Atoms for the future: New nuclear built in Europe?

by Fabian Stricker (fabian.stricker@gmail.com)

Abstract

Nuclear energy is a fiercely debated form of electricity generation and its costs and risks have once again been showcased in the aftermath of the nuclear accident of Fukushima in 2011. The nuclear industry of Europe is generally declining, but there are some European nations that are supportive of new investments. While nuclear energy is often used to describe higher or lower levels of energy security, seldom are energy security or aspects thereof used to examine investments in nuclear energy. The present essay breaks with this tendency and proposes a diversity-indices-based regression model. This model is designed to evaluate the impact of conventional fuels, such as oil, natural gas, liquefied natural gas (LNG) and coal, on nuclear energy. Preliminary findings suggest the higher a country’s resource dependence on any of the abovementioned four fuels, the likelier nuclear energy production becomes.

The below essay is a modified version of an essay submitted for “Political Economy of Energy Policy”, a module taught at the University College London (UCL) by Dr Slava Mikhaylov. Any comments or enquiries are most welcome at fabian.stricker@gmail.com.

Overview

Introduction: Nuclear energy on the rise again?

Literature Review

Theory: Conceptualizing restricted energy supply security and fuel replacement

Empirical Research Design: A diversity-indices-based regression model

Summary statistics and visualization

Conclusion and policy implications

Bibliography

Introduction: Nuclear energy on the rise again?

As the crises in The Middle East and the Ukraine continue to unfold, energy security is becoming increasingly salient among European policy makers. There is concern that secure energy supply, such as defined by the European Commission (COM) (2014) as the “uninterrupted access to energy sources at an affordable price”, (2014, 3) may not be maintained.

While nuclear power is indubitably a constituent element of energy security, it remains isolated and externalized from energy supply concepts (IEA, 2014). It has also already become or is also becoming increasingly unpopular choice for energy production in light of large capital and potentially sunk costs, lengthy lead-times, permanent nuclear waste disposal repositories, rising economic competitiveness of renewables as well as costs and dangers associated with nuclear proliferation.

Following the nuclear accident of Fukushima in 2011, nuclear construction and consumption growth prospects plummeted (Selosse et al., 2013), but recent projections by the International Energy Agency (IEA, 2014) see this trend reversing: Globally, nuclear energy is projected to increase both horizontally and vertically. The number of countries pursuing nuclear energy is estimated to rise from 31 in 2013 to 36 in 2040. Nominally, nuclear capacities are foreseen to be up-scaled to more than 620 gigawatts (GW) in 2040 from 392 GW in 2013. As confirmed by Dittmar (2012), this growth derives from emerging Asian countries while nuclear energy is generally anticipated to decline in Europe. Upon closer inspection, one finds that nuclear energy was losing attractiveness on the European market even before the nuclear accident of Fukushima. (Thomas, 2012)

Yet, European countries like the United Kingdom, France, Finland, Lithuania, Slovakia or Albania seemingly defy this trend and have either contemplated, prepared or started to construct nuclear power plants. (COM, 2014; IEA WEO 2014)

This puzzle begs the following research question:

Why do some countries pursue nuclear power despite its costs and negative externalities while others do not?

 

Literature Review

 

Generally, there are military and civilian uses of nuclear energy. International audience costs make proliferation an unlikely event in industrialized European countries. Motivations are hence assumed to be nested in the interest to produce energy. The ‘nuclear controversy’, i.e. the ongoing debate over the benefits and costs of nuclear energy yields no magic formula regarding the utility of nuclear power. In most general terms, one can argue that a country will decide to build nuclear power plants, if the expected utility (EU) of benefits outweigh costs, or:

Pursue nuclear energyi = ∑ expected benefitsi(nuclear) – ∑ expected costi(nuclear)

Given a set of available or technically available fuels, a country makes a strategic decision either to invest or not to invest in nuclear energy in order to fulfil the highest possible degree of energy security. Scholarship is divided regarding the benefits, opportunities, costs and risks of nuclear energy in domestic energy portfolios. A brief overview is displayed in the table below.

Tab

Please click on the table for better resolution.

Reflecting the publicly most salient issue, nuclear energy is often viewed to be too dangerous given its potentially hazardous effects on human health and the environment. (Shrader-Frechette, 2011; Thomas, 2012). Disposing of nuclear waste and criminal activities such as theft and subsequent diversion of nuclear materials for illicit ends (Farrell et al., 2004) pose serious challenges and threats. Most importantly, there are serious doubts about the economics of nuclear energy: Long lead-times, large capital costs, potentially high sunk costs, cost escalations, such as currently observable in France and Finland regarding the Flamanville and Olkiluoto nuclear reactors, long shut-down periods following a malfunction and high de-commissioning costs make nuclear energy an arguably economically unviable source of energy. (e.g. Farrel et al, 2004; COM, 2013)

Conversely, countries may find nuclear energy an attractive choice due to low carbon dioxide (CO2) emissions (Brown and Huntington, 2008), continuous electricity production capabilities (Farrel et al., 2004) allowing utilities to respond to spontaneous demand quickly. Nuclear energy inheres high price stability (Jun et al., 2009) and mitigates the risks regarding price hikes in oil and gas and diversifies energy supply (Bazilian et al., 2011; Visschers et al., 2011) especially vis-à-vis oil which is to a large extent spatially concentrated in areas of frequent political violence. Finally, nuclear fuel does not have to be refueled as often as other fuel types due to enrichment and reprocessing (ENR). (IEA, 2014; Farrel et al., 2004)

Energy security as an analytic concept is widely used and has, from its primal definition as the “[…] reliable and adequate supply of energy at a reasonable price”, (Bielecki, 2002) incrementally incorporated more and more concepts such as environmental stewardship. Interestingly, political economy research tends to utilize nuclear energy as an explanatory variable for lower or higher levels of energy security. In this essay, I want to revert this course and analyse how energy security is impacting investments in nuclear energy.

Theory: Conceptualizing restricted energy supply security and fuel replacement

There are many different definitions of energy security (e.g. Hughes, 2009; Cohen et al., 2011; Sovacool and Brown, 2010) and there is a debate as to what indices should or should not be included to assess a country’s energy performance other than a very common set of “availability”, “affordability” and “reliability” with their respective terminological eigenvalues both in scholarship and public policy. As a concept, it is still largely shaped by the predominant factor of security of supply which may be disaggregated into short- and long-(Kruyt et al., 2009) and arguably even medium-term parts.

A valuable contribution to the depth of literature on energy security is Löschel et al.’s (2010) distinction between so called ‘ex-ante’ and ‘ex-post’ indicators, where the former regard long-term and latter short-term aspects. In that order, Löschel et al.’s work introduces a dichotomy between indices that are more oriented to:

  • ascertain the evolution of the energy market including presumably exogenous factors such as global political issues or technological progress, or indices that
  • explain the historical development of the market based mostly based on static data such as the price of oil or natural gas at point X.

Policy-making based on ex-post phenomena, in other words ‘evidence-based policy-making’, is indisputably important, but my argument is that they cannot possibly explain the entire spectrum of nuclear investments. My assertion is that there will always be some element of surprise in the evolution of energy markets. As a corollary, countries will try to hypothesize the development of the market in the future in order to make strategically sound decisions.

One could resemble this using the concept of the optimal level of energy independence by Bhattacharrya (2011 based on Percebois, 1989) which represents the optimum point between the marginal costs of a country’s import dependence (MDC) and its marginal security cost (MSC). The former consists of direct costs of procuring foreign fuels as well as indirect, e.g. military, costs and the latter addresses costs for example related to energy demand-side management or realizing energy subsistence. He argues that “[…] the society is willing to pay [a premium] to ensure the optimal level of security of supply.” (Bhattacharrya, 2011: 472f.) This model can be modified by disaggregating energy import dependence to its constituent parts such as fossil fuels, renewables and nuclear sources such as uranium or thorium. If we limit the model to costs of imported fossil fuels and hence exclude imported uranium or thorium, we should be able to deduce the optimal level of energy independence without nuclear energy. By comparing the premiums of the unrestricted model or estimated unrestricted model in the case of non-nuclearized countries with the restricted model, leaders can make decisions to save money.

In response to increasing costs of an imported fuel type (other than uranium or thorium) or the deterioration of security in an exporting country, a country may reduce demand, try to find alternative suppliers for that commodity or discard it as an insecure component of its energy portfolio and replace it with an alternative more secure fuel, (Hughes, 2009; Brown and Huntington, 2008) such as uranium or thorium.

Synthesizing the above-mentioned characteristics of energy supply security and nuclear energy, I present my theoretical argument:

Low degrees of energy supply security for fossil fuels like coal, natural gas and oil increase investments in nuclear energy, because nuclear fuel supply disruptions are unlikely and there is ample time to respond due to relatively rare refueling necessities if supply should actually be severed.

My deduced hypotheses, based on the disaggregation of energy supply, examine not the prices of imported resources, but the diversity share of conventional fuels, namely oil, natural gas, LNG and coal, and are as follows:

H1: A higher share of imported oil increases nuclear energy production.

H2: A higher share of imported natural gas increases nuclear energy production.

H3: A higher share of LNG increases nuclear energy production.

H4: A higher share of imported coal increases nuclear energy production.

Empirical Research Design: A diversity-indices-based regression model

 

There is a credible causal mechanism that high shares of imported oil, natural gas, LNG or coal can cause investments in nuclear energy, e.g. because of unprofitability due to price hikes, volatility due to political violence distorting business-as-usual modus operandi or lower environmental stewardship performance benchmarks.

Countries may maintain ‘older’ fuel types as a failsafe option at the earlier stages of enacted replacement fuels such as nuclear fuel. Hence, the measurement effect is plausible, but I cannot entirely rule out the possibility that nuclear power causes increases in any of the above-mentioned fuels. In fact, as Hughes (2008) remarks, “[…] replacement policies that were introduced to improve energy security have, over time, become energy-security problems in their own right.” (2008: 2460) Owing to this feature of national fuel mixes, one cannot rule out rebound effects due to unsustainable replacement policies which may prove fruitful in the short-term, but raise similar problems of dependence in the long-run.

In order to test the above tested hypotheses, I will run a regression model based on four diversity indices of oil, natural gas, LNG and coal on the one hand and nuclear energy production on the other hand from 1960 to 2012. The reason I opted for a long period is to account for several temporal effects such as the oil price fluctuations of the 1970s and early 2000s, the nuclear accidents of Chernobyl, Three-Mile-Island and Fukushima as well as the financial crises of the 2007-8.

My country selection is constricted to European industrialized countries in line with the introductory puzzle. I am furthermore selecting countries that invest in nuclear energy and such that pursue phase-out policies. Hence, I selected Belgium and France to account for phase-out policies or actual reductions on the one hand and Finland, the United Kingdom and Sweden on the other hand. France, Sweden and Finland are also interesting selections for the fact that they are building costly permanent nuclear waste repositories. Selecting a control group to account for the effects of coal, oil and gases is virtually impossible, since all countries consume the above-mentioned four commodities.

Utmost care it to be exercised regarding the measurement of my dependent variable: Fulfilling high levels of validity of actually measuring what I intend to capture requires scrutiny regarding the conceptualization of the dependent variable. Investments in nuclear energy often say very little about actual replacement as can be highlighted by the Austrian case where a fully completed nuclear power plant never went into activation Pelinka (1983) and hence never contributed to the supply of energy. As a following, I measure the amount of energy produced instead.

For my independent variables, I collect data from EUROSTAT on imports of oil, natural gas, LNG and coal. In terms of confounding variables, I take into account domestic production levels, political risk levels in fuel exporting and transferring countries. In line with Löschel et al., (2010) I agree that it makes a big difference to control for political stability of exporting countries. This is commendable since most studies on energy security have not incorporated measures of political risk, but resorted to using Shannon-Wiener or Herfindahl-Hirschman Indices (SWI and HHI) (Bhattacharyya, 2009) or argued that for European countries “[…]the share of gas, oil and solid fuel imports from non-EEA countries, can be considered as a proxy.” (COM, 2013: 12) I do not share this view and propose the adaptation of diversity indices to account for the political risk of exporting countries as well. While Bhattacharyya (2011) correctly argues that the World Bank Report on Governance Matters can be used for such an undertaking, its data availability is constrained to years after 1996. I will hence use a proxy in the Polity IV Project scale on democracies which dates back 1946. The data of this scale ranges from -10 (hereditary monarchies) to +10 (consolidated democracies) with subcategories of autocracies, isocracies and democracies. (Systemicpeace.org, n.d.) Taking into account domestic production levels of fuels is necessary to explain lower or higher levels of imports. Both political stability of exporting countries and domestic production levels can be assessed using Bhattacharyya’s (2011) modified Shannon-Wiener-Neuner Index depicted below:

SWN2 = – ∑ (bixi ln(xi) (1 + gi))

Where:

  • bi is the political stability of exporting countries
  • xi represents the import share from a fuel
  • gi encompasses domestic production

I also take into account the political stability in countries on the supply routes between energy exporting and energy importing countries. I do this for two reasons: A political crisis between an importer and a transferor may impede on the trade flow between the importer and an exporter. Second, a crisis between an exporter and a transferor, such as in the case of Russian gas pumped through the Ukraine to European countries, can inflict damage on the importer as well. Hence, I complement Bhattacharyya’s index by:

SWN3 = – ∑ (bixisi ln(xi) (1 + gi))

Where:

  • si is the political stability of energy transferring countries

I do this for all identified fuel types, which constitutes my hypothesized explanatory formula for nuclear energy production:

Y = SWN3(coal) + SWN3(natural gas) + SWN3(LNG) + SWN3(oil)

Summary statistics and visualization

 

In terms of data availability. time constraints to request private data and resource limitations, I resorted to conduct a brief analysis of my independent variables and dependent variable depicted in the plot and table below. It is noteworthy that I found no suitable, i.e. disaggregated, data on energy imports for the five European countries for the period from 1960 to 1970 in The World Bank’s World Development Indicators (WDI) 2014, EUROSTAT or BP’s Statistical Review of World Energy 2014. Consequently, I used an aggregate variable for all energy imports ‘net energy imports (% of energy use)’ and ‘. However, this data is flawed and must be interpreted with particular caution as uranium imports are still included. To facilitate oversight, I averaged country-year values for every 10 years apart from 2000-2012.

5 countries finish

Please click on the plot for better resolution.

The plotted values for the UK, Finland, France and Sweden visually confirm my hypotheses that higher shares of imported oil, gases and coal increase nuclear energy production and the lower the share of imported energy, the lower the amount of nuclear energy gets. The Belgian case is interestingly deviating from this trend, however this may be due to outliers which are even visually present. The case of the UK is also thought-provoking since it is the only country exporting energy, yet had considerable amounts of nuclear energy production. This makes the case that the selected European countries utilize nuclear energy to reduce their dependence on fossil fuels, however the plot is not chronologically ordered and data on renewable energy might imply a substitution effect, if complemented to this research.

fornuclear

Please click on the table for better resolution.

Conclusion and policy implications

The projected trends of increased nuclear energy production may not pose a puzzle for emerging markets like China or India since their energy demand is continuously growing. In the European context where energy demand is saturated if not declining, increased nuclear energy production may serve the purpose of replacing other fuel types which are not deemed to be environmentally sustainable.

The present examination of countries’ motivations to pursue nuclear energy presents an interesting addition to extant literature since it proves a research design which incorporates the political risk of energy exporters and transferors. The political crisis in the Ukraine highlights that supply security includes various externalities which need to be included in scientific research on energy.

Even though this research, if actually executed, would definitely extend the scope of existing explanatory models, there are obvious shortcomings in line with the ex-ante factors as defined by Löschel et al. (2010) Technological improvements shape investment decisions and nuclear energy has, despite its drawbacks, been improved in terms of safety and security. (Thomas, 2012) Without temporal and resource constraints, it would be wise to include data on different nuclear reactor technologies. Moreover, there are different approaches regarding nuclear policy advocacy depending on electricity market types. (IEA, 2014) Competitive and regulated markets pose different investment environments for companies. Any future research should, if not addressing these issues directly, at least mention their potential impacts on investment decisions and domestic energy portfolios.

Bibliography

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