Reply #13: here is a prediction by Citigroup that explains why they attack renewable energy [View All]

The large lead times and the volatility in commodity prices though means that power prices are not necessarily at the “right” level when construction or even operation starts. As nuclear plants will by default be price takers and their life duration far exceeds any measure of economic, commodity, electoral or infrastructure cycle, it is very difficult to envisage a scenario where the economic rational of new nuclear is unquestionable without subsidies/locked in return. Indeed, Figure 3 below shows that no such 40-year period (minimum nuclear asset life) exists since the 1900s.

As a result, we argue that political will and political perception of economic variables rather than actual economic factors is the single most important driver for new nuclear construction and that in itself should be a concern for equity investors.

What the market should not take for granted


GDP impact on demand and load factors

Consensus view is that electricity demand in the wide European region will grow by 1.5% p.a. over the next couple of decades. This is a view shared by UCTE in its latest System Adequacy Report. Although it is virtually impossible to produce irrefutable electricity demand forecast we are tempted to argue that the risks are on the downside since:

1. During the boom years of 2003-07, when GDP growth was strong and infrastructure investment high on the back of very liquid debt markets and due to the convergence of the new EU joiners, electricity consumption grew by 2.1% p.a.

2. Energy efficiency is likely to become a bigger driver as technology advances and as awareness rises. It is important to highlight that such measures also fall under the Climate Change agenda of governments, which has been one of the driving forces behind the renaissance of new nuclear.

As a result, we would expect electricity demand growth to be in the 0-1% range for at least the next 5 years, before returning to more normal pace of 1.5-2%. We therefore see scope for an extra 346TWh of electricity that needs to be covered by 2020 vs. 2008 levels.

Should EU countries go half way towards meeting their renewables target of 20% by 2020 that would be an extra ca. 440TWh. Even if EU went only half way, which by all means is a very conservative estimate, that would still be ca.220TWh of additional generation. Under its conservative ‘scenario A’ forecast, UCTE expects 28GW of net new fossil fuel capacity to be constructed by 2020. On an average load factor of 45% for those plants that’s an extra 110TWh. Therefore under very conservative assumptions on renewables, we can reliably expect an extra 330TWh of electricity to be generated by 2020, leaving a shortfall of 16TWh to be made up by either energy efficiency or new nuclear.

There are currently 10GW of nuclear capacity under construction/development, including the UK proposed plants that should be on operation by 2020. If we assume that energy efficiency will not contribute, that would imply a load factor for the plants of 18%. Looking at the entire available nuclear fleet that would imply a load factor of just 76%. We do believe though that steps towards energy efficiency will also be taken, thus the impact on load factors could be larger.

Under a scenario of the renewables target being fully delivered then the load factor for nuclear would fall to 56%.

Such a reduction is actually already underway, with load factors for nuclear plants in Europe falling from 85% on average during the beginning of the decade to below 80% as renewables increase their share in the fuel mix. In our opinion a slow down or fall in demand could have an even bigger effect, substantially affecting the economics of new plants.