Competition between various methods of generating electricity in liberalised markets means that all power plants must be cost-effective. The price of electricity from nuclear power includes all waste disposal and decommissioning costs, unlike other electricity generating technologies. Most existing nuclear power plants are likely to prosper under electricity liberalisation. Many will receive operating life extensions and be able to compete in the electricity market for many years to come. Investment costs are particularly heavy for nuclear plants. Capital expenditure appraisal methodologies mean that such plants suffer financial disadvantages in times of high interest rates. Low and stable fuel costs are the prime advantage of nuclear plants against other sources of generating electricity. There will be significant demand for new generating capacity, both incremental and replacement, in the next 20 years. Under present conditions, where there is access to a stable and cheap supply of piped gas, nuclear and coal plants find it difficult to compete against gas-fired plants. The nuclear industry is addressing the need for new reactor designs, offering significant capital and operating cost reductions from the previous generation of reactors. This development and the need for carbon abatement on a worldwide basis offers nuclear plants a further economic advantage against alternative technologies.

In a world of restructuring electricity markets, all power plants must demonstrate, with even more emphasis than in a non-liberalised market, that they are cost-effective. This must be achieved whilst still maintaining very high safety standards. Safety and economic operation should, in any case, go hand in hand.

The specific position of existing nuclear power plants varies not only from country to country, but also within one country too. There have been very few premature closures of nuclear plants reflecting their very competitive forward costs.

From the national viewpoint, many countries recognise the substantial role which nuclear power has played in satisfying various policy objectives, including energy security of supply, reducing import dependence and reducing emissions. Nevertheless, such considerations may count for less in a liberalised market, meaning that nuclear plants must demonstrate their economic competitiveness on rather shorter-term criteria.

The aim of this paper is to identify the main trends in the economics of nuclear power, highlighting those factors which can either improve or worsen the picture. It seeks essentially to promote a better understanding of this complex topic by the lay-person, which may encourage subsequent wider reading. It initially examines the cost structure of nuclear power plants compared with alternative modes of generating electricity. This is then applied to an analysis of the competitiveness of current nuclear plants and then possible new plants. Finally, some conclusions are drawn on the economics of nuclear power in liberalised markets.

It is important to distinguish the key elements in the cost structure of a nuclear power plant and compare these with the costs of other modes of electricity generation. Both the magnitude and the timing of costs are very variable for different technologies.

With significant costs and revenues occurring at different times in the operating lives of all modes of electricity generation, a discount rate, which may be more or less related to prevailing interest rates, has to be chosen to bring (levelise) these to a common basis, in order to allow economic comparisons (these are often referred to as discounted cash flow (DCF) or net present value (NPV) methodologies). The interest or discount rate chosen is sometimes set by a public authority as a target rate of return on capital, but in a liberalised market will be set by the financial markets.

When interest rates are high, projects with high initial investment costs are disadvantaged in financial appraisals. On the other hand, once expensive plants are in operation, low marginal costs may lead to long economic operating lives irrespective of the discount rate.

Recent studies (OECD-NEA/IEA 1998) show that plant investment costs account for 60- 70% of the lifetime levelised costs of a new nuclear plant based on current light water reactor (LWR) technology. The efforts being made to develop alternative reactor designs aim to reduce this. With Combined Cycle Gas Turbine (CCGT) plants, usually only 30% of the costs are investment, with the bulk being fuel. For renewable electricity projects, the capital cost element can be as high as 90%.

Fuel costs, even after accounting for the full costs of spent fuel and radioactive waste management, are the main economic advantage of nuclear plants against fossil fuel generating modes. Despite concerns to the contrary expressed during the early days of nuclear power, nuclear fuel supplies are readily available at stable prices. The cost of electricity from nuclear power plants is not so sensitive to changes of fuel costs as for electricity from gas and coal plants (OECD-NEA/IEA 1998). Additionally, nuclear fuel is a solid of low volume and is therefore easily stored if required, promoting security of supply. The political stability of the major supplying countries is also a factor in favour of nuclear power - around two thirds of primary supply uranium supply today comes from OECD producers.

Fossil fuel prices are uncertain in the medium and longer term and project evaluations for power plants must incorporate fuel price escalation scenarios.

Operations and maintenance (O&M) costs are very variable for nuclear plants, depending on factors such as plant size and age. Other relevant factors include the regulatory regime and the efficiency of the plant operator. Liberalisation of electricity markets has helped in introducing the best practice in reducing O&M costs throughout the industry, while maintaining or improving high safety standards.

Plant decommissioning costs for nuclear are usually provided for by making annual contributions towards plant dismantling and eventual site restoration. Given that plants are expected to have long lives, the contributions are not generally highly significant in the context of the competitiveness of either current or future nuclear plants.

It should be noted that these costs mentioned altogether incorporate the major external costs of operating a nuclear plant, whereas fossil fuel modes of generating electricity have traditionally not incorporated their substantial environmental effects. Nuclear fuel costs include charges for spent fuel and waste management. These are well-identified and validated, providing a good level of predictability of longer term costs (OECD-NEA 1994).

The economics of generating electricity should ideally be evaluated in a consistent manner across the various possible methods. National and local circumstances are nevertheless crucial and are so important that general rules are unlikely.

In some countries, nuclear plants were primarily built for national security of supply reasons, although the promise of cheap electricity with a stable cost base was clearly very important. Even today, reducing the dependence on imported fossil fuels with uncertain price prospects remains important in countries without substantial domestic oil, gas and coal reserves, notably France, Japan and South Korea. The expected long-term stability of costs was also an important consideration in favour of nuclear and remains a strong argument today.

An electricity generating station in a liberalised market should remain on-line if its forward (or marginal) costs are competitive with those of alternatives. Previous costs of construction are effectively sunk. These capital costs may or may not be amortised in the accounting books of the plant owner, but this should not affect the decision on whether a plant continues to operate.

Electrical power generation, including nuclear, was largely developed by public bodies in a regulatory environment which permitted long term investment but passed on the full cost to customers. In an effort to move to liberalised markets, the costs that cannot be recovered from lower market-based prices (stranded costs) may be transferred to the cost of electricity distribution. In the United States, where this trend has been most apparent, nuclear power plants have proved their ability to operate profitably on the basis of forward costs and revenues. The cost of nuclear power to the consumer has declined significantly in the liberalised markets, while production from US nuclear plants rose by 6% in 1999 alone.

There are many country-specific factors but it is possible to make some general statements about the trend of fuel and O&M costs of nuclear plants over time, compared with competing technologies. OECD /NEA studies from 1982-1998 (OECD-NEA/IEA 1998 and earlier) showed a remarkable stability in the overall generating cost of nuclear power plants, on average. This stability has resulted from two different factors acting in opposite directions and cancelling each other out. Nuclear fuel costs have fallen due to lower uranium and enrichment prices together with new fuel designs allowing higher burn ups, while O&M costs have increased, owing to economic factors, regulatory requirements, nuclear safety regulations and plant ageing. OECD-NEA 1994 found a 40% real terms reduction in fuel cycle costs since the previous study undertaken in the early 1980s.

In the case of both coal and gas plants, fuel prices fell to all-time lows in real terms in the late 1990s, as additional low cost reserves were brought into production. In the new millennium, an upward tendency in these prices has become apparent. Technical developments in gas plants, particularly the introduction of high thermal efficiency CCGTs have also cut operating costs per unit of electricity .

The overall effect has been greatly to narrow the operating cost advantage which nuclear plants formerly enjoyed over the competition. Nevertheless, where O&M costs can be constrained (subject, of course, to safety considerations), the low fuelling costs of existing nuclear plants are crucial to competitiveness.

Unit electricity costs for nuclear plants fall substantially with increased output. It is vital for nuclear operators to achieve high plant availability and load factors, with full compliance with safety standards. Nuclear plants usually operate around the clock to achieve very low marginal costs which are very attractive in liberalised markets, particularly when payments to generators are high at peak times.

It remains possible to conceive of ways in which nuclear operating costs can be reduced further. The nuclear fuel cost is composed of the uranium (raw material) cost and industrial services costs. It is unlikely that uranium prices will be much lower than at present. Uranium is plentiful and supply can be greatly extended by considering non-conventional resources or by recycling. Fuel service costs, already low, could be cut further thanks to technological progress (eg higher burn up fuel) as well as implementation of new technologies (eg enrichment and spent fuel management), as far as can be implemented in full compliance with safety requirements and public acceptance. O&M costs are particularly influenced by regulatory matters and streamlining regulatory approvals is a prime aim of the industry. Varying operating cycles and combining the experience of several formerly separate utility teams will be possible where nuclear plant ownership consolidation is taking place. Capital investment, such as replacing steam generators, leading to more efficient plant operations or power up-ratings will also help reduce unit costs.

In those cases where plant licenses are limited in time, owners are seeking and obtaining extensions which they can justify running for longer. This process is most visible in the United States now with a small number of plants, but will spread much more widely. Positive signs exist that the relicensing process will be more predictable and less expensive than many commentators previously anticipated. For companies in the private sector, extending the lifetime of plants may also allow them to reduce their annual depreciation charge, spreading decommission charges and improving profitability. Nevertheless, it is accepted that requirements to undertake substantial capital expenditure, possibly for regulatory reasons, may still close some nuclear plants which cannot justify the sums involved

Uprating the power output of nuclear reactors is recognised as a highly economic source of additional generating capacity.

The demand for incremental generating capacity is very important in many countries of the world, where many people are today without access to secure electricity supplies. Nuclear power has an important role to play in meeting these needs. There is also today a substantial demand for plant for combined heat and power generation as well as desalination. New innovative nuclear technologies are targeted at this.

As electricity demand growth has slowed in Western Europe and North America, the focus for incremental capacity has increasingly switched elsewhere. East Asia is likely to remain the region with the best growth prospects for all electricity generation technologies, including nuclear. For example, Japan and Korea favour nuclear for energy security of supply, economic and environmental reasons. China, presently heavily dependent on coal, is developing a nuclear programme.

As far as new electricity generating plants are concerned, the basic economic question can be presented quite simply. Are the lower and stable fuel costs of a nuclear plant compared with local competition sufficiently attractive to offset the higher plant investment costs.

The potential for new nuclear capacity will also be determined by the need for replacement capacity for nuclear and fossil fuel-powered generating units reaching the end of their lives. There will be a substantial demand for replacement capacity in most developed countries over the next decades.

Renewable energy technologies will take an increased share of electricity supply and take their place as part of balanced supply. Many are, however, of a dispersed or intermittent nature. Renewables are very suitable complements rather than competitors. Apart from hydro, base load will have to be supplied by fossil fuel and nuclear resources.

The move to localised electricity supply, ultimately perhaps in the form of home-based generators, as opposed to large-scale grid systems, is some way off. So-called "distributed generation" also requires grid-based back-up supply.

Where there is a requirement for new substantial generating capacity, nuclear will principally compete with clean-coal and CCGT plants. Recent studies, such as those of the OECD-NEA and IEA (1998) show that where there is access to a stable and cheap supply of piped gas, under current gas prices nuclear and coal plants find it difficult to compete against CCGT plants. This conclusion is, however, very sensitive to gas prices which in 2000 have been rising sharply, along with oil. CCGTs are particularly economic at higher interest rates (ie 10% and above). Subsequent OECD-NEA studies have shown that nuclear's previous cost advantage over alternative technologies for new plants has been gradually eroded over time, owing to falling fossil fuel prices and technical improvements.

Sensitivity analyses in studies of competitiveness demonstrate that, apart from the interest rate, nuclear plant competitiveness is heavily influenced by the capital investment cost of the plant and the load factor, whereas gas plant competitiveness is essentially dictated by the gas price (OECD-NEA/IEA 1998).

The nuclear industry has proven technology and there remains scope for improvement in reactor technology. Economies of scale are certainly achievable by building larger reactors, where the market allows it (OECD-NEA 2000). However, there could be a large market in developing countries for rather smaller reactors than the evolutionary LWRs. Development is therefore proceeding of smaller-scale, modular nuclear power plants, better adapted to specific markets.

To address the need for lower capital costs of nuclear plants, the nuclear industry

has produced evolutionary Light Water Reactors (LWRs), seeking economies of scale and simplification of operations. New innovative nuclear plant designs are also being considered. Further substantial investment in nuclear R&D is essential.

Past experience has also shown that wherever several nuclear units were built on one site, significant economies were obtained. Standardisation of designs, leading to building plants in series, greatly benefits competitiveness. Substantial economies could also be obtained through streamlined regulation. International harmonisation of new plant licensing between national regulatory bodies would also be beneficial.

It is clear that for new nuclear plants to be competitive, they must achieve high load factors over long reactor lives. In plant countries where plants operate on a load following (rather than base load) basis (eg France and South Korea), capacity utilisation must also be kept high to minimise unit generating costs .

Where nuclear power is developed in new countries, it must be in full compliance with international non-proliferation agreements.

The global warming debate has led to the Kyoto Protocol which has emphasised non-emitting, clean technologies. At present, only nuclear power has the potential to make significant reductions in greenhouse gases. Inclusion of nuclear power in the Kyoto mechanisms is important to the overall perception of nuclear power as an emissions avoidance technology and economic advantage should then flow to both current and future plants.

The world energy environment has changed substantially since the time when the first generation of nuclear power plants were introduced in industrial countries. The most important changes are (a) the liberalisation of energy markets and (b) far stronger economic competition from fossil-fired power plants.

As a consequence of the former, energy security of supply and import dependence are given less consideration than before. At the same time, shorter terms analyses are preferred to the long term, thus limiting the economic lifetime under which a plant must prove its competitiveness.

The second change originated from a three-fold improvement in the economics of fossil-fired power plants, owing to reduced capital costs, higher efficiencies and, most important of all, the sharp drop in coal and gas prices in the 1980s and 1990s.

Existing nuclear plants are highly economic within this new context thanks to the successful efforts made to reduce fuel costs plus operating & maintenance costs and also to the achievement of better plant performances. A clear proof of this comes from the numerous lifetime extensions and capacity up-rates.

The position on ordering new nuclear plants is rather different. Some Asian countries such as Japan, Korea and China are presently ordering and building nuclear. What, however, will be the choice of North American and European countries when the time comes for replacement of units which reach the end of their economic lives or the need for incremental capacity?

It seems clear that in order to attract investors, new nuclear plants have not only to maintain the improvements already achieved in terms of fuel and operating costs but also to cut their capital cost, which is the main component of the nuclear generating cost. Among others, possible means to achieve this may come from -

1. application of advanced technologies through phases of design, licensing, fabrication and construction of both evolutionary plants and newly designed plants
2. new approaches both for equipment classification and for equipment purchasing policies
3. better appraisal of cost-effective safety, focussing its goals on desired ends rather than the means, hence shifting from prescriptive regulation to performance-based regulation.

The nuclear industry is presently acting to achieve the needed cost reductions. At the same time, it is important to stress that -

1. the competitiveness of new nuclear plants can be enhanced through the incorporation of externalities of fossil fuel power plants
2. with unpredictable fossil fuel prices, the stability of supply and of costs of fuel suggests that nuclear should be part of balanced energy strategies.
3. only nuclear power has the potential to substantially cut greenhouse gas emissions in the (at least) medium term .

IAEA (1993) -Nuclear and Conventional Base Load Electricity Generation Cost Experience.

IEA (1998) -Nuclear Power: Sustainability, Climate Change, Competition.

OECD-NEA (1994) -The Economics of the Nuclear Fuel Cycle.

OECD-NEA (2000) -Reduction of Capital Costs of Nuclear Plants

OECD-NEA/IEA (1998) -Projected Costs of Generating Electricity (and also refer to 4

earlier editions 1983, 1986, 1989 and 1993).

UNIPEDE (1997) - Electricity Generating Cost for Thermal and Nuclear Power Plants to be Commissioned in 2005