Although some have argued that new nuclear is necessary for the power mix, Jan Ondřich disagrees. He takes a look at the numbers and finds that in the next 30 years, there’s no way that nuclear can compete with a mix of solar, wind, and gas.
When I speak on the topic of commercial viability of new nuclear projects, I am often asked why I thought power prices would stay so low that nuclear projects would not be feasible. Everybody in the in the industry knows, the argument goes, that current power prices are low because of high output of zero-marginal cost wind and solar generation which are subsidized directly by customers. And everybody knows that the current price level makes it impossible to build any generation source. Therefore, they maintain, power prices must increase significantly so that new capacity can be built in the long run.
Below I explain why I think power prices will not increase to levels necessary to allow commercial construction and operation of new nuclear plants in the next 30 years.
My estimate that prices will not increase over EUR 65/MWh in 2015 prices is based on the following assumptions:
- Germany will reach its energy policy targets and will be producing 60% of its energy mix from renewable sources, mostly wind and solar by 2050. Demand is expected to decrease by 25% by 2050 compared to 2008 levels
- Pay-as-you-clear based spot markets will continue to dominate energy trading in Germany and CEE, although other market models such as capacity payments, bonuses and feed-in tariffs will continue to co-exist.
- Power grids of Central and eastern European (CEE) markets remain connected with Germany with at least current interconnector capacity.
The chart below shows a German merit-order curve in 2050 assuming Germany meets its policy targets and 3 different load scenarios – low, median and high and 3 wind and solar generation scenarios – low, median and high. By 2050 all nuclear plants will have been decommissioned and significant coal capacity also will have left the grid. The fuel mix will be dominated by wind and solar with gas balancing the market.
Around 120GW of wind and solar will be producing for free because its 20 year support schemes would have finished, but they will still have another 5 years of technical lifetime ahead of them.
New wind and solar will still be bidding at their marginal cost EUR 0/MWh. Those projects will continue to be supported by fixed-price contracts tendered in auctions. Recent auctions cleared at EUR 69/MWh for solar in Germany and EUR 64/MWh in Denmark for offshore wind.
Wind and solar will be generating 282 TWh at zero marginal cost. This is around 58% of German energy annual consumption. Another way of expressing this is that there will be 5,080 hours in which German demand will be fully met by wind and solar resources selling electricity at EUR 0/MWh.
Another generation class contributing to lowered power prices would be gas cogeneration, or CHP. Gas CHP can be cheaper than condensing plants because approximately 50% of its fuel cost is covered by the heat sales. Large share of capital cost amortization comes from CHP bonus, that is, another support scheme outside of the power market. Gas CHPs will therefore come second on the merit order after renewables.
The remainder of the merit-order curve will be made up of legacy coal and gas peaking plants. Coal will likely supply 17% (83 TWh) of German mix with around 3400 full-load equivalent hours. Typical coal bid would be EUR 68/MWh in 2015 prices, meaning it will deliver mostly peak load demand. The remainder of what is needed will be provided by gas peaking plants. Currently 11GW of modern gas-fired power plants are mothballed in Germany, able to provide 90 TWh of power if needed. This is certainly sufficient capacity for peaking, therefore no new peaking capacity needs to be built in the next 20 years.
In summary, 58% of demand will be covered by wind and solar generation at EUR 0/MWh. It is important to note that price of this generation is not linked either to inflation or to commodity prices. Therefore, it is even likely that power prices may increase at below-inflation rates.
The model shows that the system will be more sensitive to weather conditions than it is today, which is an intuitive conclusion. Power prices will be often close to zero, but price volatility will increase as expensive gas peaking plants will provide the missing power in case of high demand and low RES output. In our model, power prices may increase to as much as EUR 180/MWh in scarcity hours when wind and solar capacity is idle. Power prices will continue falling into negative territory when wind and solar output is significant but demand is low.
This will not however result in a high average power price – the price at which difficult to regulate nuclear plants sell electricity. The system average price (volume weighted price) will stay at around EUR 63/MWh due to high production of cheap wind and solar compared to small production of expensive gas peaking plants.
New nuclear projects need power price of around EUR 127/MWh in 2015 prices, as the Hinkley Point C project in the UK shows. And this price needs to be indexed to inflation. It is highly unlikely that nuclear projects would ever be in the money as our above presented model shows. Power prices would have to double in 2015 levels from the price gas-fired peaker plants need to operate and quadruple from today’s levels.
Jan Ondřich is a partner in market analysis and advisory firm Candole Partners. He is a regular contributor to this blog.