The Australian National Electricity Market and Investment in Nuclear Power in Australia

1. The Australian National Electricity Market and Investment in Nuclear Power in Australia Professor Anthony (Tony) D Owen Santos Chair of Energy Resources and Director UCL School of Energy and Resources Torrens Building, Adelaide, SA 5000 Presentation to 34th International Conference of the IAEE, Stockholm, 19-23 June 2011

2. Outline of Presentation • Outline of Australia’s National Electricity Market (NEM) • The cost structure of current power generation technologies • The dash for gas • Is nuclear power compatible with Australia’s competitive electricity market? • What are the desirable characteristics of the next generation of power generation technologies?

3. National Electricity Market Gross wholesale market for electricity supply Only WA and NT not included NEM operates on the world’s longest interconnected power system (approx. 4500 km) Registered capacity: 49,010 MW 81% of generation from coal; 10% gas; 6% hydro; 3% other (mainly wind) Half of generation government owned or controlled. However, the private sector is being encouraged to invest in new capacity in all states. The vast bulk of planned additional capacity is wind or gas

4. Brief history of nuclear power in Australia • May 1969 Prime Minister John Gorton announced that the Commonwealth government would construct a 500 MW nuclear power station on Commonwealth land at Jervis Bay (NSW) • Tenders obtained and site preparation undertaken • May 1971 Sir Phillip Baxter stated that Australia’s nuclear power capacity would reach 22.5 GW by 1995 and 36 GW by 2000, or 27.2 and 32.8 per cent of projected total installed electricity capacity from all sources • Project deferred when McMahon replaced Gorton as PM • June 1971: project cancelled • Prepared site now serves as a (rather large) car park

5. Comparison of overnight costs of electricity generating technologies: US$/kW (Source: IEA/NEA)

6. Levelized cost of electricity by technology and discount rate (5% and 10%): 2015¢/kWh (Source: IEA/NEA)

7. New entrant capital costs: Australia(real 2009A$/kW installed) ACIL Tasman for DRET

8. Emissions permits: a double-edged sword for nuclear? • A tradable emissions scheme puts an upper bound on the aggregate level of emissions in a country, but the price at which emissions trade is determined by market conditions • A carbon tax places a fixed unit price on carbon emissions, but the aggregate quantity of emissions is determined by market conditions • Carbon price volatility will raise the level of risk for capital intensive projects

9. Is CCS the answer to reducing CO2 emissions? • CCS is of at least a comparable cost to nuclear • CCS has a similar construction period • CCS is likely to generate significant public concern around safety issues But • Governments may subsidise CCS beyond its public good stage • Will the private sector invest in CCS without government support? Or will a carbon price suffice?

10. Competitiveness of nuclear power • Particularly suitable for countries not well endowed with fossil fuels (energy security benefits) • Benefits from economies of scale (i.e. extensive domestic nuclear programme) • Up-front cost structure less attractive to private investors in liberalised markets (they have higher discount rates). Governments can include social and security benefits implicitly in decision making. • Benefits from pricing of externalities (GHG emissions, emissions of local pollutants, etc.) plus energy security • Some governments do not tolerate legal challenges to critical infrastructure investments! Thus construction timelines are not extended.

11. The tyranny of discounting • High discount rates favour investments where benefits come early and costs can be delayed for as long as possible. • Private investors tend to have much higher discount rates than governments (opportunity cost of equity capital) • Discount factors for a project under construction for 2 years are 0.84 and 0.72 (for real discount rates of 7% and 14% respectively) for year 3. • Discount factors for a project under construction for 5 years are 0.69 and 0.49 (for real discount rates of 7% and 14% respectively) for year 6. A 3 year delay reduces these to 0.56 and 0.33

12. Advantages of gas for power generation in Australia • Modular and relatively low capital cost • CCGT, running optimally, produces 40% of CO2 emissions of comparable coal-fired plant • Versatile: open cycle for peaking and load following, close the cycle when justified by demand • Largely pre-fabricated off-site + economies of scale • Intermittent renewables need open cycle gas, therefore lack of significant public opposition • Domestic gas in plentiful supply But: LNG-export driven prices may be a problem, and supply interruptions can be critical (e.g. Longford and Varanus Island incidents)

13. Is there a bias in the NEM toward low-cost low-risk fossil fuel generation? Possible Commonwealth reforms to make investment in renewables, nuclear, and CCS more attractive: • Carbon price floor: to provide a higher degree of price certainty than can be provided by an ETS • Long term contracts with price guarantees; such as feed-in tariffs for low emission technologies (“contract for difference” model?) • Capacity payments • Emission performance standards to ensure any new coal-fired plant had CCS technology inbuilt

14. In summary • Over the next decade new generating plant in Australia will be gas and renewables. The latter driven by government support and, subsequently, a price on carbon. • Enhanced levels of price-induced energy efficiency • In the longer term, and to promote diversification of supply, either CCS or nuclear may be required. • Essential attributes for new technologies are: Modular construction of small generating units; Load-following capability; Low unit capital cost; and General acceptance by the Australian public. Neither of these technologies have these attributes at present

15. Conclusion Generation IV nuclear technology must address the above issues and simultaneously demonstrate to the private sector that such investments would be financially viable. Thereafter the nuclear power industry would have to convince the Australian public of the virtues of a technology that, to date, it has failed to embrace. However, there is an urgent need to put in place enabling investments now. Regulatory requirements, potential sites, public acceptability, and training of nuclear engineering graduates must be addressed well in advance of the nuclear plant planning stage.

16. Thank You tony.owen@ucl.ac.uk