«The Economics of Nuclear Energy Markets and the Future of International Security Erwann O. Michel-Kerjan Debra K. Decker The Wharton School, Kennedy ...»
The Economics of Nuclear Energy Markets
and the Future of International Security
Erwann O. Michel-Kerjan Debra K. Decker
The Wharton School, Kennedy School of Government,
University of Pennsylvania Harvard University
Revised: January 2008
Working Paper # 2008-01-08
Erwann O. Michel-Kerjan
OPIM Dept., The Wharton School
Managing Director, Wharton Risk Management and Decision Processes Center University of Pennsylvania Jon Huntsman Hall, 5th Floor, Room 556 3730 Walnut Street, Philadelphia, PA 19104 Voice: 215-573-0515 Email: erwannMK@Wharton.upenn.edu _____________________________________________________________________
Risk Management and Decision Processes Center The Wharton School, University of Pennsylvania http://opim.wharton.upenn.edu/risk/ ___________________________________________________________________________
CITATION AND REPRODUCTION
2008. The views expressed in this paper are those of the author and publication does not imply their endorsement by the Wharton Risk Center and the University of Pennsylvania. This paper may be reproduced for personal and classroom use. Any other reproduction is not permitted without written permission of the authors.
THE WHARTON RISK MANAGEMENT AND DECISION PROCESSES CENTERSince its creation 24 years ago, the mission of the Wharton Risk Management and Decision Processes Center has been to carry out a program of basic and applied research to promote effective corporate and public policies for low‐probability events with potentially catastrophic consequences. The Risk Center has focused on natural and technological hazards through the integration of risk assessment, risk perception and risk financing with risk management strategies. After 9/11, research activities extended also to national and international security issues (e.g., terrorism risk insurance markets, protection of critical infrastructure, global security). Building on the disciplines of economics, decision sciences, finance, insurance, marketing and psychology, the Center's research program has been oriented around descriptive and prescriptive analyses. Descriptive research focuses on how individuals and organizations interact and make decisions regarding the management of risk under existing institutional arrangements. Prescriptive analyses propose ways that individuals and organizations, both private and governmental, can make better decisions regarding risk. The Center supports and undertakes field and experimental studies of risk and uncertainty to better understand the linkage between descriptive and prescriptive approaches under various regulatory and market conditions. Risk Center research investigates the effectiveness of strategies such as risk communication, information sharing, incentive systems, insurance and regulation. The Center is also concerned with training decision makers and actively engaging multiple viewpoints, including the expertise of top‐level representatives in the world from industry, government, international organizations, interest groups and academics through its research and policy publications and through sponsored seminars, roundtables and forums. More information is available at http://opim.wharton.upenn.edu/risk
ABOUT THE AUTHORSErwann O. Michel‐Kerjan is Managing Director of the Wharton School’s Risk Management and Decision Processes Center, a center with more than 20 years of experience in the development of strategies and policies for dealing with extreme events. As large‐scale risks reshape the future of an increasingly interdependent world, Dr. Michel‐ Kerjan has worked over the past 10 years helping corporations and governments address this new landscape, develop appropriate solutions and create market opportunities. His current work focuses on terrorism risk insurance, climate change, mitigation and financing of natural disasters, energy interdependence and non‐proliferation, the impact of information sharing on optimal risk sharing, and projects on national security and critical infrastructure protection in collaboration with Lockheed Martin and several federal agencies. He has authored or coauthored over 40 publications and two books focusing on the intersection of financial management and global risks/opportunities, including Seeds of Disaster, Roots of Response: How Private Action Can Reduce Public Vulnerability (with P. Auerswald, L. Branscomb, and T. LaPorte, Cambridge University Press, 2006), which is the first attempt to analyze the private efficiency/public vulnerability trade‐off in the context of national and international security. (See www.seedsofdisaster.com.) From 2003 to 2005, he served on the OECD Terrorism Insurance Task Force, and in 2005, he co‐ led, with Howard Kunreuther, the Wharton initiative on the future of terrorism risk financing in the United States (TRIA and Beyond). He has studied and collaborated with several research institutions in North America (including McGill, Columbia and Harvard) and is also Faculty Research Associate at the Ecole Polytechnique in Paris, where he completed his doctoral studies in mathematics and economics before joining Wharton in 2002. In 2007, Dr. Michel‐Kerjan was named a Young Global Leader by the World Economic Forum, an honor bestowed to recognize and acknowledge the most extraordinary leaders of the world under the age of 40. Debra K. Decker is a Research Associate with the Belfer Center for Science and International Affairs at the John F. Kennedy School of Government at Harvard University and has worked with the American Academy of Arts and Sciences’ Global Nuclear Future project. Her research focuses on nuclear proliferation and proposals for reform. Early in her career, Mrs. Decker worked on arms control and foreign aid for U.S. State Department–related agencies. Entering the private sector, she was manager of planning for Europe for Chase Manhattan Bank and then a consultant on strategic planning. Most recently, she has been a national award‐winning journalist writing editorials and columns for the Dallas Morning News and other newspapers and journals. She received an MBA from the Wharton School and an MPA from Harvard, where she was distinguished as a Littauer Fellow. Mrs. Decker is a member of the International Institute for Strategic Studies, the World Affairs Council and the Dallas Committee on Foreign Relations. In 2007, she also joined the consulting firm Booz Allen Hamilton as an advisor to government clients. The Economics of Nuclear Energy Markets and the Future of International Security
AbstractThis paper discusses the evolution of nuclear energy markets and key drivers of the growing “nuclear renaissance.” We focus on uranium, the largest part of the nuclear fuel markets, and analyze market demand, supply, and prices since the 1970s. We review the forces impacting this market – historically and prospectively - and note proliferation concerns surrounding nuclear energy: i.e. the same facilities that enrich uranium for electricity generation can also enrich it further for nuclear weapons.
We discuss proposals currently being offered by the international community to counter this proliferation challenge and propose a complementary solution: the development of a market-based approach that relies on what has become the largest industry in the world, insurance and finance. We analyze the feasibility of such an “Insure to Assure” approach, developed in conjunction with the public sector, and its implications for international security and nuclear energy markets (including the possible commoditization of enriched uranium).
1. INTRODUCTION Nuclear energy is likely to play a small but important role in satisfying rising energy needs as concerns grow over carbon-based energy’s effect on global warming and countries look to fulfill their electricity needs through alternative sources (International Energy Agency, 2007). The U.S. Department of Energy estimates the world commercial nuclear generating gross capacity could increase from 2005 levels by 35 percent in 2015 and by 70 percent in 2030 (U.S. Department of Energy, 2006).
Until the end of the 1970s, nuclear reactors provided less than 5 percent of the world’s electricity. Today they provide 16 percent of a much higher level of world electric production (Figures 1a and 1b). They contribute about 2,600 billion kilowatthours (kWh) each year to satisfy electricity needs, as much as from all sources of electricity worldwide in 1960 (U.S. Department of Energy, 2005).
Figures 1.a and 1.
World Electricity Generation by Fuel—As a Percentage of World Electricity Generation
1971 (total: 5,500 billion kWh) Figure 1.b. 2004 (total: 17,500 billion kWh) Source: Data from OECD (2007) Nuclear power is particularly important in parts of the industrialized world.
Electricity from nuclear reactors typically represents a significant portion of the electricity consumed in most Organization for Economic Cooperation and Development (OECD) countries: about 20 percent in the United States, 25 percent in the United Kingdom, nearly 30 percent in Germany, and over 75 percent in France. Although about 439 nuclear power plants currently operate in thirty countries, the United States, France, and Japan operate about half of these. Five countries—the United States, France, Japan, Russia, and Germany—represent nearly 70 percent of the worldwide commercial nuclear generating gross capacity; the top fifteen countries represent over 90 percent (Table 1).
As energy needs increase disproportionately in developing countries, however, these figures are changing. Currently, an additional 33 plants are or are in the process of being constructed, with another 94 planned, and 222 proposed by countries ranging from China to South Africa (UIC, 2007b). These figures do not include potential nuclear electric production in Saudi Arabia and some other member states of the Gulf Cooperation Council, which have recently expressed interest in nuclear development. Thus, in accounting for future potential reactors, the relative importance of nuclear power will vary, with China becoming one of the leaders in nuclear power generation, and countries such as India, Brazil, South Africa, and Iran joining the top fifteen nuclear energy users.
Overall, with the planned or proposed reactors, the world would go from thirty countries having commercial nuclear reactors to at least thirty-eight—more than a quarter increase.
This increase in the expected need for nuclear power and its wider geographic spread has led to new concerns over the security of nuclear power generation. Although concern over reactor safety—fueled dramatically by the Three Mile Island (1979) and Chernobyl (1986) accidents—have been allayed somewhat by new power designs, the problems of safe disposal of the waste and the potential for nuclear proliferation (that could both lead to use of nuclear weapons by terrorists and by states) have not been fully resolved. To understand these concerns and their relationship to nuclear energy markets, one must first become familiar with the entire nuclear fuel cycle, from the mining of uranium ore to the production of electricity—or of nuclear weapons.
Table 1. World Commercial Nuclear Generating Gross Capacity, Nuclear Power Reactors, and Uranium Required, 2007