Nuclear: too hot to handle
Recent reports about the potential of BHP Billiton to delay uranium production from its massive Olympic Dam project, and Resource Minister Martin Ferguson’s urging of the NSW coalition government to overturn the state’s ban on uranium mining, suggests differing views about the outlook for the nuclear industry.
That the much anticipated “nuclear renaissance” has been stalled – at least in western democracies – appears to be beyond doubt, at least in the short term. But the medium- to long-term outlook is subject to much conjecture, and seems to depend on how you answer two questions: Who is going to want it? And who is going to pay for it?
In the immediate aftermath of the Fukushima nuclear crisis, we noted that the nuclear industry was unique among energy sources in that it relied on the indulgence of public opinion – unless, of course, you live in a country like China – to be built. This has been borne out by events in Germany and Italy, and the continuing angst in Japan.
But it’s not the only problem – even in those countries where nuclear is supported by the government, the question remains, who is going to pay for them? And it seems clear that the private sector is not.
Advocates for nuclear power in this country like to present the industry as the lowest-cost clean energy alternative to fossil fuels. But this ignores the fact that nuclear plants are massively expensive and involve huge up-front costs, invested well in advance of a commercial return because of the long lead times.
And it is completely dependent on government support. As Citigroup analysts pointed out in a2009 analysis on the economics of the nuclear industry, there hasn’t been a plant in the world built without the relevant government assuming much of the construction, operating and financing risk. There is not a single insurer, banker or construction company in the world that is willing to assume that risk.
France is often cited as the glowing example of low cost nuclear energy, but the French government effectively wrote off the capital investment of its nuclear fleet, meaning that the operating companies such as EdF and GDF Suez have been able to book what the International Energy Agency described as billions of dollars in “nuclear rent."
Now, the assumption that nuclear will be cheaper than competing “clean” technologies such as coal with carbon capture and storage is being questioned again, particularly in light of the extra costs that will become an inevitable consequence of post-Fukushima safety reviews.
Nomura Securities analyst Kyoichiro Yokoyama last week released a detailed assessment of competing clean baseload technologies, in which he concluded that the cost of nuclear was considerably higher than that of even coal with carbon carbon and storage.
Yokoyama noted that low costs had been a key selling point for nuclear power, underpinned by an analysis from the IEA and the OECD’s Nuclear Energy Agency last year that suggested that the levelised cost of energy (LCOE) for coal-fired plants with CCS comes out 25-40 per cent higher than that for nuclear plants, with or without a carbon price. But Yokoyama said that, since the Fukushima Daiichi incident, an increasing number of people have been questioning the real cost of nuclear power generation.
“Some observers have noted that the cost of the various subsidies paid when nuclear plants are constructed is not factored in and it has also been pointed out that the estimation of costs associated with spent fuel has tended to be overly optimistic,” he wrote. “In many cases, the details of these amounts are unclear or unspecified, which makes calculating the actual cost of nuclear power generation somewhat problematic.”
He drew on research from MIT that noted how the cost of disposing of spent fuel and numerous regulatory and political risks associated with operating licences, including gaining the approval of residents, meant the capital costs were considerably higher (around 2-3 percentage points) than for thermal generation. MIT suggested that this translated into a LCOE for nuclear power generation of $US60-$US65/MWh for the US and Germany and $90/MWh for the Czech Republic. These costs are roughly the same as for coal-fired generation with CCS.
The question of costs and the ability of the private sector to come to the party has been raised on several occasions in recent weeks in the UK, which is keen on pressing ahead with its nuclear rollout. A joint venture between France’s EDF and the listed UK utility Centrica plans to roll out of three or four nuclear plants by the end of the decade.
Last week, Lakis Athanasiou, the utilities analyst with London-based investment bank Evolution Securities, warned that Centrica should "not touch (the new nuclear venture) with a barge pole," particularly if the UK government is unwilling to take construction risk.
The Evolution Securities view reinforces renewed concerns expressed by other investment specialists such as Citigroup, which a week earlier said new nuclear was not an investable option for public equity markets and listed companies such as Centrica or Germany’s RWE.
“The cost of capital based on those risks would be way too high to give you an electricity price which is affordable,” Citigroup’s utilities analysts told reporters at a briefing in London. "You would be looking at a project cost of capital of at least 15 per cent. That would require a power price of about 150-200 pounds per megawatt hour (based on 2017 money) to make that project work," he said, noting it is three to four times as much as current UK spot power prices.
In that 2009 report, Atherton noted that three of the risks faced by developers – construction, power price, and operational – are “so large and variable that individually they could each bring even the largest utility company to its knees financially. This makes new nuclear a unique investment proposition for utility companies.” He noted that UK government policy remains that the private sector takes full exposure to the three main risks. “Nowhere in the world have nuclear power stations been built on this basis,” he said.
Further delays and cost overruns at new generation nuclear plants being developed in Europe by French companies have also raised questions about the cost factor, particularly with the extra safety measures that would appear to be an inevitable consequence of the Fukushima incident. EDF said the new generation European pressurised reactor (EPR) at Flamanville, in north-western France, has been further delayed and is now expected to open in 2016 (rather than 2014), and its budget has now jumped out to €6 billion ($8 billion). It was originally to be built by 2012 at a cost of €3.3 billion.
Another French company, Areva, is experiencing similar problems at its EPR plant in Finland. EDF has blamed “structural and economic” problems, noting that a nuclear plant has not been built in France for 15 years. It’s a similar problem in the US, where even nuclear technology suppliers such as GE say it is impossible to estimate the cost of nuclear reactors because none have been built for more than two decades.
A plan unveiled in 2007 to build two nuclear plants in San Antonio using reactors provided by Toshiba was effectively abandoned three years later after the prospective cost ballooned from an estimated $US5.8 billion to $US22 billion. The Obama administration has said it would release $58 billion in loan guarantees to help a new fleet of nuclear reactors to be built, but there are questions about whether this would be anywhere near sufficient.
Indonesia's dirty energy challenge
Unless reversed, Indonesia’s current trends of expanding coal-fired power plants in order to respond to energy shortages and of heavily subsidising dirty energy will see the country fall radically short of its 2025 renewable energy targets. These trends will also continue to drain the country’s financial resources and deplete government budgets.
But switching to renewable energy won’t be easy. Removing fuel subsidies is a sensitive political issue. Promoting renewable energy requires structural adjustment and high levels of initial investment. Yet these are the conundrums which need to be urgently resolved if Indonesia wants to secure its energy, develop its economy and tackle climate change.
Increasing energy demand
Who would have thought that such a resource-rich country would one day have difficulties securing and providing basic energy to its citizens? Indonesia has a plentiful supply of accessible energy sources, both from fossil fuels and renewables, and is the largest energy producer in southeast Asia. Yet the country is struggling to keep up with its own energy demands.
Historical data from the Ministry of Energy and Mineral Resources show that energy demand has been increasing faster than economic development and population growth. According to the Green Policy Paper released by the Finance Ministry, total energy demand is growing by around 7 per cent per year, as the transport and industrial sectors grow, and as households become more affluent.
A large proportion of this demand has been met by polluting fossil fuels, mainly oil. A consequence of this skyrocketing demand is that since 2004 Indonesia had become a net-importer of both crude oil and refined products.
With a production capacity of half a billion barrels per year and increasingly limited oil reserves, it is estimated that Indonesia’s remaining 10 billion barrels of oil reserves will be exhausted in less than 20 years. If no new reserves are found, with the increasing demand for energy and a ‘business as usual’ approach, Indonesia will be a significant oil importing country in less than two decades. Already, dramatic increases in average global oil prices have hit Indonesia’s purse strings.
Electricity shortages
More than 70-80 million people, or almost one third of Indonesia’s 225 million inhabitants, lack access to electricity. These people mostly live in rural areas and the outer islands. In 2004, for instance, 90 per cent of rural households had no electricity compared to only 16 per cent in urban areas, and the electrification ratio in Papua and Nusa Tenggara was only 20-30 per cent.
Most power generation today is from conventional thermal sources including fossil fuels such as oil, coal and natural gas. Less than 20 per cent comes from hydroelectric, geothermal and other renewable sources. Hence, the high price of oil on the global market has not only made it more expensive to produce and import gasoline, but has also led to increasing electricity-generation costs.
Electricity is heavily subsidised and currently customers pay for electricity at far below market price. The state-owned electricity company PLN, however, is required to buy energy at the market price – as stipulated in Presidential Decree number 55 of 2005 – and it struggles to do so. Fuel is also heavily subsidised by the government. Together, fuel and electricity subsidies have created a massive burden on the state budget. Their estimated cost to the government in 2010 is $US9.78 billion, and in 2011 had already hit $US3.68 billion by March.
Reliance on subsidies
The subsidies have various perverse economic implications. In 2008 the Coordinating Ministry for Economic Affairs admitted that indiscriminate fuel subsidies have been a poor way to pursue welfare transfers from rich to poor, because the wealthiest 40 per cent of households capture 70 per cent of the subsidies. Moreover, and very relevant to the issue of climate change, subsidies lead to over-consumption of energy because the actual cost of that energy is not reflected in the price that consumers pay. Many reports suggest that subsidies discourage energy efficiency measures and the development of alternative or renewable energy sources by way of low electricity tariffs.
Adjusting prices and removing subsidies could promote better energy efficiency and conservation. There is plenty of room for improvement. Some studies show that Indonesia could relatively painlessly achieve increased energy efficiency, by as much as 10-30 per cent in households, 10-23 per cent in the commercial sector and 7-21 per cent in industry. In 2009, Agus Purnomo, the special advisor to the president on climate change, stated that cutting subsidies on fossil fuels would bolster the competitiveness of renewable energy sources. The logic is that the money previously used for subsidies could be utilised to help seed investment in renewable energy development, reaching the country’s sustainable energy growth path.
However, eliminating fuel subsidies has never been an easy task. Many ordinary Indonesians hate the idea of paying more for fuel, electricity and related services. Throughout the past 10 years, the government has had some success at whittling away at these subsidies, but the issue remains politically contentious. The parliament, in particular, is reluctant to take action.
Renewables: potentials and challenges
As well as taking action on the demand side, the government could take action on the supply side by providing more support for renewable energy. Indonesia possesses a variety of renewable energy resources, including geothermal, solar, micro-hydro, wind and bio-energy. Indeed, Indonesia has more geothermal energy potential than any other country. Most estimates put the potential reserves at 28,000 megawatts, which could meet some 40 per cent of national electricity demand. Yet currently Indonesia only uses 4.2 per cent of that potential.
The central government’s general energy policy advocates diversification of energy sources and conversion from coal and petroleum-based fuels to renewable energy sources, with the overall goal being to reduce emissions. Nonetheless, promotion of renewable resource development over the last five years has progressed very slowly. At present, renewable energy production (hydropower, geothermal and biomass) makes use of only 3.4 per cent of total potential reserves. This low figure is partly because shifting the country’s energy portfolio to renewables would require massive investment.
Another obstacle is Indonesia’s very system of government. Not only is the bureaucracy lacking in capacity and resources – and riddled by inter-departmental tension at the national level – but the decentralised system of government, and the resulting division of power between central and local governments, also impedes national coordination in delivering a policy of transition to renewable energy. Under decentralisation, local governments have been given the rights and responsibility to issue concessions and licences for renewable energy. However, most local governments have very limited capacity or understanding of the implications of various energy scenarios. There is no established policy framework through which to encourage local governments to pursue renewable energy initiatives.
Between a rock and a hard place
Currently, Indonesia’s total power generation capacity is 21 gigawatts, but the actual rated capacity is just 18 gigawatts, two-thirds of which is concentrated in Java, Madura and Bali. Electricity demand grows by 9 per cent per year on average, hence the current capacity is no longer sufficient. The pressure to meet the energy shortfall is immediate and pressing, and a cause of discontent both to those who are beyond the reach of the existing grid, and those who are part of it but increasingly subject to black outs.
The government faces dilemmas in working out how to meet the expectations of these groups. Continuing the use of subsidised oil will cost the country’s economy. Increasing the use of coal – the current policy envisages the construction of coal-fired power plants with a total capacity of 10,000 megawatts – will meet demand in the short term but it does not provide a long-term solution, since the plants are mostly inefficient. Coal-fired plants also contradict Indonesia’s commitment to tackling climate change, and also produce other environmental harm, such as smog and acid rain.
On the other hand, despite the potential of renewable energy in Indonesia, the preference for coal, and previously oil, have seen this sector grow only sluggishly. Successful renewable energy development would address escalating concerns over environmental issues and reduces dependency on conventional energy resources. However, to get there, significant investment and serious governance reforms are needed.
This is ripe for Indonesia to make tough but right decisions about its future energy needs. The Indonesian government needs to stiffen its political resolve to phase out subsidies for fossil fuels. Actions to reform policy incoherence, remove structural impediments and promote investments in renewable energy are also needed. Mixing various sources of funds from the private sector and international funding institutions, and encouraging investments with pricing and tax reforms could promote investment in renewable energy. Strong leadership and clear guidance from the top, notably from the president and his cabinet is needed.
Fitrian Ardiansyah is a PhD candidate at the Australian National University, and was formerly program director for climate and energy at WWF-Indonesia.
An earlier version of this article was published in Inside Indonesia.
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