The promise of electricity ‘too cheap to meter’ of the 1950s and early 1960s brought about a quasi-unprecedented enthusiasm for a new technology throughout societies around the world. It was going to open up an era of abundant and clean electricity and stop the filth and smoke of oil — and coal-fired power plants. Numerous countries launched ambitious peaceful nuclear power programmes, a trend that was further fuelled by the oil supply crises and associated price hikes of 1973 and 1979. Global nuclear generating capacity expanded rapidly beginning in the 1960s from barely 1 GW to 325 GW by 1990. During these early years, nuclear power plants were enthusiastically supported and mostly funded by governments in large part to develop and commercialize this new technology. Utility orders began to mushroom by the 1970s and expectations were that nuclear power would provide the lion’s share of electricity globally by the beginning of the twenty-first century. The order books of the nuclear industry were brimful as plant orders poured in by the hundreds.

Reality, however, proved different. Beginning in the early 1980s numer­ous orders were cancelled — even where plant construction had almost been completed — and global nuclear power faced stagnation which lasted until about 2002-03. There were many reasons for these cancellations and sub­sequent stagnation but the bottom line was economics. Given the current rising interest in nuclear power, a review of factors underlying past nuclear stagnation and whether the situation is different today than 30 years ago is in order. In essence, the following factors chiefly determined and will continue to determine the economics of nuclear power: market structure, government policy, generating costs relative to alternatives, finance, public acceptance and environmental performance.

Looking back to the 1980s, the nuclear stagnation is not attributable to a single factor but is rather the result of a combination of several (often unrelated) factors. Regarding demand, while the oil price shocks of the 1970s had been a major driver of the nuclear expansion, they also had prompted government policy mandating efficiency improvements through­out the energy system as well as the development of alternative energy sources. High fossil fuel prices not only provided incentives for accelerated exploration and development of non-OPEC oil resources but also resulted in structural economic change in many industrialized countries, i. e., a shift from energy-intensive primary and secondary manufacturing industries to tertiary (service and knowledge based) industries. The net effect of all these measures was a considerably lower growth in electricity demand which due to time lags became only evident by the early 1980s. Demand uncertainty — until then a relatively insignificant risk — became a new challenge. Risks were further compounded by the emergence of surplus generating capacity in many markets. Long lead times in power capacity planning and plant construction made it difficult to respond in a timely manner to the new demand situation. As a result many — nuclear and non-nuclear — power plant orders were cancelled or halted where construction was already underway.

At the time, electricity supply was viewed as a strategic good and most electricity utilities were government owned. In markets where utilities were privately held, strict regulatory oversight ensured cost controls, supply reli­ability and security. In either case, utilities were vertically integrated, viewed as natural monopolies without real market competition (except with other fuels). In return for quasi-guaranteed markets, utilities had a supply obliga­tion at government-controlled sales revenues. Revenues were usually struc­tured to cover actual fuel and variable operating and maintenance (O&M) costs plus, in the case of private sector ownership, a regulated (reasonable) return on capital. Through direct ownership or through the regulatory approval process, governments directly influenced investment decisions and technology choices.

In essence, privately owned utilities operated under a ‘cost plus’ scheme, i. e., they could essentially recoup all costs, including investments — even if these were higher than anticipated (unless imprudently incurred) or if demand turned out lower than projected. To that extent, the economic risk of electricity supply was entirely borne by the taxpayer. It was this low-risk framework that enabled utilities to invest in capital-intensive generating stations such as hydro or nuclear power. However, the situation changed in the 1980s, in large part in response to surplus generating capacities in many markets and the resulting widely differing rates between regional markets. Another change concerned a shift in the recognition of the different roles of public and private sector entities and their respective efficiency and effectiveness in decision making and risk management. Regulated electric­ity markets gave way to deregulation and market liberalization. Many gov­ernment utilities were privatized. Electricity market competition, unbundling of generation, transmission and distribution instead of quasi-natural monopolies became the new paradigm in many countries for addressing surplus capacity and stranded costs, reducing rate differences between regional markets and encouraging electricity trade. Competition, partition­ing and allocating risks to entities that are best positioned to manage them were hailed to improve efficiency and overall market transparency and ultimately incur lower costs to consumers. Clearly ‘cost plus’ rate setting as well as long-term investment planning and decision making became a thing of the past overtaken by short-term shareholder value optimization.

Investment in nuclear power, however, not only requires long-term plan­ning but also involves long pay-back periods and lower returns than alterna­tive investment opportunities — characteristics which proved incompatible with short-term shareholder optimization. The general retreat of govern­ment involvement (usually with longer planning horizons) in financing elec­tricity sector investment — be it because of general divesture or the many other non-energy demands on government budgets or economic transition — further reduced the attractiveness and market potentials of nuclear power.

In addition, the track record of the nuclear industry to deliver nuclear power plants at budget and on schedule was marred as construction delays and cost overruns through the 1980s often became the norm rather than the exception. The plants built in the 1970s were scaled-up adaptations of smaller demonstration plants built in the 1960s, thus effectively represent­ing a ‘first-of-a-kind’ experience. Often designs were being finalized on-the — fly during construction, resulting, at times, in widely differing final plant designs for initially identical units as different engineering approaches and design improvements provided for different solutions (NEA, 2009).

While extreme cases of cost overruns, e. g., of an order of magnitude, or delays of many years were rare, and many less extreme delays and overruns can be rationalized (see below), they brought many utilities to the brink of bankruptcy and the reputation of the industry with investors plummeted and has yet to be fully restored. Several factors — partly beyond the control of the industry — contributed to plant completion delays and cost overruns. The 1979 Three Mile Island (TMI) accident in the United States raised safety concerns and prompted regulators to toughen safety regulation. New regulatory requirements mandated upgrading of existing plants and plants under construction with additional and more complex safety features. For plants under construction this resulted in extended construction schedules and added costs; for completed plants it meant lengthy shutdowns and loss of sales revenues. Moreover, the early 1980s saw a period of two-digit interest rates and high inflation which further compounded cost overruns through cost escalation and accumulated interest during construction.

The TMI accident also adversely affected public and political acceptance and served as a wake-up call to investors about the economic and technical risks of nuclear power plants. Governments seeing their budgets stressed by cost overruns began to see the technology in a different light. The revised regulatory and plant licensing procedures also opened prospects for the involvement of civil society through public hearings, environmental impact assessments and legal intervention. Especially, anti-nuclear groups seized the opportunity and over time perfected the effectiveness of legal interven­tion, causing further delays and added costs.

As regards overall energy supply, the stepped-up investments in non- OPEC oil exploration and production capacity as well as the delayed effect of efficiency and performance standards began to impact the international oil market: lower demand was met by rising supplies exerting downward pressure on prices. This situation culminated in 1986 when OPEC lost control and global oil prices collapsed (and gas and coal prices followed suit), compromising the economic rationale for nuclear power. Plentiful cheap oil and gas on the one hand, and the advent of low capital cost, highly efficient combined cycle gas turbines (CCGT) with smaller unit sizes and considerably shorter construction and payback schedules than nuclear power (and coal), on the other hand, offered utilities less bulky and lower risk investment opportunities. Smaller unit sizes were highly welcome in markets with uncertain electricity demand prospects, and high returns were consistent with short-term profit and shareholder value maximization.

With plentiful cheap oil and gas available, energy supply security — the prime driver of nuclear power in the 1970s — was no longer a national policy concern in most countries. Environmental performance also appeared less a matter of concern. Policies targeted at controlling sulphur and nitrous oxide emissions chiefly responsible for local air pollution and regional acidification had taken effect already in many industrialized countries and the threat of climate change had not yet been high on the international environmental agenda.

In summary, the economics of the day had already disfavoured nuclear power with investors when the disastrous Chernobyl accident of April 1986 — like the straw that broke the camel’s back — also turned the public at large against the technology. Many reactor orders not already cancelled for eco­nomic reasons were now stopped due to safety fears and several countries decided to abandon their national nuclear power programmes. The global nuclear power situation was further set back by the disintegration of the Soviet Union and consequent economic collapse.[87]

508 Infrastructure and methodologies for justification of NPPs