Too Costly to Matter: Economics of Nuclear Power for Saudi Arabia

Nuclear Power Industry

Ahmad and Ramana reported in 2014 that Saudi Arabia had ambitious plans for nuclear power. Given this context, this paper examined the economics of nuclear power and compares it to two other sources of electricity, natural gas and solar energy. It calculates the costs of electricity generation, water desalination and the opportunity cost associated with forgone oil and gas revenues.

A sensitivity analysis is included to account for variations in important parameters within the comparative cost analysis. Our results suggest that for a large range of parameters, the economics of nuclear power are not favorable in comparison with natural gas, even if the currently low domestic natural gas prices in Saudi Arabia were to rise substantially. Further, electricity from solar plants has the potential to be cheaper than nuclear power within the next decade if the rapid decline in solar energy costs in the last decade continue, i.e., before the first planned nuclear power plant would be completed. However, unless the price of oil drops substantially below current values, it would be more economically optimal to export the oil than using it for generating electricity.

This paper has examined the economic prospects for nuclear power in Saudi Arabia and found that they are not favorable in comparison with natural gas, even if the currently low domestic natural gas prices in Saudi Arabia were to rise substantially. As shown by our sensitivity analysis, this is a robust conclusion. The comparison with solar power is contingent upon future variables, in this case the capital costs of solar photovoltaics and concentrated solar power generation equipment. Given the rapid declines in solar costs that have been witnessed in the last decade, electricity from solar plants has the potential to be cheaper than nuclear power within the next decade. If the U.S. Department of Energy’s Sunshot goals for 2020 are reached, for example, solar power would certainly be cheaper than nuclear power by 2020. The relative
economic advantage of solar power has added relevance because of the coincidence between the peak demand and solar insolation in Saudi Arabia. This coincidence also implies that the LCOE measure that we have used undervalues solar power. However, this will be partially or wholly compensated by the costs of technologies needed to deal with short term variability of solar insolation.

Our analysis suggests that a focus on solar energy is indeed justified, even if storage technology is still quite expensive and solar power cannot as yet be used to meet nighttime electricity demand economically. This is not the case for desalination, wherein nuclear power is more expensive than natural gas based plants, but is
clearly cheaper than solar CSP and PV. Through our sensitivity analysis, we confirmed that the potential of solar power to produce relatively cheaper electricity
compared to nuclear power for a wide range of possible parameter values. This includes both higher discount rates and capacity factors. In the case of solar power, the baseline values of the capacity factor are relatively low compared to what is projected by many analysts for the coming decades.

Though nuclear power is sometimes justified because Saudi Arabia could export its natural gas instead of burning it to produce electricity, this opportunity cost is positive only if Saudi Arabia can procure a price of $13.6/million BTU for exported (and shipped) LNG for the several decades it would take to recover the high construction cost of nuclear reactors. However, in the case of oil, global prices are much higher than domestic oil prices and it would be economically optimal for Saudi Arabia to export some of the oil and substitute with any of the other forms of power we discussed.

The high costs of nuclear power suggests that, despite impressive projections of a rapid and massive construction of reactors, economic considerations would limit the role nuclear power will play in meeting Saudi electricity demand. As the Economist magazine observed famously, “nuclear power, which early advocates thought would be ‘too cheap to meter’, is more likely to be remembered as too costly to matter” in Saudi Arabia.