Political and Economic Risks of Nuclear Power Generation - Assignment Example

Political and Economic Risks of Nuclear Power Generation Name Institution Political and Economic Risks of Nuclear Power Generation Nuclear power production is controversial. Its proponents argue that it is economic, a safe secure in producing enough energy for development. On the other hand, its opponents argue that it is risky, uneconomic and unnecessary (Beck, 1994). This paper focuses on economic and political risk associated with implementation of a nuclear energy plant in Khakariastan. The government influences most uncertainties involved in nuclear energy production. It reacts to pressure from the people. It sets environmental and safety standards, control nuclear waste and decides whether to reprocess spent fuels. It sets the market electricity structure, energy security and decides whether to support nuclear energy. It is the governments’ concern and in some instances international concern in nuclear energy production. The public on safety grounds does not trust nuclear energy (Beck, 1994). Environmental issues are so far more political than scientific. The government must ensure that power production adheres to UN convention on climate change requirements. Controlling production of green house gases such as sulphur and nitrous oxide is inevitable. Further, measures taken to control environmental pollution should be cost effective. Thus, the government controls establishment of these projects to ensure environmental issues is handled as required. The government influence decisions no matter the owner of the plant (Beck, 1994). In most business organizations especially where the public is involved in decision-making, decisions made are usually the outcome of economic calculations by considering different means of achieving desired results and selecting the optimum. However, such a method cannot be used in nuclear energy production especially when doing a cost benefit analysis (OECD Nuclear Energy Agency 2007). Assessing project cost when it is still a blue print and estimating return per capita on electricity production and prices over time is not possible (Beck, 1994). However, comparative analysis and economic calculations play a role judgment of different possible scenarios thereby identifying the most important possibilities and concentrating debate on them. Economic analysis used as the main basis in making a choice is dangerous (Michael and Hartlief, 2003). When considering economic comparative advantage, a number of factors are considered. Capital cost and project time- capital cast vary greatly with time. This may be due to time taken before authorization and changes in design. Estimating the cost may be done in comparison to other similar projects already in place. Since it is a large scale and long-term project, funding from experience is done after a long-term contract substantial portion of energy with agreed prices and price escalation clauses. However, such a contract would depend on whether the government is willing to reinvest in nuclear power. Nuclear energy production therefore would only be possible with government support (Beck, 1994). The government either directly or indirectly influences nuclear power production. It may fund the project, license it or through taxation. With nuclear energy, it is only possible to implement it if the government backs up the project. This is after ensuring there is a balance between risks and benefits. Without government backing, a private investor would have to do with a high risk/ low reward project which may not be economically viable (Beck, 1994). As stated earlier, investment in a nuclear project is long term, multi dollar and filled with future uncertainties. Therefore, when analysing the economics of nuclear power, discussion on who to bare the risk is inevitable (Michael and Hartlief, 2003). In the existing plants owned by the government the consumer instead of the supplier bares costs of risks related to process, fuel, construction, accident costs and other factors. The government covers the cost of insurance liability. There is a variance in economic evaluation in cases where the suppliers and operators bear the risks and not consumers. In light of the precedent nuclear disasters, costs are liable to escalate owing to on-site used up fuel management and lofty plan foundation threats (Massachusetts Institute of Technology 2001). Economics associated with a new nuclear power cannot be disregarded. Market for electricity generated in light of current and future competition of other energy sources should be put into consideration. Possibilities of future decrease in prices and sustainable production of coal and oil may offer stiff competition to nuclear power. On the other hand, the countries’ hydropower production may decrease to zero due to pollution of rivers and overdependence in irrigation thus the nuclear power may be embraced. Decreases in cost of renewable energy sources may be a disadvantage to this power source (Energy fair, 2012). Upfront cost of nuclear power generation is a second risk. It is a very expensive project with up scaling safety measures pushing the cost higher up. The adjusted costs of setting up new plant rise due to inflation. Thus, the project must be rated as sustainable and economically viable in the future before investing in it (Energy fair, 2012). Despite the fact that nuclear production is huge project, it relies on government subsidies. There is a risk in project sustainability should the government withdraw these subsidies in future. Where quantification has been done by actuarial expertise, subsidies are large amounts. They include limitations of liabilities where the plant pays less insurance costs. The government may underwrite commercial risks so that the investor does not fail as well as subsidize the cost of disposing nuclear waste. The plant does not fully bare the cost of long-term management of nuclear waste. The government and the public are exposed to risk of terrorist attack, as protection is only partial (Energy fair, 2012). Lastly, public and government attitude towards nuclear energy production poses a risk not only in Khakariastan but also globally. Nuclear meltdown in Fukushima makes the project politically vulnerable. This incident led to a close down of these projects and divert to other energy sources. If such a disaster occurs again, it may lead to close down of all nuclear power production in the world, affecting even those under construction (Energy fair, 2012). Construction risk is a challenge to investors. The duration of time needed to put up the plant and complexity in design, which will increase due to safety measures may increase stipulated duration for the project completion. Inflation affects construction cost and will remain a risk even in future. From recent reports, a plant that is under construction in Olkiluoto Finland is likely to be three to five years late with an inflation of 4.5 billion dollars. Such problems are common and made more complex due to stepping up of safety measures (Ferguson, 2007). While nuclear energy production cost has been on the rise, especially due to inflation adjustment terms, other energy sources are becoming cheaper in exception of hydro electricity. Maintenance cost for nuclear plants is expected to rise if the government raises the safety bar following the Fukushima incident (Energy fair, 2012). Besides the government risk of eliminating subsidies from nuclear plants, there is a risk of influence by international bodies to close own all nuclear plants. It is said that a nuclear plant is likely to cause disaster in every 10,000 years. With over 400 plants in the world today, probability of a disaster is once in 25years. From the past global records on nuclear disasters, one disaster occurs in 11 years. Further, countries like Germany are closing all its nuclear plants by 2022 and the same decision has been taken by Belgium, Italy, Bulgaria, Switzerland and Taiwan. In Thailand, construction of new nuclear plants has been frozen. These decisions may be an indication of uncertainty in the future of global nuclear power production (Energy fair, 2012). Though nuclear energy is faced with many uncertainties, it would be unfair to face it out without further considerations. With the state of environmental conditions in Khakariastan, extracting fossil fuels would lead to worse environmental condition due to green house effect. On the other hand, these fossil fuels would offer sustainable energy production over a good period. People’s perceptions may change over time and thus are not reliable sources of information in making a lone-term project. Present perceptions may change with time, thus, before deciding for or against such a project, it would be necessary to observe change of trends with time (Ferguson, 2007). In addition, with some countries already facing out nuclear power production, there is a possibility of risk reduction with those left operating. Nuclear terrorism may increase to levels that would make a nation deal with climate change than terrorism but the opposite too may occur. While deciding for or against nuclear power, a nation should balance between risk and affordable sustainable electric power sources (Beck, 1994). Further, instead of facing out nuclear power, security measures may be upgraded to cover possible risks. There are different means through which insurance may be provided for nuclear projects. An export credit agency (ECA) also known as Investment Insurance Agency is a private or quasi government institution acting as a bridge between national government and the exporter offering export financing. Financing is in form of financial support (credit) or insurance and guarantees or both depending on the given directive. They offer credit from their own accounts (Drummond , 2008). Credits are short- term, long -term or medium- term extended to the exporter (supplier’s credit) or to the importer, (buyer’s credit). The sponsoring government bares risk for credits and guarantees. It is closed to risky counties. An officially supported ECA may be linked to official development assistance (ODA). The two may offer assistance to the same project (mixed credit), with the export credit tied to the issuing country, qualifying for a tied aid credit even with part of ODA as untied aid. Tied credits do not differ much from export credits apart from repayment, grace period and interest. They are separated from export credits by OECD requirements (Drummond, 2008). According to OECD agreement, borrowers have to finance 15% of the contract value ahead of financing. They have to make repayments in equal semi-annual installments in a maximum period of fifteen years calculated from the start of operation of the plant (Drummond, 2008). To obtain full support from export credit, the exporting government should apply for an export license and export insurance. The insurance covers for export hindrances such as wars, prohibition on remittance of foreign exchange, commercial risks or insolvency (Export Credit Agencies, 2010). Though it is a criticized energy source, nuclear energy still has the potential to produce electric power only with more modification in security matters from what is present on the ground. It remains an option in a country with already deteriorated hydrological system. It is therefore not time yet to face out nuclear power and with EAC insurance and international funding, the project is still viable. The only thing required is intensifying security system in nuclear energy production. References Beck Peter. (1994). Prospects and strategies for nuclear power, Earths can publications limited, Great Britain. 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Ferguson, 2007, Nuclear Energy: Balancing Benefits and Risks, New York: Council on Foreign Relations. Michael, G Faure, Hartlief, T 2003, Insurance and Expanding Systemic Risks, London: OECD Publishing. Read More