Too much hot air in nuke deal

This editorial from today's ET brings a fresh look at the nuclear deal. Though I do not agree with the author's view that the feeling in the market is that nuclear deal will reduce oil bill, I surely do agree with the author's opinion on how the nuclear power might also become costly affair like oil given limited uranium resources. But what the author misses is the bigger psychological benefit of this deal. It is step forward for India to be recognised among elite economic groups and gradually giving it more clout in world economy. Moreover, the deal, in no way is committing India to build uneconomical nuclear plants but it will keep the doors open for it to adapt new innovations in nuclear field as and when they appear in the future.

--Vj
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The partisan rancour over the Indo-US nuclear deal has helped obscure facts, allowing shibboleths and fantasies to substitute for an informed debate on a critical issue. Several myths continue to be repeated untiringly. The biggest of them draws a meretricious link between nuclear energy and soaring oil prices to justify the proposed import of high-priced, foreign fuel-dependent power reactors from overseas.

What does nuclear power have to do with the price or import requirements of any transportation fuel? Thanks to the oil price shocks in the 1970s and 1980s and the advent of new energy technologies, the share of global electricity produced from oil has shrunk from 25% in 1973 to barely 4%. The remaining oil-fired power plants - of which India has only a handful - will be phased out, or refitted to run on gas. Oil now is primarily used for transportation, while the reactor-import option is about electricity generation.

The link between nuclear power and oil is specious. In the years ahead, the world could move toward electric vehicles and even use grid power to make hydrogen for the fuel-cell vehicles of the future. In another futuristic scenario, nuclear energy may indirectly serve as a substitute to some oil use in the commercial and industrial sectors. But today, greater nuclear-generated electricity is not going to really reduce any country’s oil needs, certainly not India’s. In fact, with little overlap in the oil and nuclear global-market structures, nuclear power now competes principally against coal, natural gas and renewables.

If global oil demand is threatening to outstrip supply, so is the case with uranium. Current concerns associated with oil’s price volatility, supply security and geopolitical risks are no different than uranium’s. And if global oil reserves are finite, so are uranium resources, with proven uranium reserves likely to last barely 85 years, according to the Red Book published jointly by the OECD and IAEA.

In fact, in the past five years, the international spot price of uranium has risen faster than that of crude oil, with uranium today trading six times above its $10 a pound historical average. Oil and uranium prices are likely to stay volatile, but the long-term trend for both is surely up.

Just as cheap oil now seems fanciful, cheap nuclear power for long has been a mirage. More than half a century after the then US Atomic Energy Agency chairman Lewis Strauss claimed nuclear energy would become “too cheap to meter”, the nuclear power industry everywhere subsists on generous state subsidies, not reflected in the published costs of generation.

The current electricity-market liberalisation trends spell trouble for the global nuclear-power industry as they threaten the state support on which it survives. As a 2005 IAEA study by Ferenc Toth and Hans-Holger Rogner warns, “nuclear power’s market share might indeed follow a downward trajectory” if state subsidies abate and more cost-effective reactors are not designed.

Other international studies have shown that nuclear power, although a long-matured technology, has demonstrated the slowest rate of learning in comparison to other energy technologies, including newer sources like wind and combined-cycle gas turbines. Instead of the price declining with nuclear power’s maturation, the opposite has happened.

Power reactors also remain very capital-intensive, with high up-front capital costs, long lead times for construction and commissioning, and drawn-out amortisation periods that discourage private investors. In the US, two separate studies by the University of Chicago (2004) and MIT (2003) showed new nuclear power remaining comparatively more expensive.

That explains why the US industry has yet to receive its first domestic power reactor order in more than three decades, despite the Bush administration offering among the world’s most-attractive tax sops and other state incentives.

But in India there has been little debate on the nuclear deal’s premise - that the way to meet burgeoning energy demands is to import power reactors. While nuclear power certainly deserves a place in a diversified energy portfolio, reactor imports will be a path to external fuel dependency and exorbitant plant costs.

India ought not to confuse its electrical generation problem with transportation fuel problem. Also, India cannot correct its oil-import dependency on the Gulf region by fashioning a new dependency on a tiny nuclear-supply cartel made up of a few state-guided firms.

While oil is freely purchasable on world markets, the global nuclear reactor and fuel business is the most monopolised and politically regulated commerce in the world, with no sanctity of contract. Without having loosened its bondage to oil exporters, should India get yoked to the nuclear cartel?

With few reactors being built in the West or Russia, this cartel has aggressively sought export markets. In a bizarre spectacle, after having castigated Iran’s pursuit of civil nuclear technology as unsuited to its energy wealth, France and the US have competed to sign up reactor deals with oil-rich Arab countries.

Yet, even at the current slack rate of construction of reactors, bottlenecks are becoming a serious problem for key components. There are just a few manufacturers for many components. For example, at least nine reactor components, including giant pressure vessels and steam generators, are made only in one facility owned by Japan Steel Works. A recent study by the US-based Keystone Centre reported a six-year lead time for some parts.

The harsh truth is that reactor imports, far from cutting India’s oil imports, will increase the already wide price differential between nuclear energy and thermal power. While all the Indian power reactors built since the 1990s have priced their electricity at between 270 and 285 paise per KW hour or higher, the coal-fired Sason plant project has contracted to sell power at 119 paise per KWh.

Of the three countries lobbying to sell power reactors to India, the US has little record to show while France’s stands blemished by a two-year time overrun and $2.1 billion cost escalation in building Finland’s Olkiluoto-3 plant. The third, Russia, is struggling to complete its already-delayed twin reactors in Kundakulam. Wishful thinking ought not to cloud India’s options.

(The author, Brahma Chellaney, is professor, Centre for Policy Research)