Of Climate Change and Cost Curves
As communities around the globe strive to meet ever-increasing energy demand and produce sustainable jobs and investments, we are at a crossroads where we must either aggressively adopt non-fossil fuel energy sources or risk exceeding the 2°C temperature rise already expected from the cumulative buildup of greenhouse gases in the atmosphere. Mainstream conventional wisdom holds that nuclear power must be embraced in the transition to a post fossil fuel future, and that solar and wind’s high costs and lack of scalability will consign their contributions to the margins. But as we discuss in this article, for reasons inextricably linked to their environmental profiles, nuclear power is still an unattractive financial investment, while solar and wind look increasingly attractive. Most compelling, the costs of providing nuclear power are rising while those of wind and solar are making their way down the cost curve.
According to researchers at the Lawrence Berkeley National Laboratory, photovoltaic (PV) systems costs have dropped 50 percent over the last 12 years, much of it due to module cost reductions that accelerated in just the past two years. According to another report, prepared by Dr. John O. Blackburn and Sam Cunningham of Duke University, these cost reductions have brought solar power to parity with nuclear. The Duke report draws on the work of Mark Cooper of Vermont Law School’s Institute for Energy and the Environment, concluding that third generation nuclear will cost 16 cents per kWh on average. The investment bank Lazard Ltd. estimates nuclear slightly lower at 12.3 cents per kWh and solar at 15.6 cents. But whether it is 12 or 16 cents one can expect the nuclear cost curve to start climbing, due to increased regulatory, safety, and permitting costs post-Fukushima. Meanwhile, solar’s cost curve is headed south and expected to be cost-competitive without subsidies by the end of the decade.
The Rocky Mountain Institute (RMI) sees great efficiencies ahead for solar beyond reductions in module costs. Its recent report, Achieving Low Cost Solar PV, asserts that installation costs alone, known as “balance of system” costs, represent half the cost of a solar system and can be reduced by 50 percent over current best practices. RMI’s Amory Lovins points to private equity as a gauge of where the smart money is flowing. In 2010, $151 billion in private dollars underwrote 50 gigawatts of renewable energy, while nuclear received no inflow at all. Lovins goes further to highlight wind energy’s inherent cost advantage over nuclear: “they [nuclear plants] cost two to three times as much as new wind power, and by the time you could build a reactor, it couldn’t even beat solar power.”
This last point is especially relevant, given the urgency of making the transition to clean energy sources in the midst of climate change. Although nuclear has been championed in some quarters as the “no carbon” solution, the time required to build a nuclear plant disadvantages it relative to solar and wind. New nuclear plant construction requires a 60-month timeline and is growing, versus 18 months for wind installations. While nuclear plants are stuck in the planning and construction phase, renewable energy installations can be quickly deployed. Further, with the cost of renewables continuing to decline over time, nuclear begins to look less and less competitive.
It is also important to consider whether estimates of nuclear energy’s potential contribution to slowing global warming are misleading. According to a Carnegie Endowment report, many estimates unrealistically assume nuclear would replace carbon intensive coal-fired energy generation alone. A more likely scenario is that nuclear capacity will displace natural gas, wind, solar, and other forms of lower-carbon energy as well. The all-coal assumption leads to artificially high emission reduction projections.
Nuclear generation is also burdened by high upfront costs. In fact, nuclear plants do not generate profits in their first decade, which is why financing, which can range from 25 to 80 percent of total costs, has been such a challenge. As taxpayers and investors, we should question the total costs, including waste disposal, disaster preparedness, healthcare, terrorist threats, and loan defaults. Cost overruns have been the norm for the industry. The Congressional Budget Office reported in 2008 that historic cost overruns were 207 percent prior to the Three Mile Island disaster and 250 percent following the event. Even the highly touted AREVA, a French nuclear conglomerate with third generation technologies, was one and a half years behind schedule and $1 billion over budget in building its Olkiluoto, Finland plant.
Solar is not the only alternative power source journeying down the cost curve. Many alternatives boast competitive cost structures. Wind costs 8.5 cents/kWh, geothermal 7.5 cents, and energy efficiency 2.5 cents, by far the cheapest with the least technology risk. These solutions are poised to transform the energy infrastructure globally, from a centralized generation model to a distributed, more efficient power system. Layer on “smart grid” technologies that enhance the efficient delivery of energy to consumers, and we will be able to effectively harvest solar and wind power from the center of the country and transmit it to higher density population centers.
But cost breakthroughs alone will only go so far to hasten the adoption of wind, solar and other clean technologies when government incentives reward nuclear and fossil fuel development. Public policies must practice a “reverse discrimination” in favor of subsidizing non-nuclear renewables. A forthcoming report by the Intergovernmental Panel on Climate Change will argue renewables could provide up to 77 percent of the world’s energy needs by 2050, but only if the government and private sector were willing to invest up to $5.1 trillion through 2020, and $7.2 trillion in the decade following.
Despite the sunny outlook [pun intended – Ed.], the critical question is how to achieve reliable baseload power when the sun is not shining and the wind is not blowing, as intermittent energy sources only produce power about 30 percent of the time.
Natural gas is currently the most viable alternative given its lower carbon profile, but the bulk of the U.S.’s abundant gas beds must be extracted with hydraulic fracturing (or “hydrofracking”), a technique linked to highly publicized instances of groundwater contamination and well blowouts. It remains to be seen whether drillers will rise to the occasion to mitigate the risks to public health and the environment, or whether far reaching legislation will be necessary.
Projected technological advances hold the promise that solar may one day contribute to baseload needs. The World Resources Institute report Juice From Concentrate: Reducing Emissions with Concentrating Solar Thermal Power, promotes Concentrating Solar Thermal (CST) power as a base load solution. CST combines solar power and thermal storage to power steam turbines around the clock.
As ESG investors, we look for the most viable, cost competitive technologies that also deliver the least environmental, social, and governance risk. Representative Ed Markey (D-MA) articulates the importance of the investor’s perspective:
Wall Street is what did in the nuclear industry after Three Mile Island and Chernobyl…It is Wall Street again today that is going to believe that nuclear power has become an increasingly risky financial investment.
As ESG investors, the onus is on us to determine risk in the context of cost curves, climate change, and viability. Given the trend lines, it’s clear for the foreseeable future that solar and wind are truly clean, safe and renewable, while there is little evidence to support the inclusion of nuclear power in an ESG-screened portfolio.