Middle East Economic Survey

 

VOL. LI

No 6

11-February-2008

 

EGYPT

 

Egypt: On The Road To Nuclear Electricity

 

By Hussein ΄Abd Allah

 

Dr ΄Abd Allah, a consultant on energy economics, is a former Senior Undersecretary at the Egyptian Ministry of Petroleum.

 

The oil and gas consumed by the Egyptian electricity sector has risen over the period 1952-2006 from less than 1mn tons/year to more than 21mn t/y of oil equivalent (toe), of which the natural gas share was around 18.7mn toe, or 88% of the total. Hydro-electricity now accounts for only the equivalent of 3mn toe. Granted that a nuclear power plant which takes 10 years to build in an industrialized country, may take 12 years in Egypt, our first nuclear reactor may not be operating before 2020. Therefore, the crucial question becomes: how could we cross the gap from now to the year 2020?

 

Egypt is already a net importing country of both oil and gas due to the fact that our share of both sources is not enough to cover our domestic consumption which increased over the period 1975-2006 from 7.5mn toe to 52mn toe, at an average growth rate of 6.5% per year. The development of our oil and gas resources is carried out under production-sharing agreements which allow a foreign oil company to explore for oil and gas, and, if a commercial discovery is found, the agreement can be extended to nearly 35 years. The foreign partner, which undertakes all exploration and production costs, starts recovering its costs as soon as production begins, first receiving a share of 40% of total output to be valued in terms of US dollars, at the export price of oil or gas. The total dollar value is then deducted from the balance of the foreign partner’s total expenditures. Year after year, this procedure is repeated until the total cost balance is recovered.

 

Foreign Partners’ Share

The foreign partner is further entitled to a net profit share of 25% of the remaining output, which is equal to 15% of total output before cost recovery. What remains after the 55% received by the foreign partner represents the Egyptian share. As for the long-term overall share of the Egyptian partner, views differ between one-half and two-thirds of total output. Either way, this share has in recent years fallen short of satisfying the domestic needs. For example, out of total production of oil and gas of 58mn toe in 2005, the Egyptian share was 39mn toe, while domestic consumption of both sources was 49mn toe. Egypt has to purchase nearly 10mn toe from foreign partners. The same experience was repeated in 2006 when total production of oil and gas rose to 71mn toe, with the Egyptian share ranging 44mn toe but falling short of covering domestic consumption which reached 52mn toe in 2006. Therefore, at least 8mn tons had to be purchased from the foreign partners’ shares in order to fill the gap. 

 

To answer the crucial question of how to cross the gap to 2020, the choice becomes one of two: either gas production expands, as it did when it jumped from 23mn toe to 45mn toe in two years (2005-07), at nearly 50% growth rate per year. In such case, the Egyptian share of oil and gas production would be raised enough to do without purchasing from the foreign partners. Or, alternatively, the gas output growth would be limited to such a level as to match only domestic consumption, even if Egypt keep purchasing the total share of the foreign partners. The first choice would deplete gas reserves in the shortest period. The second choice would conserve gas production and extend gas reserves until we cross the gap and catch up with nuclear power in 2020, and may be beyond.

 

What is in focus at this point is: according to production-sharing agreements, Egypt is entitled to purchase from the foreign partner whatever is needed to meet domestic consumption at a maximum price of $2.65/mn BTU. Nuclear power becomes competitive, as we will later explain, only when the price of gas is higher than $6/mn BTU. Therefore, it is more economical to use gas at home, even if we have to buy the whole share of the foreign partners (at $2.65/mn BTU) which we are legally entitled to. Gas prices on world markets are far below those of crude oil, and, since gas is environmentally cleaner than oil, the export gas projects are not good choices, considering gas economics which give priority to using it at home.

 

Nuclear Worries And Concerns

Nuclear power generation is an internationally-involved industry, as compared with most domestic industries which are national by nature and require little or no international involvement. The most important aspect of such involvement are:

  1. Concerns have been raised about proliferation risks created by the further spread of sensitive nuclear technology, such as uranium enrichment and plutonium reprocessing. This is both a domestic problem and an international one. Proliferation continues to raise public concerns in many countries and hinders the development of new nuclear power reactors. On the other hand, it has to be solved to the satisfaction of the world community, otherwise, the project will be challenged, as it happened in the case of Iran’s uranium enrichment.
     

  2. Uranium is the prime source of fuel for nuclear reactors and it is explored for and found in nature. However, raw uranium has to be enriched to at least 3% and manufactured to make the “yellow cake” in order to be usable. Enrichment above 20% makes uranium suitable to build an atomic bomb. Plutonium is a man-made material that could be used to generate electricity and/or make a bomb. Nuclear power advocates assure us that uranium sources are abundant, widely distributed around the globe, and, therefore, they represent no constraint. However, there are strong indications that those resources may fall into short supply at a near point in future, as is the case with oil and gas. While the International Energy Agency (IEA) states that proven uranium reserves are sufficient beyond 2030, it also says that investment in uranium mining capacity and nuclear fuel manufacture capacity must increase significantly to turn “uranium in the ground into yellowcake” and to meet world increasing demand. The underlying assumption is that expected expansion is only that of the countries already using nuclear generation (31 countries). The new tendency of the West to let developing nations go nuclear is not accounted for in this forecast. In either case, the industrialized countries do not have to worry about nuclear security, because they already hold the major bottlenecks of this industry, including the hardware technology and uranium enrichment and fabrication. Therefore, if their nuclear interests conflict with those of the developing countries, it will be theirs which will win.
     

  3. Driven partly by rising expectations for nuclear power worldwide, uranium spot prices continued to rise in 2006, to nine times their historic 2000 low, reaching $72 per pound U3O8. However, in what may be taken as a mitigating factor in this respect, a proposal was submitted to the International Atomic Energy Agency (IAEA) by Russian President Putin to create “a system of international centers providing nuclear fuel cycle services, including enrichment, on a non-discriminatory basis and under the control of the IAEA”. Several additional proposals to assure supplies of enriched uranium in the event of political supply interruptions have demonstrated the will of states to develop new, international approaches to the nuclear fuel cycle.
     

  4. Nevertheless, the IAEA conference, which considered the above proposals for assuring supplies of uranium-based nuclear fuel at one stage in a longer-term multilateral framework, has recognized that establishing such a fully developed, multilateral framework that is equitable and accessible to all users of nuclear energy, is a complex endeavor, requiring a phased approach for both natural and low enriched uranium, as well as spent fuel management.
     

  5. As for nuclear safety, indicators, such as those published by the World Association of Nuclear Operators, improved dramatically in the 1990s. However, in some areas improvement has stalled in recent years. Also the gap between the best and worst performers is still large. The IAEA has developed, in cooperation with 28 of its members, the International Project on Innovative Nuclear Reactors and Fuel Cycles (INPRO) which completed a methodology that member states can use to evaluate and select innovative nuclear systems (INS) for development.
     

  6. Safety of nuclear waste disposal is another crucial aspect of world nuclear concerns. Annual discharges of spent fuel from the world’s reactors total about 10,500 tons of heavy metal (t HM) per year. By the end of 2004, approximately 280,000 tons of spent fuel had been discharged globally. Two different management strategies are being implemented for spent nuclear fuel. In the first strategy, spent fuel is reprocessed (or stored for future reprocessing to extract usable material ‒ uranium and plutonium). Approximately one third of the world’s discharged spent fuel has been reprocessed leaving about 190,000 t HM tons of spent fuel in storage. In the second strategy, spent fuel is considered as waste and is stored pending disposal. Based on more than 50 years of experience with storing spent fuel safely and effectively, there is a high level of confidence in both wet and dry storage technologies and their ability to cope with rising volumes pending implementation of final repositories for all high radioactive wastes. China, France, India, Japan, Russia and the UK either reprocess, or store for future reprocessing, most of their spent fuel. France has set goals for a reversible deep geological repository by 2015 and to open the facility by 2025. Canada, Finland, Sweden and the US have opted for direct disposal. The Finnish, Swedish and US repository programs continue to be the most developed, but none is likely to have a repository in operation before 2020. The world’s one operating geological repository is the Waste Isolation Pilot Plant (WIPP) in the USA, but it will receive only waste generated by research and the production of nuclear weapons; no waste from civilian nuclear power plants.
     

  7. Most countries have not yet decided which strategy to adopt. They are storing spent fuel and keeping abreast of developments associated with both alternatives. Therefore, developing nations, should carefully consider the disposal of nuclear waste in their feasibility studies, from both the technical and financial aspects.
     

  8. If the Egyptian nuclear program is to start operating around 2020 with expected economic life of 60 years, then decommissioning may not occur before 2080. This is a too long period and many of the present day variables may drastically change. Since the technical and economic feasibility studies of a nuclear reactor must be calculated based on the length of its production life, then careful attention should be given to the above considerations. For example, capital costs of construction, decommissioning and waste disposal, which are the major component of total nuclear cost, are depreciated on the basis of electricity units produced over the life span of the reactor.
     

  9. To conclude this chapter, it was anticipated that nuclear generation would decline, as aging nuclear reactors (especially among the OECD nations) were expected to be taken out of operation and not replaced. But the role of nuclear power in meeting future electricity demand has been reconsidered more recently, given concerns about rising fossil fuel prices, energy security, and greenhouse gas emissions. In Europe, nuclear power is the largest source of electricity in eight countries and represents more than half electricity produced in four of them: France, Belgium, Lithuania and Slovak Republic. However, many European countries opted to phase out part or all of their nuclear capacity. For example, Lithuania and Slovak Republic agreed with the EU to shut down their capacity, and Belgium is to follow suit.
     

  10. Now, nuclear power is accounting for 16% of world electricity production which was 2,750 TWh (Tera or trillion Watts-hour) in 2006. At the end of 2006 there were 31 countries operating 435 nuclear reactors with installed capacity of 370gw. A Reference Scenario forecasts world nuclear capacity to increase to 416gw in 2030 at an average rate of 0.5% per year. An Alternative Policy Scenario, which assumes greater use of nuclear power and lower CO2 emissions, forecasts nuclear capacity to grow to 519gw in 2030 at an average growth rate of 1.4% per year. Approximately 70% of this growth will come from developing countries which account for 17 of the 29 reactors now being built, mainly in Asian countries. Non-OECD Asia is poised for a robust expansion of nuclear generation. For example, in China, electricity generation from nuclear power is projected to grow at an average annual rate of 7.7% from 2004 to 2030, and in India by an average of 9.1% per year.

 

Economics Of Nuclear Power

Concerns over surging fossil prices and rising CO2 emissions have revived nuclear power which is proven technology for large scale base-load generation. The existing plants in OECD countries and the countries of non-OECD Europe and Eurasia (including Russia) are expected to be granted extensions to their operating lives to 60 years. As shown above, economics are not the only factors affecting nuclear generation. Yet, economics, as in all other sources of energy, play crucial roles, most important of which are:

  1. Nuclear power is capital intensive because building a reactor would cost between $2bn and $3.5bn. The discount rate (interest on loans) plays a major role in nuclear financing. The long lead period of preparation and construction (10-12 years) requires spending with no output to sell. Moreover, as the loan period extends, the discount rate becomes higher. Therefore, a government has to reduce investment risk in order to support the nuclear economics.
     

  2. The most important factor affecting competitiveness of nuclear power is the investment cost as represented by the discount rate and plant economic life. Depending on various factors of the economic components, capital cost would range between $2,000-2,500 per 1kW installed capacity. By comparison, the capital cost of using the combined cycle gas technology (CCGT) in electricity generation is only $550-650.
     

  3. In developing countries, including Egypt, more than 70% of nuclear capital and operating expenditures have to be spent in foreign exchange, because most of the project components are provided by industrialized countries. 
     

  4. Fuel cost is a small component of nuclear power total production cost, accounting for only $0.4-0.6/mn BTU, while it ranged in CCGT between $5-7/mn BTU in 2006. Therefore, nuclear power cost is less vulnerable to fuel-price change than coal or gas-fired generation. Uranium cost is around 5% of total cost and becomes 15% after treatment (enrichment and fabrication), while gas fuel represent 75% of total cost. Therefore, increases in gas and coal prices improve the nuclear competitive position. A 50% increase in uranium, gas and coal prices would cause costs to rise by only 3% in nuclear power and by 20% in coal and by 38% in CCGT. This would endow nuclear costs with greater stability and predictability and make it more attractive to heavy users of electricity. In Finland and France, electricity-intensive industrial users expressed interest in long-term fixed price contracts for electricity which, in turn, facilitate finance investment in new nuclear plants.
     

  5. In a scenario of high discount rates, where nuclear generating costs are between 6.8-8.1 cents/kWh, nuclear power would be competitive with gas-fired generation if long-term gas prices were above $6.60 /mn BTU (corresponding to $65/B). There are other scenarios which expect construction and operating risks to be mitigated and the new nuclear cost to be 4.9-5.7 cents/kWh. In such cases nuclear would be cheaper than gas-fired electricity if gas prices were above $4.70-5.70/mn BTU.
     

  6. The introduction of a value for limiting carbon emission also improves the competitiveness of nuclear power. In Europe and the US, where coal is the major fuel for electricity generation, $10/ton of CO2 emitted makes nuclear compete with coal. It is the more so, considering that the average value of a CO2 ton in the EU Emission Trading Scheme in 2005 was €18.3 per ton ($23 and above).
     

  7. Regional differences, size of reactor, site location and whether it contains one reactor or more, all affect costs. No one approach to nuclear energy supply carries the same costs and benefits for different countries. Therefore, we have to be very careful in studying and selecting the best approach that really suits our needs within an integrated and comprehensive strategy for energy, as we explained above.