From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market

IAEA Fourth International Conference on Nuclear Power Plant Life Management Lyon, France 23-27 October 2017 From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market Prof.dr. ŽELJKO TOMŠIĆ University of Zagreb Faculty of Electrical Engineering and Computing Department of Energy and Power Systems Unska 3,10000 Zagreb, CROATIA --------------------------------- tel. +385 1 61 29 983 fax. +385 1 61 29 890 email: zeljko.tomsic@fer.hr

A world of volatility and change Today world of volatility and change Hope to be vaguely right, not precisely wrong Long-term forecasts are uncertain Climate change, policy, technology, consumers and economy will decide Energy demand and energy mix differ depending on growth, efficiency, technology and policies Renewables requires large changes in particular in transport and power Energy related CO 2 emissions vary considerably driven by policy, energy intensity, and fuel mix Power sector is undergoing radical change. Renewable energy sources (RES), distributed generation and demand response are playing increasing role in the power system. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 2

Contribution of nuclear for meeting long term energy needs Nuclear energy contributes to the three major energy policy objectives: security of supply, decarbonisation of the electricity sector and competitive power prices. Nevertheless, the sector faces a number of challenges: One of these is to improve the economic operation of existing and new nuclear power plants - competitiveness Another challenge is to enable new market-based investment (even for LTO), which is not viable under the existing energy policy and market framework. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 3

4 How Can Electricity Supply be Organized? Central planning approach Usually one state owned vertically integrated monopoly company Centrally defined prices (usually artificial) Central dispatch of generation units Market approach Many producers International competition Many suppliers/traders Self dispatch of generation units based on actual market prices (spot market or even intraday market) No motivation for rational behaviour Natural motivation for rational behaviour

Economic point of view From the economic point of view, the costs of nuclear plant lifetime extension are usually relatively lower than the construction of any other source of electricity. But in the aftermath of the Fukushima accident, policies towards nuclear energy changed. Changes from phasing-out nuclear power plants no matter of real safety status, ruling new regulatory requirements regarding safety of operating plants way beyond existing design basis, to imposing "nuclear taxes" etc. All, including additional capital expenditure necessary to meet regulatory requirements, have significant impact on the cost of nuclear generation to the extent that is prudent to reconfirm/check the continuity of economic sustainability of NPP continues operation. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 5

Economic analysis for decision on LTO of NPP

Economic analysis for decision on LTO of NPP Decision on life time extension includes many of the tasks associated with LTO that includes input to the corporate strategy and interaction with many corporate elements not directly associated with plant operations. These activities include economic evaluations of alternatives for major refurbishment or replacement projects as well as strategic decisions regarding use and disposition of the plant. Today, elements for decision for LTO also depend of electricity market structure: regulated or deregulated market. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 7

Assess the economic benefits of life time extension It is not enough just to assess independently NPP and comprehensive approach in assessing the economic viability of actual operational lifetime should include a power system analysis. This means that in order to decide on economic viability of extended nuclear power generation, it should be compared the costs (or rather the present value) of this generation with the costs of replacement power. As replacement power alternatives can be generation on conventional or innovative & renewable power sources, power purchases from power exchange, contracts with independent power producers or demand side management. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 8

Types of nuclear power plant costs Three types of nuclear power plant costs can have important and distinct roles in determining the economic life of individual units: 1. historical capital costs, 2. future capital additions (for regular operating time and for LTO) 3. annual O&M and fuel costs. It is important to stress that the economic evaluation of LTO measures is complicated and depends on the concrete circumstances for each plant. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 9

Important parameter for LTO The crucially important parameter for prolonged operation is the investment cost for refurbishment. This investment is to a large extent determined by the overnight refurbishment cost (ORC) Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 10

Cost summary of specific Overnight Refurbishment Investment Cost in some OECD countries [NEA, 2012] Country Specific investment in LTO Comment Belgium USD2010 650/kWe Including ~11% increase due to post-fukushima measures. France USD2010 1090/kWe Including all investments from 2011 to 2025: maintenance, refurbishment, safety upgrades, performance improvement; and ~10% increase due to post-fukushima measures. Hungary USD2010 740-792/kWe Including 10-17% increase due to post-fukushima measures. Korea, Including ~10% increase due to post-fukushima USD 500/kWe Republic of measures. Specific future investment in NPP refurbishment and Switzerland USD2010 490-650/kWe maintenance (approximately the double of the specific LTO investment) is USD2010 980-1 300/kWe. United Electric Power Research Institute (EPRI) survey About USD2010 750/kWe States data and current spending on capital improvement. Russian Federation Ukraine About USD2010 485/kWe About USD 300-500/kWe Data for Novovoronezh 5 unit (first series of VVER- 1000: V-187). Public statements by Energoatom and Ukrainian prime minister. 11

Economics of lifetime extension and safety improvements In a deregulated electricity market power plant lifetime extension and upgrading are driven by cost and revenue consideration. Decision to continue operating an existing plant is based on its marginal generation cost, i.e., operation & maintenance, fuel cycle cost, taxes and capital cost compared to generation costs of other options. Lifetime extension and uprating of NPPs are going hand in hand together with safety improvements. The cost for lifetime extension and consequently necessary safety upgrading are in the average 400 million per unit despite of the size. These large costs increase the generation cost during the amortisation period by 0.2 0.6 eurocent/kwh [JRC, 2010]. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 12

Study of life extension project The work should focus on three key work stream themes: Commercial (contracts; policy; and regulation) Financial (historic cost trends; financial modelling of cost projections; and indicative funding costs) Economic (macro-economic statistical data and publicly available statistical forecasts for cost items and GDP, to inform the assumptions for projecting costs forward) Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 13

Economic assessment and analyses (1) Decision on continued operation of NPP may be based but not necessarily limited to: future electricity prices; liberalized nature of European electricity market makes the prices of electricity highly volatile; assessment of production costs; (production costs = operation & maintenance + fuel) production costs have to be assessed in structure and stability over time as well as properly discounted; scope of needed NPP upgrades; investment costs of Engineering Procurement and Construction (EPC) for replacements and upgrades plus cost of capital considering characteristics of financial market for nuclear projects. structure of how refurbishments/upgrades required for operation in extended life is financed; impact of refurbishments/upgrades schedule on availability factor Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 14

Economic assessment and analyses (2) Decision on continued operation of NPP may be based but not necessarily limited to: Identification of alternative electric energy sources based on the assumption that the same capacity and production need to be assured from other source (imports, water, coal, biomass, wind, solar, etc...) with associated price per MWh for the same period of time LCOE after refurbishment is the price needed to cover all the costs of NPP plus decommissioning costs. LCOE could be understood as break even price on the electricity accessible market. LCOE after refurbishment shall be compared with levelised costs of electricity generation with alternative sources of electricity, including replacement of NPP capacity and with prices of imported electricity (accessible market), etc.; carbon policy and security of energy supply Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 15

Uncertainty for Investment in NPP LTO ELECTRICITY MARKET

Types of Risks Investment in the LTO PROJECT comprises a large and diverse set of risks. These risks include but potentially are not limited to: Business risks, Technical risks, Regulatory risks, Political and social risks Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 17

Impacts to investment decision Short-term price volatility in electricity market is more extreme and frequent than in other commodity markets, because storage for electricity is too costly for commercial application. Another factor that is considered crucial is that the policy makers change market rules and market institutions. Impacts to decision FOR LTO can be market based and policy based risk factors. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 18

Typical market risks Impacts of typical market based factors to electricity investment are: large variations in demand over the course of the year; the need to balance physically the supply and demand and supply at every point of the network; non-storability of electric power; inability to control power flows to most individual consumers; limited use of real time pricing by retail consumers; price and volume risks in the electricity market; fuel price and supply risks Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 19

The potential financial benefits of nuclear power There are potentially two attributes of nuclear power generation that could make it more appealing to investors. First, nuclear generation costs are insensitive to both gas and carbon prices (as are most renewables). Therefore, rising gas prices and carbon trading or carbon taxes will make nuclear more competitive against CCGTs and coal-fired plants. Second, investing in nuclear can be thought as a hedge against the volatility and risk of gas and carbon prices for a (large) generating company. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 20

21 SOME EXAMPLES OF MARKET INFLUENCE

Impacts to investment decision Competitive wholesale markets for electricity and energy often fail to provide adequate net revenues to attract investment in generation to meet reliability criteria. Short-term price volatility in electricity market is more extreme and frequent than in other commodity markets, because storage for electricity is too costly for commercial application. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 22

Energy efficiency policies risks Electricity consumption and gross domestic product of the EU EU Climate and energy targets for the year 2020: 20% cut in greenhouse gas emissions (from 1990 levels) 20% of EU energy from renewables 20% improvement in energy efficiency The 2030 EU climate and energy framework sets three key targets for the year 2030: At least 40% cuts in greenhouse gas emissions (from 1990 levels) At least 27% share for renewable energy At least 27% improvement in energy efficiency Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 23

RES policies risks Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 24

Regulated market Electricity price = average cost Demand Marginal cost Wholesale price Import Gas Fuel oil Supply NE Coal Base load HE Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 25

Open Electricity Market Electricity price = marginal cost Demand Fuel oil Supply Marginal cost Gas HE NE Coal Import Base load Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 26

Open Electricity Market with RES Electricity price = marginal cost Demand Fuel oil Supply Imports Gas Marginal cost NE Coal Base load windy night Wind HE Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 27

Nuclear power generation: cost benefit analysis under uncertainty EU case

EU Electricity Market - EU Internal Energy Market (IEM) The biggest market of electricity, connecting more than 600 million consumers throughout the continent Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 29

MARKET COUPLING CONTRIBUTING TO THE ESTABLISHMENT OF A EUROPEAN INTERNAL ELECTRICITY MARKET Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 30

Market Data: European Electricity Index (ELIX) 20-40 /MWh ELIX is an essential benchmark price for the single European market Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 31

Market Data EEX: Auction Data: 15.10.2017. Phelix Base 20-40 /MWh Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 32

Phelix Power Futures EEX Power Derivatives Cal 20 BASE Phelix Baseload Year Future Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 33

CONCLUSIONS Currently nuclear power plants present too many financial risks as a result of uncertainties in: electricity market, electric demand growth (decelerating load growth) energy efficiency policies very high capital costs, renewable energy policy, power market structures, the absence of a price on carbon. operating problems, increasing regulatory requirements (post-fukushima safety enhancements) growing public opposition. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 34

CONCLUSIONS There is little private value to merchant generating companies in retaining the nuclear option in risky electricity markets with current gas and carbon prices. But recently on the opposite the U.K. Government clearly accepts that there is a social or consumer value in keeping the nuclear option open The Finnish experience shows that if well-informed electricity-intensive end users with long time horizons are willing to sign long-term contracts, then nuclear new build can be a realistic option in liberalized markets. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 35

Conclusion Nuclear is more competitive if: Demand grows faster Renewable targets are lower Lower WACC (lower cost of financing) Higher CO 2 prices Higher gas prices Higher availability Building or refurbishment (LTO) times are reduced Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 36

CONCLUSIONS The nuclear power industry is facing a period of extreme uncertainty especially on deregulated electricity market. The reason is relatively simple: quite apart from overcoming any regulatory and public opinion difficulties, the economic risks of nuclear power have been adversely affected by liberalization. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 37

Main questions for todays investment in NPP at electricity market There is no country that on some way not support (subsidise) Renewables increasing penetration of renewables, especially wind generation, now encourage some level of load-following capabilities for historically baseload plants, including nuclear. Can Nuclear Power and Renewables be Friends? Load-following with nuclear plants, especially larger plants! Can nuclear be profitable on lower capacity factor because of more RENEWABLES? In such a situation generators would require some additional forms of remuneration which would have to be borne by consumers or tax payers. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 38

39 SOME EXAMPLES OF MARKET INFLUENCE

Nuclear power generation: EU electricity market Current electricity market price on EU Power Exchanges are so low that no new Power plant can be competitive on electricity market and that almost all investment will be in renewable energy sources because of support schemes (Feed-in tariffs or Green certificates). Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 40

PUBLIC vs PRIVATE INTEREST APRIL 21, 2016 41 Study shows benefit of New York nuclear units: The overall benefits of keeping New York's upstate nuclear power plants in operation under the state's Clean Energy Standards (CES) program would significantly outweigh the costs Energy giant Entergy s decision to close its nuclear plant near Oswego shocked the central New York community. State officials are still working to get Entergy to change its mind. The ripple effects of the loss of $75 million in payroll and approximately $18 million in taxes to the county, towns, and their schools will be felt by businesses large and small. Governor Andrew Cuomo is still trying to save FitzPatrick to save the central New York economy, and local leaders are behind him all the way It's final: Entergy will close FitzPatrick Nuclear Power Plant in Oswego County Its CEO told Wall Street analysts last week Fitzpatrick can t compete with cheap natural gas. Entergy blamed several financial factors for the closure, including high costs to operate the plant and low current and long-term wholesale energy prices. Saving up to $275 million by closing FitzPatrick is being factored into future earnings projections. Gov. Andrew Cuomo said the state would attempt to prevent Entergy from shutting down FitzPatrick. Those efforts weren't successful

Vattenfall opts for early closure of Ringhals units - 28 April 2015 Declining profitability and increased costs have forced Swedish utility Vattenfall to decide to close units 1 and 2 of the Ringhals nuclear power plant earlier than previously planned. Vattenfall's head of business said, "Unfortunately, we see market conditions with continued low electricity prices in the coming years: decision is business driven. Vattenfall president and CEO said, "Demand for electricity remained weak during the first quarter of the year, and electricity prices have continued to fall. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 42

Sweden's Oskarshamn 1 and 2 reactor units to close German utility Eon has decided that units 1 and 2 of the Oskarshamn nuclear power plant in Sweden will be shut down permanently. It is stressed that EOn's decision is not based on safety related reasons, but on continuously low wholesale electricity prices, the burden of Sweden's tax on nuclear power and "additional requirements on extensive investments". These factors mean, "there are no prospects of generating financial profitability either in the short or the long term" at either unit 1 or 2. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 43

USA: Entergy decides to close Pilgrim plant The single-unit Pilgrim plant - the only nuclear power plant in the US state of Massachusetts - will be permanently shut down by mid-2019, owner Entergy announced. The utility said the continued operation of the plant is not economically viable. The company said its decision to shut down the plant - which comprises a single 680 MWe boiling water reactor that began operating in 1972 - was driven by poor market conditions, reduced revenues and increased operational costs. "Market conditions and increased costs led us to reluctantly conclude that we had no option other than to shut down the plant.,leo Denault, Entergy chairman and CEO Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 44

USA: Vermont Yankee Entergy shut Vermont Yankee at the end of December 2014: the 580-MW unit could not operate profitably in the New England market. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 45

U.S. Nuclear Industry is in Trouble, June 15, 2017 Nuclear power plants are getting paid $20 to $30 a MWh for their electricity, Nicholas Steckler, an analyst at Bloomberg New Energy Finance, said in a report Wednesday. Meanwhile, it costs them an average of $35 MWh to run. That puts 34 of the nation s 61 plants out of the money, with almost all of the merchant reactors owned by Exelon Corp., Entergy Corp. and FirstEnergy Corp. appearing to be below break-even, he said. The report underscores the increasing pressure nuclear power generators are facing even as cheap natural gas and renewable resources encroach on their share of the U.S. power market. States including New York and Illinois are now working to subsidize nuclear plants to keep them generating emissions-free electricity. Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 46

EC Recommended harmonised values for key supra-nationally determined parameters ETS carbon prices Carbon price (in constant 2010/tCO 2 ) Year 2015 2020 2030 2035 2050 EU ETS carbon price 7 10 35 57 100 Source: 2020 to 2035 based on results of the EU Reference scenario 2013, see http://ec.europa.eu/clima/policies/2030/models/eu_trends_2050_en.pdf; recommended value for 2015 taken from EU Baseline with adopted measures scenario 2013 (as published in first EU Biennial Report http://ec.europa.eu/clima/policies/g-gas/monitoring/docs/swd_2014_1_en.pdf) Z. Tomsic: From Market Uncertainty to Policy Uncertainty for Investment in LTO of NPP on Electricity Market, Lyon, October 2017 47