IEA endorsement puts nuclear energy under scrutiny in low-carbon transition

The International Energy Agency (IEA) has called on governments to facilitate private-sector investment in nuclear power based on its potential for promoting a low-carbon transition and enhancing energy security. But some observers don't think such efforts will be worthwhile.

In its Nuclear Power and Secure Energy Transitions report published last week, the IEA said annual nuclear investment globally needs to increase from $30 billion in the 2010s to over $100 billion by 2030 and stays above $80 billion until 2050 to achieve a net-zero world.

The Paris-based energy watchdog expects government involvement to be required to finance new investment, with nuclear power projects deemed by private investors as capital-intensive assets exposed to significant policy risks.

In general, nuclear plants involve capacity in excess of 1 GW, cost billions of dollars to build, and remain controversial with the public due to safety worries and long-lived radioactive waste.

"Very few utility company balance sheets can support the risks associated with building and operating a fleet of such large nuclear power plants without some form of guarantee from the government," the IEA said.

That said, the IEA said it believes countries can still seek to create financing frameworks for investors to support new reactors aside from directly owning them.

Governments can utilize policy tools including feed-in tariffs and contracts for differences to mobilize capital, keeping new plants at an acceptable cost, and spreading risk between investors and consumers, the IEA said.

"Countries who would like to have nuclear in their own countries … have to find ways to facilitate investments in the nuclear industry," IEA Executive Director Fatih Birol said at the report's launch event on 30 June.

A distraction?

However, the IEA's endorsement of nuclear energy comes as renewables become cheaper, and some question whether governments have better ways of spending their resources.

"Investors are always looking to maximize returns and minimize risks. New nuclear energy projects are notoriously expensive and risky," said Arjun Flora, a Europe-based energy finance director at the Institute for Energy Economics and Financial Analysis.

"They take many years to plan and build and are hugely complex. They usually experience significant cost overruns," Flora told Net-Zero Business Daily by S&P Global Commodity Insights.

Of the 413 GW of nuclear capacity operating worldwide at the beginning of 2022, about 290 GW was in advanced economies, according to IEA data.

But construction of nuclear plants has often been delayed in the developed world in recent years due to regulatory hurdles, design maturity, and project management issues, pushing up costs. Capacity additions reached 67.6 GW in 2010-2021, and China accounted for nearly 60% of the growth.

In the US state of Georgia, Southern Company's Vogtle Units 3 and 4—which have a combined capacity of 2.2 GW—were originally projected to cost $4,300 per kW on an overnight basis and take four years to complete, the IEA said. The most recent estimates put the cost at $9,000/kW and nine years of construction time.

In South Korea, the 1.4-GW Shin Kori 3 unit took seven-and-a-half years to build, and the sister Shin Kori 4 unit took 10 years. Both had been projected to take five years.

Finland's 1.65-GW Olkiluoto 3 unit began producing electricity earlier this year, a delay of 13 years from its original planned date.

In its report, the IEA also admitted nuclear power's cost is higher than other low-emission energy sources. The levelized cost of electricity (LCOE) for solar photovoltaic and onshore wind projects are expected to be less than $50 per MWh in most markets by 2030, compared with $65-120/MWh for nuclear energy.

"Even with significant public subsidies and guarantees … nuclear power is simply not an attractive investment proposition," Flora said.

Sharing a similar view, London-based think-tank E3G Chairman Tom Burke said nuclear energy is "very expensive" and "takes a long time to build."

"It's pretty much a distraction … from a cheaper, more reliable, and quicker way to achieve a net-zero electricity system," he told Net-Zero Business Daily.

Role of sustainable financiers

Despite the perceived risks, some investors that focus on environmental, social, and governance (ESG) standards are still willing to bet on nuclear energy.

Canada's Bruce Power last November raised C$500 million ($382.8 million) from selling green bonds, calling its issuance "a global first" for a nuclear power developer. Certifier Cicero concluded the bonds met the International Capital Markets Association's standards.

But the enthusiasm was quickly dampened when the Canadian federal government excluded nuclear energy from its Green Bond Framework in March.

"Private-sector investors often invest in nuclear projects, where that provides clear investment opportunities and the risks are well defined and managed," said Jonathan Cobb, senior communication manager of trade body World Nuclear Association.

"But current ESG frameworks are largely being developed on a voluntary basis and are fragmented, and some lack full transparency," Cobb told Net-Zero Business Daily. "We anticipate as ESG moves to become more regulated, more robust data and transparency will be needed and the role of nuclear energy to support climate change and sustainable development will become clearer to investors."

Flora suggested nuclear energy's low-carbon credentials are offset by waste management issues, and risks from accidents and terrorist attacks. "ESG investors in particular are increasingly under pressure to look beyond carbon alone and consider a wider set of risks in their investment decisions," he said.

A net-zero future

In the IEA's net-zero scenario, nuclear capacity will nearly double from 413 GW in early 2022 to 812 GW in 2050. This requires annual nuclear capacity additions of 27 GW in the 2030s, higher than any decade before.

Currently, there are 52 reactors totaling 54 GW of capacity under construction, including 16.1 GW in China, 5.6 GW in South Korea, 4.4 GW in Turkey, 4.2 GW in India, and 3.8 GW in Russia.

The IEA expects emerging markets to account for 90% of the global growth in its scenario. For the developed world, the IEA said governments should extend the lifespans of nuclear reactors to 60-80 years—the average age stands at 36 years in North America and 38 years in Europe currently.

IEA analysts estimated the capital cost for most extensions at $500-$1,100/kW in 2030, yielding an LCOE well below $40/MWh that is competitive against renewables.

"Lifetime extensions are a very cost-effective source of low emissions electricity," they wrote in the report. "Nuclear plays a complementary role, contributing to system stability, expanding the suite of low emissions sources, and stepping up where renewables are constrained."

In contrast, the IEA said governments will need to spend an extra $500 billion on renewables, energy storage, and carbon capture, utilization, and storage to achieve net-zero if developed economies refrain from extensions and emerging economies fail to accelerate their pace of nuclear expansion. This will raise consumer electricity bills on average by $20 billion a year to 2050.

But Burke questioned whether the scenario will actually pan out, saying the IEA tends to overestimate renewable energy costs and underestimate those of nuclear in its forecasts.

"As long as you're willing to spend enough money to make sure that it's safe, you can extend the lives of the existing reactors … [But] they're very expensive to extend," he added.

Earlier this year, the US—the world's largest nuclear power producer—launched a $6 billion subsidy program to bail out nuclear plants facing economic woes.

Energy security

Another potential advantage nuclear power has is in securing energy supply, the IEA said. With the invasion of Ukraine by Russia—one of the world's largest fossil fuel suppliers—putting energy security under spotlight, France, Poland, India, China, and the UK recently said they envisage a significant role for nuclear power in the energy transition.

In South Korea and the Philippines, new administrations have pledged to revive the nuclear industry in their countries.

"Today's focus on energy security provides an opening for nuclear," the IEA said. "Nuclear energy is one of the options that can be deployed by governments to reduce reliance on fossil fuels."

But the IEA also cautions that Russia occupies a large chunk of the nuclear supply chain. In 2020, the country accounted for 16% of the world's uranium fuel supply, 38% of uranium processing capacity, and 45% of fuel enrichment capacity aside from being a major builder of reactors, according to the IEA.

Cobb said the nuclear fuel supply chain remains generally diverse, and that nuclear power generators have more means of managing their energy sources than those reliant on fossil fuels.

"Uranium ore is mined in many countries … Russia does have a role in some parts of the uranium fuel cycle and new nuclear construction, but the nuclear industry is a global industry with many different supply options available," Cobb said.

"It is possible for plants to stockpile nuclear fuel and have enough for several years' worth of operation. This is in sharp contrast to the situation in Europe where Russia has been able to turn the tap off on pipeline [natural gas] supplies to European countries almost immediately," he added.

On the other side of the argument, Burke believes countries can improve their energy security by increasing renewables capacity, energy storage and efficiency, and low-carbon hydrogen production. "There are cheaper, quicker, and more reliable ways to do it," he said.

Posted 05 July 2022 by Max Tingyao Lin, Principal Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.