver.
 
Looking ahead to the future should not mean turning our back to the lessons of the past, but building on them. We will abide by this principle and hope decision-makers, researchers, and policy-makers follow it as well. We hope the following set of data will help.

Myrto,

for the Voices

Nuclear power, CO2, economic growth and market dysfunction in the OECD

By Edgardo Sepulveda

A Chilean-born consulting economist based in Canada, Edgardo Sepulveda has advised UN agencies, the World Bank, national ministries and regulatory agencies, service providers, public interest groups and unions in more than 40 countries over 25 years. He is president of Sepulveda Consulting Inc. which provides advice to the telecommunications and electricity sectors. This article is based on data from his “Profiles in Decarbonization” website (edecarb.org); @E_R_Sepulveda on Twitter.

Decarbonization track records

Our energy future is contested by different visions of whether and how to decarbonize. As in any debate, the past is also disputed because of how it could be used to guide future policy. In this article, I summarize results of my research on how nuclear power contributed to the decarbonization of the electricity sectors in advanced high-income countries and the magnitude of carbon emissions avoided by having nuclear power. I then examine the economic framework in which nuclear energy has significantly developed, and try to draw lessons for the future electricity market design.

Energy transitions are slow, and hence their analysis requires high-quality data that is comparable across both countries and time. My dataset includes generation and direct emissions data over 50 years (1971-2020) for 30 advanced high-income countries, which I refer to as the “OECD-30”[1]. I provide more data sources and methodologies on the edecarb.org website.

While the OECD-30 represented about 20% of global population in 2020, they accounted for 60% of global GDP and more than half of global electricity generation and of total carbon emissions over the 1971-2020 period.

Nuclear and Non-Nuclear Countries

On the first question of how nuclear power contributed to decarbonization, I separate the OECD-30 into the “Nuclear-17” that had some nuclear generation over the last 30 years and the “Non-Nuclear-13” that had none. Each figure shows the percentage in the generation mix of nuclear, hydro, wind and solar (together), coal, oil, gas and biomass and the emissions intensity in kg CO₂/MWh.

Nuclear power is a solid base for deep decarbonization.

The above figure, presenting data for the Nuclear-17, shows that at the beginning of the period, these countries had relatively few hydro resources (about 20% of the mix) and hence relatively high emissions intensity of about 595 kgCO2/MWh. The nuclear rollout from the early 1970s to the mid-1990s dramatically reduced emissions intensity, mostly by displacing oil, until 2000, after which wind and solar and lower-emissions gas displaced higher-emitting coal. 2020 emissions intensity in these nuclear countries averaged about 335 kgCO2/MWh, meaning that emissions were reduced by as much as 5.2 kg per year over five decades.

The Nuclear-17 include countries from North America, Europe and Asia with varying political and policy backgrounds and geographic endowments. The graphs below highlight six countries with high nuclear power shares: Belgium, Finland, France, Slovakia, Sweden and Switzerland. In each case, rollout of nuclear reduced emissions intensity to levels well below the OECD average. This reduction was even sharper in countries that also have large hydro shares, such as Sweden or Switzerland.

Over the last 50 years, countries that adopted nuclear power consistently reduced emissions intensity, by more than three times as much as those that went without nuclear.

In contrast, as shown below, the Non-Nuclear-13 countries reduced emissions intensity by only 1.5 kgCO2/MWh per year since 1971. That is less than one third of the reduction achieved by the Nuclear-17. There are two reasons for this relatively poor performance. First, they have three “lost decades” of climate inaction: emissions intensity increased in the 1970s and 1980s and stabilized in the 1990s. Second, in the last 15 years, during which emissions intensity declined in both sets of countries as they replaced coal with gas and also added wind and solar, the Non-Nuclear-13 were not able to “catch up” with the Nuclear-17, both groups having similar rates of reductions in those years.

Actual and Avoided Emissions

How much CO2 has been emitted by the OECD-30 since 1971, and how much has been avoided thanks to nuclear and to wind and solar?

The analysis shows that total OECD-30 generation since then has been about 380 PWh (a petawatt-hour is a thousand terawatt-hours, or 1 quadrillion watt-hours). Of that, 230 PWh generated by coal, oil, gas and biomass resulted in direct emissions of about 178 Gt (a gigaton is a billion tons).

Nuclear has made an important contribution to emissions reductions

How much higher would those emissions have been if nuclear and wind and solar had not been deployed when they were?

The figure below shows that the 79 PWh of nuclear generation avoided about 57 Gt, or about 32% of actual emissions. On the other hand, the 9 PWh of wind and solar avoided about 6 Gt, corresponding to 3.5% of these emissions. Given 2020 total global electricity-related CO₂ emissions of about 14-15 Gt, that means that nuclear in the OECD-30 has avoided the equivalent of about 4 years of current global electricity emissions, while wind and solar have avoided just 5 months.

Economic and Market Growth

Expectations about future market growth are critical for new nuclear plant projects, and the slowdown and stagnation of electricity growth in the OECD-30 has been overlooked as a reason why little new nuclear capacity has been built there in the last two decades. To show this, I use another measure – electricity intensity – which is defined by the ratio of electricity generation (GWh) to national income (GDP in $).
 
The figure below presents the average annual change in electricity intensity for the OECD-30 since 1960. Until the mid-1980s this ratio increased more than 1% per year, meaning that electricity generation was growing faster than GDP. From today’s perspective, we can see this phenomenon as the tail end of the century-long “Electrification 1.0,” first begun in the 1880s, whereby electricity greatly increased its share of the energy mix. The expectation of this type of sustained electricity growth is likely to have provided one of the key economic rationales at the time for electricity public planners and private investors to make large, longer-payback-period nuclear investments.
 
However, as a result of a series of external structural factors, the expectation of continuous electricity growth started to change in the 1970s and 1980s to a scenario of stability and then relative and absolute decline. Presumably, this changed environment reduced the overall need for investment in all types of new generation and favored smaller, modular projects with shorter payback periods.

Massive decarbonization through electrification will require a doubling or tripling of electricity generation by 2050

But growth expectations may have changed recently, based on the recognition that many decarbonization pathways would require an “Electrification 2.0” in which climate policy drives structural changes to electrify many sectors (e.g. transport and heating) that up to now have been powered directly by carbon fuels. This type of electrification would require a doubling or tripling of electricity generation by 2050 in the OECD-30. The next figure shows how this policy-driven increase in electricity use, if applied, could again create the expectations for long-term growth in electricity intensity. This growth-oriented scenario would provide the financial rationale for the needed massive capacity investments, including nuclear in particular, to meet this additional demand.

Considerations on Economic Regulation

Another overlooked reason that little new nuclear capacity has been built in the OECD-30 relates to economic regulation, or lack thereof. The bulk of nuclear capacity in advanced countries was built either by government-owned utilities or by private utilities in regulated markets. Over the last two decades, however, the broad adoption of “restructured” competitive wholesale markets that no longer guarantee stable revenues (“deregulation”) has increased market risk for new investment. To “de-risk” new investment, especially in wind and solar generation, governments have established mechanisms to provide supplementary “out-of-market” revenues. Contrary to policy intentions two decades ago to create a “free” market, only a portion of new investment in the OECD-30 has been on a “pure” market basis. This has led to an expert consensus that current market design is inefficient to attract the very significant low- or zero-carbon investment required to achieve an “Electrification 2.0”.
 
One of the rationales for the adoption of traditional “de-risking” strategies such as state-led investment, economic regulation, and long-term contracting was that policy makers realized that much socially desirable, longer-payback investment would not otherwise take place. It was under such institutional arrangements, combined with expectations of robust electricity growth, that early nuclear was planned and deployed. Both elements are likely necessary again for nuclear to achieve significant new investment now and into the future.

Out-of-market mechanisms are being introduced to ensure a more nuclear-friendly investment environment

It is not surprising, therefore, that successful traditional and recent nuclear financing developments have focused on out-of-market revenues, either via guaranteed regulated rates (such as the existing rate-of-return – ROR – regulation in many North American jurisdictions, or the newly-proposed Regulated Asset Base – RAB – model in the UK), climate-related credits (such as the Zero-Emissions Credits – ZECs – in a number of states in the USA), or long-term contracts-for-difference (such as those for the Bruce NPP in Ontario, Canada). All of these are critical to ensuring that the regulatory environment becomes more nuclear-friendly. As noted above, these types of out-of-market mechanisms are already widely used to “promote” wind and solar generation, especially in Europe.

Closing Thoughts

Nuclear has made a very significant contribution to emissions reductions: over the last 50 years, countries that adopted nuclear power reduced emissions intensity by more than three times as much as those that went without nuclear, avoiding the equivalent of about 4 years of current global electricity-related emissions. Looking forward, to make sure this legacy continues, we should support policy-driven electrification growth scenarios because they are most likely to achieve decarbonization objectives and because they are the most conducive for construction of new nuclear capacity.

The scenarios based on increasing electrification are most likely to work best for decarbonization

On forms of market regulation, in the short and medium term and with a view to leveling the playing field, we should ensure that nuclear has access to out-of-market revenues and other support mechanisms available to other low-carbon technologies, in recognition of the unique zero-carbon, dispatchable, and baseload electricity services it provides.

In the long term, however, we need to address a deeper policy issue: debunking the historically recent (two-decade) policy idea that wholesale markets should be relied on to guide the amount and mix of socially optimal investment in the electricity sector. Many governments’ commitments to this “free” market have proved shallow and mostly of convenience; whether it is the legislatively mandated shutdowns of nuclear plants in Germany, France and Belgium, or the combination of mandated renewable portfolio standards, tax breaks, or above-wholesale-price feed-in-tariffs in North America and Europe, the “market” is often used as a shield to constrain nuclear while justifying out-of-market mechanisms for other technologies such as wind and solar.

We should be wary of disingenuous political pronouncements and focus on proven and evidence-based policy to guide our decarbonization transition.

Notes:

^[1] Much of the data comes from the Organization for Economic Cooperation and Development and its affiliate, the International Energy Agency.