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U.S. energy policy after Japan:
If not nuclear, then what?

March 30, 2011 Knowledge@Wharton
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As the crisis at Japan's crippled Fukushima Daiichi plant continues to unfold, every bit of news that trickles out deepens the debate about nuclear energy. Anti-nuclear activists point to smoldering reactors and radioactive drinking water as reason enough to abandon nuclear power permanently. Others say the fact that the aging plant survived a 9.0-magnitude earthquake and 46-foot tsunami without greater damage signals its ability to withstand major disruptions.

The crisis has raised questions in the United States about the role that nuclear power should play in the country's energy future. The U.S. produces 20% of its energy with nuclear power but has not built a new facility since the accident at Three Mile Island soured public opinion on nuclear energy in 1979. In his State of the Union Address in January, President Obama called for "building a new generation of safe, clean nuclear power plants" as a way for the United States to reach the goal of drawing 80% of its power from "clean energy" sources by 2035.

Yet while the Administration continues to voice its support, Fukushima may have stalled the expansion of nuclear power in the U.S. for the near future, say Wharton professors and nuclear experts. Despite calls for a "nuclear renaissance," the industry was already struggling to move forward in the midst of an economic downturn and competition from cheap natural gas. Now events in Japan have reignited fears about nuclear's safety, which could cause further delays. The lingering question for U.S. energy policy: If not nuclear, then what?

Nuclear as part of U.S. energy policy "depends on what leadership we have," says Erwann Michel-Kerjan, managing director of the Wharton Risk Management and Decision Processes Center. "Where do we want our country to be? We have been talking about energy independence for a long time. The question is, what do we do about that?"

Before the earthquake in Japan, a growing number of people were saying nuclear. Not only would it allow the United States to become more energy independent, but it would also lower greenhouse gas emissions, the industry argued. When measured by carbon footprint, nuclear is on par with solar, hydro, wind, biomass and geothermal, and in terms of the land use required, nuclear comes out ahead of other green energy sources, they say. For a 1,000 megawatt power plant, nuclear requires about one square mile of space, compared with 50 square miles for solar, 250 for wind and 2,600 for biomass.

But nuclear power plants are enormously expensive, costing as much as $2 billion to $6 billion to build, according to "Nuclear Energy Policy," a report from the Congressional Research Service. Financing new reactors is heavily dependent on loan guarantees from the federal government, which are highly controversial. To expand, the industry says it needs more than the $18.5 billion in loan guarantees the government currently allocates, which is enough for three or four reactors. Opponents argue that loan guarantees unfairly subsidize a mature industry and would be better spent elsewhere.

The debate in some other countries is less heated. Unlike the United States, which has significant natural resources, many other countries have fewer energy options and have made a strong commitment to nuclear power. They are unlikely to abandon it now, says Michel-Kerjan. France, for example, which turned to nuclear energy decades ago after suffering through an oil crisis, relies on nuclear for 80% of its power. Emerging economies such as China and India are also investing heavily in nuclear to cope with increasing energy demand.

Although many countries are reevaluating safety measures in the wake of Fukushima, few are likely to abandon plants that are already in the works, especially those with more modern designs. "So many countries are going to be very heavy on nuclear in the next 10 years," Michel-Kerjan suggests. "These are not small decisions. They're billions of dollars.... I don't see China or Brazil saying, 'Oh, we saw what happened in Japan. Let's forget about it.'"

A Decline in Public Support

Yet Fukushima has no doubt had an impact. Italy put a one-year moratorium on its plans to re-establish a nuclear energy program. Germany idled seven of its 17 nuclear reactors for safety checks as protesters clamor for an end to nuclear power. China, which had planned to quadruple its nuclear energy capacity by 2020, temporarily suspended all project approvals.

For projects in the United States, an uphill climb has become even steeper. According to a poll released March 21 from Pew Research Center, public support for the increased use of nuclear power has declined since the earthquake in Japan. More than half (52%) now oppose the increased use of nuclear power, while 39% favor it. That compares to 47% in favor and 47% opposed in October.

"As for the long-term prospects for the industry, I think the implications of Japan will be long-lasting," says Chris Lafakis, an energy economist at Moody's Analytics. It will be more difficult to get approval for a plant and more difficult to obtain financing. Although the federal government is pushing for loan guarantees, projects would still need support from a financial institution to get financed, he points out. "And the large banks are in no hurry to extend credit for a plant knowing the regulatory environment" and current public sentiment, he says. There may not be a "formal moratorium" against new nuclear power plants, "but I think there's an effective one."

Even before the Japanese earthquake, the nuclear industry was struggling to expand in the U.S. because of a sluggish economy and a sudden abundance of cheap natural gas. Based on recent shale discoveries, the U.S. Energy Information Administration estimates the country's recoverable shale gas resources are more than double the volume it assumed just one year ago.

"Cheap natural gas makes it difficult to pull the trigger on nuclear investment," Chris Hansen, director of strategy and initiatives at IHS Cambridge Energy Research Associates, noted during a panel discussion at the Wharton Energy Conference in October 2010. "The outlook is that the 'Shale Gale' will really increase the chance for natural gas to grow its market share."

Japan's nuclear crisis will not create that much more additional delay, Hansen told Knowledge@Wharton in a follow-up interview. Low gas prices had already slowed down proposed projects because investors were hesitant to commit billions of dollars that might not pay off. Safety reviews will simply be added to an already delayed process. "I see market share in the U.S. probably eroding for the next 10 years," Hansen says. "All of the new build will be gas, so nuclear will slip."

Economics prevented the much-touted "nuclear renaissance" from ever taking hold in the United States, adds Debra K. Decker, a research associate with the Belfer Center for Science and International Affairs at the John F. Kennedy School of Government at Harvard. "Like all business, the nuclear business is about risks and returns," says Decker, who studies nuclear proliferation and proposals for reform. "The risk of getting approvals has been high enough in the United States, and the electricity business has been deregulated enough, that the risk-return ratio has not really supported new builds. When you factor in the high upfront capital costs of nuclear and the still relatively inexpensive gas and coal options, the economics are not there. Nuclear does not come out as an attractive option without supports."

Decker believes the biggest long-term impact on demand for nuclear power — and renewables as well — would be a carbon tax or a requirement that a certain percentage of U.S. energy would come from alternative sources. "As more states worry about air pollution and the federal government expresses concern about global warming, nuclear looks to have more societal returns," she says. "If clean air were not a free good, if we could get the negative externalities of carbon priced as a tax, then the equation [for nuclear] would change."

A 'Pivotal Moment'

Noam Lior, a professor of mechanical engineering and applied mechanics at the University of Pennsylvania who studies energy and the environment, believes nuclear energy has three major risks that policymakers need to consider: public safety, long-term nuclear waste and proliferation. The events in Japan have highlighted the dangers of nuclear accidents, which are rare, but when they happen become "a raging problem." It also highlights the problem of waste storage, as one of the biggest risks at Fukushima has been linked to spent fuel rods. While there are risks associated with fossil fuels -- such as air pollution, mining accidents or oil spills -- nuclear is unique in that it passes risks to the next generation in the form of radioactive waste. And with the threat of terrorism ever present, the cost of securing nuclear facilities keeps increasing. "Each problem has some solution, but each solution costs money, and we're not there yet," Lior says. "Just building without solutions is not a good idea."

The crisis in Japan can become a "pivotal moment" to reevaluate the true risks of nuclear energy and how it is regulated, says Howard Kunreuther, co-director of Wharton's Risk Management and Decision Processes Center. "I think it's going to have an enormous impact in terms of rethinking how safe nuclear power is. If you are ever going to do it, this is the time to put regulations in place and rethink" the issues.

Part of that rethinking should be the risks not only of nuclear energy, but other forms of energy as well. Several experts pointed out that nuclear's worst disaster, the 1986 Chernobyl accident, will eventually kill about 10,000 people, mostly from cancer. Yet pollution from coal, which currently supplies 45% of the country's energy, kills 10,000 people in the United States every year.

"With any energy source, there are risks involved," points out Wharton legal studies and business ethics professor Eric W. Orts, who also directs Wharton's Initiative for Global Environmental Leadership. Solar panels require mining of materials, wind power blocks views and kills birds, and geothermal was thought to be safe at first, but now appears to increase the chance of earthquakes, he notes. Orts hopes the accident in Japan might spur Congress to "do something serious on energy" that would be forward-thinking and would secure the nation's future. He cites new technologies such as the Bloombox, a type of fuel-cell generator that allows users to generate their own power and get off the grid. He hopes that work undertaken by the U.S. Navy to make itself energy self-sufficient through wind, solar and biofuels might one day translate into energy independence for the country as a whole. Until then, Orts says, "really the best solution to [the nation's energy] problems is energy efficiency." And that, he adds, causes no risk at all.

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