Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

Monday, March 06, 2006

Nuclear Energy (Accounting) Economics

A US-India nuclear agreement was completed during George Bush visit to India. Loosely speaking, according to the terms of this deal (which needs to be approved by the US Congress), the US will supply technology and uranium to India in exchange for the promise that India will designate 14 of its 22 nuclear sites as civilian and open to inspection. This deal has been analyzed from a motley of perspective like geo-political, energy-related and strategic. However, solely from the viewpoint of energy economics, I think increasing reliance on nuclear power is not the route to energy independence that India should take.

There is absolutely no debate that energy shortages are one of the main stumblings blocks to India's growth. Frequent power cuts are a major cost to businesses and the future of the Bharat Nirman infrastructure project, the key to India's growth potential, relies heavily on the availibility of energy. But nuclear energy constitutes only 3% of installed electrical capacity in India and if India expands its nuclear energy generation to desired goals, it will still only constitute 8-10% by 2020. Let's talk about the economics of nuclear energy. Nuclear power has very high fixed costs (present costs) and lower variable costs (future costs) whereas other energy sources like coal are the opposite. Research using discounted cash flow (DCF) methodology ("Economics of Nuclear Power from Heavy Water Reactors, Economic & Political Weekly) has shown that coal-based energy is cheaper than nuclear energy. In DCF, the timing of inflows and outflows of cash is important. The priniciple underlying the approach is that money received today is worth more than the same amount received later. The general approach is: all costs are discounted to some arbitrary but fixed reference date; the total cost is the sum of present value or future values of costs discounted to this date. After calculating the present value of revenues from electricity generation, we can set the sum of dicouted costs to discounted revenues to get the levelised costs of electricity.

The authors categorise and calculate three main costs of energy: capital costs of construction, fueling+operational+maintenance costs and decomissioning costs (that is, costs associated with shutting down the facility). Using data from Kaiga I& II nuclear reactors and Raichur (coal) power station, they compare the costs of nuclear power and coal. They conclude that, under their assumptions, for a real discount rate (consider this the interest rate) above about 2-3%, nuclear power is more expensive.

And I think this is a conservative estimate since their are many uncertainties associated with nuclear power, and risk only leads to a higher discount rate. The most important uncertainty associated with nuclear power is disposal. No country has yet come up with a sustainable nuclear waste disposal program. Proponents of nuclear power argue that coal is a dirty technology. However, although the risk of meltdowns may be low, even a small amount of radiation has very damaging effects.

The focus of India should be to clean up coal technology and more importantly, develop alternative energy sources like wind, water, ethanol and even biogas!

By the way, Chindabaram should slap a huge tax on energy-guzzling cars. But I will address that in my Union Budget post at a later date....

4 Comments:

Blogger Michael said...

What B.S. Only devoting one sentence to the downsides of coal is grossly understating the enviornmental consequences of a growing economy of India's size relying solely on this disguesting and outdated energy source. Coal power ruins the ozone layer; it furthers global warming; and it is just nasty. Clean coal is better, though there is no incentive to use it because "dirty" coal is much easier and cheaper. The very real short-term costs of energy far outweigh the neblous and seemingly distant costs of enviornmental degradation. Alternative energy sources suffer from this same problem. Each of the listed alternatives have separate and debiliting falacies that cannot be ignored. It would take hundreds of square miles of solar panels to provide significant power to India; the same with wind power (and oh by the way it would distort the world's weather patterns); other technologies are dangerous, untested and grossly inefficient.

The solution is to reach government's long arm into the research arena by funding further research into these area so that they will become profitable.

Until that great day, nuclear power is the best option. Only at Chernobyl was there a very serious nuclear accident and that can be attributed to serious deficiencies is the building regulations that should have ensured a more sophisticated containment mechanism. Further, if the people that are unfortunate enough to live near these beasts would simply keep iodine tablets on hand in the event of a meltdown, it could apprecibly lower the ensuing cancer rates.

Bottom line: if Homer Simpson can handle working in a nuclear power plant, then they are safe enough for me.

7:47 AM  
Blogger Jay said...

Mike, stop being such a hippie. Nuclear waste is much more harmful to the world than CO2.

We should institute more stringent rules to force conservation of energy (i.e. Pollution permits).

1:21 PM  
Blogger Ishani said...

I think the biggest, least considered and most underestimated issue about nuclear energy is the fact that there is currently no workable model of nuclear disposal. The Yucca Mountain repository has been in the works for decades and as of now, spent nuclear fuel is just piling up at reactors.

There is no point in building new reactors until we figure out a way to get rid of the trash.

2:16 PM  
Anonymous Anonymous said...

Uh Michael I can't help but wonder if you sleep on a cusion made of plutonium if a cartoon character is your barometer for judging the safety of a nuclear power plant.

7:53 AM  

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