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«The Economics of Nuclear Energy Markets and the Future of International Security Erwann O. Michel-Kerjan Debra K. Decker The Wharton School, Kennedy ...»

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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

ErwannMK@wharton.upenn.ed Debra_Decker@ksg.harvard.edu

Revised: January 2008

Working Paper # 2008-01-08

Contact information:

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 

  This  document  appears  as  Working  Paper  of  the  Wharton  Risk  Management  and  Decision  Processes  Center,  The  Wharton  School  of  the  University  of  Pennsylvania.  Comments  are  welcome  and  may  be  directed to the authors.    This paper may be cited as: Erwann O. Michel‐Kerjan and Debra K. Decker, “The Economics of  Nuclear  Energy  Markets  and  the  Future  of  International  Security,”  Risk  Management  and  Decision  Processes  Center,  The  Wharton  School  of  the  University  of  Pennsylvania,  January 

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 CENTER 

  Since  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 AUTHORS 

  Erwann 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





January 2008

Abstract

This 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.

b.

World Electricity Generation by Fuel—As a Percentage of World Electricity Generation

–  –  –

Figure 1.a.

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

–  –  –

2. THE NUCLEAR CYCLE: RELATING ELECTRICITY GENERATION AND

EXTREME THREATS

The nuclear fuel cycle involves multiple steps. Uranium is first mined then milled to obtain uranium oxide concentrate (U3O8, or “yellowcake”). This is the form in which uranium is commonly contracted for sale.



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