Nuclear-Based Electricity and Economic Theory

NUCLEAR-BASED ELECTRICITY AND ECONOMIC THEORY

The purpose of this article is to extend the short paper I presented as part of an energy ‘debate’ at the recent ‘Singapore Energy Week’. What I attempted to do in that talk was to call attention to several issues that were not understood by at least one debater at the ‘meeting’. This errand was important, because as Marcel Boiteux – the eminent French economist who at one time was President of Electricit’e de France – once remarked: “In the United States (U.S.) and elsewhere, they have succumbed to the dictatorship of the non-nuclear minority.”

The emphasis here should be on elsewhere, because I am not aware of any indication that a majority of voters in the U.S. have succumbed to the bizarre arguments dreamed up by prominent members of the anti-nuclear booster club.

There is also an unfortunate misunderstanding of a key theoretical aspect underlying the cost of nuclear, and it roughly amounts to the following: if e.g. a firm can construct an ‘optimal’ nuclear facility for ‘X’ dollars per kilowatt hour (= $X/kWh), and this is the lowest cost in the world, then $X/kWh should – at that time – be taken as the (inter-temporal) equilibrium cost for all producers of this equipment, especially in industrial countries. This is one of the cornerstones of neo-classical economic logic, and one of the few that I accept without reservation. The background to this acceptance turns on the industrial performance of the United States during World War 2.

This might also be the place to note that the anti-nuclear minority referred to above repeatedly trumpets the beauty of wind, solar and other renewables and alternatives. This is both rational and imperative, because these items should probably be exploited to a much greater extent than they are at present, even though the claim in my Singapore lecture was that the scope for technological improvement is almost certainly greater for nuclear equipment than for other sources of electric power.

I can also confess that what I wanted to do in Singapore was to explain that regardless of the approval of or indifference to the goofy changes that Chancellor Angela Merkel has proposed for the German nuclear inventory, it is only a matter of time before German voters show that they have no intention of accepting a large-scale dismissal of nuclear energy that could have a negative influence on their standard of living. The Merkel initiative is nothing less than an attack on the living standards of the gainfully employed in Germany, and to a lesser extent surrounding countries that will have to supply energy to Germany.

As Professor Dale Jorgenson argued in a brilliant lecture in Stockholm many years ago, (physical) capital and energy are complementary, and together a substitute for labour. As a result, higher energy costs (which will likely result from a downgrading of state-of-the-art nuclear) will lead to a decrease in investment. Furthermore, the fall in capital intensity of new enterprises switches the economy onto a lower growth track. This can be put another way: the cost of energy is an operating or variable cost, and for a given value of output, if this increases, there will be a decreased return (or yield) to capital, and therefore the incentive to purchase more capital is reduced. As we remember from Econ 101, this outcome inexorably leads to a decline in wages and salaries, or an increase in unemployment, or both.

Myth and Meaning in the World of Nuclear Energy

Berthold Brecht put it as follows: “If you don’t know the truth, you are a fool, while if you know the truth but say that it is a lie, you are a villain.” I seldom object to that kind of language, because I used it all the time when I taught financial economics, but it is not appropriate when the subject is nuclear, and so I modified it somewhat for my talk in Singapore: If you don’t know the truth about nuclear energy you are probably too tired or unlucky to find out, because learning what you need to feel comfortable when the conversation turns to energy is as simple as locating your name on your birth certificate. On the other hand, if you know the truth but say that it is a lie – which often happens – it generally means that you don’t want to offend certain persons. For example, persons who might not invite you to their parties and dinners if you reject their beliefs about this very touchy subject.

The most important project in energy economics at the present time is understanding that optimal national energy structures of the future will be a mix of all sorts of items – nuclear, fossil fuels, renewables, various alternatives etc. The anti-nuclear booster club wants to eliminate nuclear from that collection, but fortunately they are going to be greatly disappointed. Once this is appreciated, some effort should immediately be put into comprehending perfectly a few basic characteristics of nuclear. This is not always easy, even for me, however I can congratulate myself on my familiarity with a few things. For instance, I know that while some countries, to include China, make a special effort to pay tribute to renewables, where serious business is concerned they will bet on nuclear. They will make this bet because they can construct reactors faster and probably cheaper than any country in the world. I know something even more important. I know that when dealing with all energy matters, you are liable to find yourself confronting a whirlwind of lies and misunderstandings.

Mainland China has 14 nuclear reactors in operation, more than 25 under construction, and perhaps 100 are in the planning stages. But even so, the energy directorate in that country is apparently in no hurry to increase the pace at which reactors are produced, because they possess plenty of coal to burn in a clean or dirty manner, and in addition they want to make sure that they are constructing and installing the most efficient nuclear equipment. Perhaps I should mention that the Chinese are in the nuclear business because, given their elaborate industrial agenda, an enormous amount of energy will have to be consumed. Attempting to obtain a majority of this energy from items like wind and solar would be completely and totally counterproductive.

What about Japan? I had the Japanese nuclear situation explained to me in detail by a Japanese gentleman during a long walk through Vienna about twenty years ago. What he essentially said was that contemporary nuclear technology was merely an entr’ee to the real deal, by which he meant fast-breeder technology. That was a discussion that I was not anxious to take part in, because for various reasons I have never found a plutonium community something to cheer about, but I did accept one thing that he said: Japan will be the last country on the face of the earth to abandon nuclear.

And Germany? The answer here is that the venture taking place under the supervision of Angela Merkel in Germany is on the level of a half-baked soap opera, since the main object of that gambit is to obtain another term in office for Frau Merkel and her foot soldiers. Governments with a genuine interest in making low-cost electricity available to their constituents should try to make certain that they never become involved in anything like the nuclear travesty that may be underway in that country. “Underway”, but which will never reach the announced goal.

A Swedish Example

When I write papers or give lectures on oil, my preparation usually begins by examining the situation in the United States, by which I mean the situation going back to about 1931, and then transposing the materials I gain access to into a short but useful survey which includes things like OPEC and the peak oil hypothesis. Where nuclear is concerned, I always turn to Sweden for an indication of nuclear capabilities and successes. This led me to question something weird that the renewables ‘superstar’ Jeremy Leggett stated during the Singapore ‘debate’, which was that it takes ten years to construct a nuclear facility. He then wanted to know whether anyone in their right mind would become involved in such a project.

My rejoinder suggested that if he were correct, nobody would or should put in a good word for nuclear, but since he didn’t really know what he was talking about, he should not expect that the crank judgements he advertises as wisdom will be universally accepted and exploited. The key observation here is that nuclear facilities have been constructed in China in less than five years (e.g. Qinshan), and soon it might be much less. As for Sweden, the initial 12 Swedish reactors were constructed in only 13 years, following which they supplied about 45 percent of the electric generating capacity (in Megawatts) in this country, and more than 50 percent of the electric energy.

I have often claimed that in terms of reliability and cost, the Swedish electric sector was perhaps the most efficient in the world before the curse of (electric) deregulation arrived. Given these circumstances, it is easy to understand that when the global macro-economy began deteriorating a few years ago, the illogical nuclear ”downsizing” that had commenced in Sweden – and already involved demolishing badly situated reactors near Malm”o – was at least temporarily postponed. I can hardly tell you how happy this made me, because in case you don’t know, or don’t want to know, a high electric intensity for firms, combined with a high rate of industrial investment and the various skills created by a modern educational system, generally results in a high productivity for large and small businesses. This in turn brings about a steady increase in employment, real incomes, and the most important ingredients of social security (such as pensions and comprehensive health care).

When a student of nuclear energy walks through the streets of beautiful summer Stockholm, he or she might conclude that without the contribution of nuclear energy, the standard of living might be lower. As for me, when I walk through the streets of summer or winter Stockholm, I don’t think about the standard of living as such, but the Swedish welfare system, and how my modest pension and possible future medical requirements might be influenced by a total or partial nuclear retreat. They would be influenced in such a way that I could eventually be in serious trouble, although fortunately the rich citizens of this country would hardly notice the change.

Some Basics and a Conclusion

Recently, the Swedish energy minister and the head of a Swedish labour union were brought together in a very short television debate. Almost every sentence that Madame Energy Minister uttered contained the expression renewable energy, and caused me to think back to something that the great American president Franklin D. Roosevelt once said: “repetition of a lie does not transform it into the truth”. Of course, in her case it was not a lie but a misunderstanding.

Furthermore, as the gentleman from the labour union pointed out, he grew up in Northern Sweden, and though winter temperatures in that part of the country sometimes reached minus twenty-five degrees centigrade, he had no memory of air currents of such strength that they would guarantee the sustained motion of wind turbines. I often skied in northern Sweden many years ago, and my son did a part of his military service in that region, but neither of us can recollect a wind strength and consistency that would justify abandoning nuclear energy in favour of wind turbines that provide rated power less than twenty five percent of the time. (In other words, their capacity factors are on average less than 0.25, and sometimes much less.)

There is another item that everyone everywhere should be aware of. I do not know of any country, in any part of the world, where decision makers, rank and file politicians, academics with access to the corridors and restaurants of power, break dancers, rappers, moonwalkers or anybody else have talked as much about a major expansion in the use of renewable energy as in Sweden, and in addition have tried to give foreigners the impression that much has been done and even more will be done in the near future. In reality hardly anything has been done, because suggestions for greatly modifying the present Swedish energy profile to provide for more renewable energy in conjunction with less nuclear energy are scientifically absurd.

I perhaps should mention the last Social Democratic prime minister in Sweden, Mr Persson, went so far as to call nuclear energy “obsolete”. This kind of mistake is natural or typical where the vote-getting process is concerned, because in a democracy everyone is encouraged to express their opinion on all sorts of topics, even though in this case the prime minister’s opinion overlooked the likelihood that the nuclear reactor may be the most important invention of the 20th century. I want to emphasize though, that when that eccentric and inaccurate statement about obsolescence was made, the cost and price of Swedish electricity was among the lowest in the world, while the cost and price of electricity in the promised land of wind energy, which as you probably know is Denmark, was among the highest.

I constantly hear how the one time student of physics, Angela Merkel, has at least an inkling of the economic fiasco that would result from doing away with nuclear, and replacing it with renewables and/or imported electric power. But votes are votes, and if she prefers chilling out in the Reichstag to watching (on her wide-screen TV) her political rivals staring across the table at charmers like Sarkozy and Berlusconi, she evidently feels that she has no choice but to accept what the great American songwriter Irving Berlin called ‘Doing what comes naturally’, which in this context means supporting an energy program that makes no technical or economic sense whatsoever, although politically – if German voters are sufficiently na”ive – it might provide Chancellor Merkel with another term in office.

I engage in many polemics about energy in my articles, lectures and especially my textbooks (2000, 2007, 2011). I also have long conversations with myself on the subject, usually in the silence of my lonely room, This might be why I have received a number of strange mails from a Catalan engineer (who says that he is a PhD from the Massachusetts Institute of Technology) informing me that a large team of experts at MIT have produced research on the cost and desirability of nuclear energy that – in his opinion – casts some scepticism on my humble work on these subjects.

Their research casts no scepticism on my work, because I doubt whether they are capable of understanding my work. The calculations made at MIT or IIT (Illinois Institute of Technology) or CIT (California Institute of Technology) or the storefront university that gave me my economics degree may or may not be correct for the short run, but as for the long term – where the issue is mainly economics, to include energy economics – they are probably as wrong as the Dean of Engineering at Illinois Institute of Technology thought that I was when he expelled me from his school for failing physics and mathematics (twice), and told me to never come back.

Wrong because there are no electricity generating assets on the horizon that are as flexible as nuclear reactors when it comes to providing large amounts of reliable electric power. Flexible in what way? How can someone look at a nuclear facility and talk about flexibility? The answer is that flexibility in this context means the ability to greatly improve the technology and economics of future generations of reactors, although admittedly improvements will also be made where wind and solar equipment is concerned.

Readers with an interest in microeconomic theory should also take a look at some aspects of the paper by Fabien A. Roques et al (2006), which views nuclear as a hedge against uncertain fossil fuel prices, and also suggests that it might be fruitful to view energy as a ‘public good’ (like e.g. streetlights and defence). I certainly can accept that, since it is clear to me that investing in energy makes more economic sense than investing in stupid wars on the other side of the world.

Also, and please note carefully, with nuclear installations located domestically, you know almost exactly what you will get over very long time frames. With other energy resources there can be large uncertainties about fuel availability and prices. This is why Finland, with Norwegian gas on one side of that country, and Russian gas and coal on the other side, decided to buy the largest reactor in the world from Areva of France. Finland has also decided to purchase one more large reactor, and perhaps two. What is happening in that country is clear: Finland has one of the best educated populations in the world, so why should they endanger their economic future by playing the energy fool?

I can close by saying that many people are afraid of nuclear energy, which is good, and that is why I am able to be positive to that resource. If people were not afraid, if they desired an unlimited expansion of nuclear, or a reactor on every street corner, I would have a difficult time being partial to nuclear. I definitely would not have given a talk at the Singapore Energy Week, or any other Energy meeting, because there is enough hypocrisy in academic economics and in politics without my participation. The bottom line here is that nuclear is nothing to play games with, technically or other-wise. In the hands of the wrong people it can be very dangerous. For instance, if decision makers should make a habit of doing foolish or careless things like putting reactors in the wrong place, it could help destabilize portions of the global economy by causing the abandonment of potentially safe reactors. This may turn out to be a major outcome of the Fukushima tragedy.

REFERENCES

Banks, Ferdinand E. (2011). Energy and Economic Theory. London, New
York and Singapore: World Scientific.
_____. (2007). The Political Economy of World Energy: An Introductory
Textbook
. Singapore and New York: World Scientific’
_____. (2000). Energy Economics: A Modern Introduction. Dordrecht and
Boston: Kluwer Academic.
Roques, Fabien A., William J. Nuttall, David M. Newberry, Richard de Neufville,
Steven Connors (2006). ‘Nuclear power: a hedge against uncertain gas and
carbon prices.’ The Energy Journal, (Volume 27, No 4).

© 2013 Energy Tribune

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