Nuclear Energy and Renewables. System Effects in Low-carbon Electricity Systems

Abstract

Electricity generating power plants do not exist in isolation. They interact with each other and
their customers through the electricity grid as well as with the wider economic, social and natural
environment. This means that electricity production generates costs beyond the perimeter of the
individual plant. Such external costs or system costs can take the form of intermittency, network
congestion or greater instability but can also affect the quality of the natural environment or pose risks
in terms of the security of supply. System costs in this study are defined as the total costs above plantlevel
costs to supply electricity at a given load and given level of security of supply.

Accounting for such system costs can make significant differences to the social and private investor
costs of different power generation technologies. Not accounting for them implies hidden costs that can,
if not adequately anticipated, pose threats to the security of electricity supply in the future. The present
study continues the work of the OECD Nuclear Energy Agency (NEA) on the full costs of electricity
generation in the wake of recent reports on Projected Costs of Generating Electricity (2010), The Security
of Energy Supply and the Contribution of Nuclear Energy (2010) and Carbon Pricing, Power Markets and the
Competitiveness of Nuclear Power (2011).

While the study analyses the system costs of all power generation technologies, it concentrates on
the system effects of nuclear power and variable renewables, such as wind and solar PV, as their
interaction is becoming increasingly important in the decarbonising electricity systems of OECD
countries. In particular, the integration of significant amounts of variable renewables is a complex issue
that profoundly affects the structure, financing and operational mode of electricity systems in general and
nuclear in particular. System costs also vary strongly between different countries due to differences in the
generation mix, the share of variable renewables and the shape of the daily and seasonal load curves.

The study focuses on grid-level system costs that are composed of the costs for network connection,
extension and reinforcement, short-term balancing and long-term adequacy in order to ensure
continuous matching of supply and demand under all circumstances. Such grid-level costs are real
monetary costs that are already being borne today by network operators, dispatchable power producers
using nuclear, coal or gas, as well as electricity customers. An important contribution of this study is
the first systematic quantification of such grid-level system costs for six OECD/NEA countries (Finland,
France, Germany, the Republic of Korea, the United Kingdom and the United States). Including system
costs increases the total costs of variable renewables, depending on technology, country and penetration
levels, by up to one-third.

The study also looks at total system costs in a qualitative manner. This broader set of system cost
would include local and global environmental externalities, impacts on the security of energy supply
and a country’s strategic position as well as other positive or negative spillover effects relating to
technological innovation, economic development, accidents, waste, competitiveness or exports. In
addition, the study also considers the ability of nuclear energy to contribute to the internalisation of the
system costs generated by intermittency in low-carbon electricity systems.

In addition, the study examines the important “pecuniary externalities” or financial impacts that
the introduction of variable renewables has on the profitability of dispatchable technologies both in
the short run and in the long run. In the short run, with the current structure of the power generation
mix remaining in place, all dispatchable technologies, nuclear, coal and gas, will suffer due to lower
average electricity prices and reduced load factors (“compression effect”). Due to its lower variable costs,
however, existing nuclear power plants will do relatively better than gas and coal plants. In particular,
gas plants are already experiencing substantial declines in profitability in several OECD/NEA countries with high shares of variable renewables. In the future, dispatchable technologies, including nuclear, will
require that a portion of their revenues be derived from other sources than “energy-only” electricity
markets if they are to stay in the market and provide the necessary back-up services. Capacity payments
or markets with capacity obligations will play an important part in addressing this issue.

In the long run, nuclear energy will be affected disproportionately by the increased difficulties
to finance large fixed-cost investments in volatile low-price environments. This can have significant
impacts on the carbon intensity of power generation. If, for instance, such baseload is currently produced
by nuclear power, replacing the latter in the future by a mix of variable renewables and gas will mean
that carbon emissions will rise rather than fall.

System costs, both technical costs at the grid level and pecuniary impacts, vary strongly between
countries, depending on the amount of variable renewables being introduced, local conditions and
the level of carbon prices. The latter are particularly important. While nuclear power has some system
costs of its own, it remains the only major dispatchable low-carbon source of electricity other than
hydropower which is in limited supply. Carbon prices will thus be an increasingly important tool to
differentiate between low-carbon and high-carbon dispatchable technologies.

System costs are not only country-dependent, as a policy-relevant issue they are also a complex,
relatively new phenomenon that poses a number of methodological challenges, not all of which have yet
been resolved in a generally accepted manner. The present study provides a contribution to the debate,
which is still ongoing. Further research is necessary and will undoubtedly refine both methodologies
and empirical results. Nevertheless, by building on a systematic review of the available literature and
by contributing some carefully considered methodological advances, the findings herein should help
inform discussions.

The policy implications for governments are clear and unaffected by these methodological considerations.
First, governments need to ensure the transparency of power generation costs at the system
level. When making policy decisions affecting their electricity markets, countries need to consider the
full system costs of different technologies.

Second, governments should prepare the regulatory frameworks to minimise system costs and favour
their internalisation. This includes remunerating the capacity services of dispatchable technologies,
allocating the costs for balancing, adequacy and grid connection in a fair and transparent manner and
monitoring carefully the implications for carbon emissions of different strategic choices for back-up
provision. Failure to do so will rebound in terms of unanticipated cost and environmental emission
increases of the overall power supply for many years to come.