Chernobyl / Pripyat Exclusion Zone. Graffiti on a wall facing the amusement park in central Pripyat. Photo: Pedro Moura Pinheiro via Flickr.com.
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The true cost of disaster insurance makes nuclear power uncompetitive
6th February 2014
The European Commission is assessing how it should augment its nuclear disaster insurance. Ingmar Schumacher calls for full transparency of insurance costs in the cost-benefit evaluation of the nuclear industry.
Nuclear energy becomes uncompetitive once the costs of completely insuring against disasters are fully integrated into its price.
The continuing nuclear disaster at Fukushima has concentrated minds on the risks of nuclear catastrope in Europe - all the more so as estimates of Fukushima's cost rise towards a giddying US$500 billion.
And so it is that the European Commission is considering whether, and how, it should amend the insurance of nuclear power plants on European territory. In the event of the unthinkable taking place in a European reactor, who will pay the cost?
The focus is timely. For these three observations on nuclear power seem indisputable:
- We will continue to operate nuclear power stations for many decades to come.
- There is no exemption from nuclear disasters in the future.
- We will have to decide on the best ways to compensate victims of nuclear incidents as far as that is based.
Nuclear power highly likely to continue in energy mix
A recent review by the World Nuclear Association argues that nuclear energy is still, for most places on this planet, among the cheapest means to produce electricity.
The claim is of course highly disputed - in that actual power stations under construction seem to be very expensive, even without accounting for disaster costs
Rather more certain is that CO2 emissions from nuclear energy - together with hydropower and wind - continue to rank among the lowest of all energy sources. So nuclear energy is seen as one possible road to take for a low carbon energy mix.
Based on this EU member states, in the European Parliament resolution of 14 March 2013 on the Energy roadmap 2050, agreed on the principle that nuclear energy will continue to play a large and significant role in energy production.
Disasters are an ever-present risk
Despite all these claims of low CO2 emissions and cheap electricity, the potential for nuclear disasters cannot be ignored. Even Naomi Hirose, the president of Tepco, operator of Fukushima Daiichi, recently stated that "we have to keep thinking: what if ... "
History's largest accident in Chernobyl in 1986, and especially the more recent one at Fukushima in 2011, have vividly shown that a thorough analysis of the costs and benefits of nuclear energy must not ignore the expected costs from nuclear disasters.
Within Europe, these expected costs are currently partly covered by a compulsory disaster insurance that the nuclear operator pays. However, this disaster insurance is grossly insufficient to include the expected costs of disasters into the price of nuclear energy.
As a result, governments around the world socialize the damages that are not covered by this insurance. This is precisely the reason for which the European Commission is trying to reform the insurance of nuclear disasters.
And, obviously, since the impacts of nuclear disasters are not limited by national borders, it only makes sense to reform disaster insurance at the European level.
Current approach to nuclear disaster insurance in Europe
Nuclear insurance within Europe is governed by the Paris Convention and the Brussels Convention. Most European countries have signed and ratified one or other, or indeed both.
The two conventions place full liability on the operator, who must also provide insurance. But they also limit the operator's maximum liability.
If operators had to be insured for the whole potential damage, then, according to calculations by Versicherungsforen Leipzig GmbH for German nuclear power plants, this would lead to a price increase for nuclear energy of €0.139 to €2.36 per kWh. Calculations for France lead to a price increase of €0.047 per kWh.
This insurance cost would raise current electricity prices for the French nuclear industry by 60%, for the German industry by at least 100%, while electricity prices for households would increase by 25% in France and by 50% or more in Germany.
The certain result would be to make nuclear electricity uncompetitive. For this reason operator's maximum liability tends to be capped, as in the UK.
Major accident costs - who pays?
Some countries, like Germany or Finland, by law have an unlimited operator's liability. In the case of an accident in Germany, therefore, if the operator's insurance of €2.5 billion is insufficient to cover the losses from an accident, then the operator would be liable with their own corporate equity.
However, even this may not be sufficient to cover worst-case disasters. For example, in Germany in January 2014, the nuclear power plant operator EnBW had a stock market value of €7.3 billion.
However estimated cost of Chernobyl amounts to €450 billion. The Fukushima bills are not yet in and the dangers remain live, but estimates to date range from around $200 billion up to about $500 million - many times the entire equity value of any nuclear power corporation.
As a result of Fukushima, the Japanese government had to partly nationalize Tepco, the operator of Fukushima. Future profits by Tepco will be used to repay society for the financial aid.
Whether a government can recuperate costs in this way depends on the extent of damages, versus the operator's market situation. But in this instance Tepco, with all its liabilities, must have a large negative value.
As one operator is unlikely to be able to cover the total costs of a larger nuclear accident, the European Commission, through the Brussels Convention, decided to socialize the costs of a disaster - at least in part.
Based on the 2004 amendments, both the operator and installation state cover €1.2 billion, of which at minimum €700 million is provided by the operator, and a further €300 million are provided by an 'international tier' - meaning the other European states that signed the convention.
In addition, several European states signed the Convention on Supplementary Compensation for Nuclear Damage, which is equivalent in spirit and intent to the 'international tier' of the Brussels Convention. Once fully ratified, it may provide up to an additional €360 million in the event of disaster.
The problem is that these amounts still fall well short of the total costs of larger disasters. Yet it appears the international community is moving towards a socialization, or internationalization, of disaster losses.
This is also the case, though with a slightly different approach, for the US, where the risk-sharing strategy is implemented through the Price-Anderson Act. Here the operator needs to have an insurance that covers €375 million per nuclear plant that he runs.
In addition, in case an accident occurs, then all US operators need to pool up to €82 million per plant they own together. With currently around 104 US reactors running, this means that, in case of an incident, €9.2 billion will be available to cover damages.
Problems with current approach to disaster insurance
However, the socialization of disasters has two serious downsides attached to it, one of which is moral hazard. Under limited liability and risk-sharing, an operator will be inclined to under-invest less in the security of the nuclear plant. This would make accidents more likely.
So to minimize moral hazard and free-riding, operators should have unlimited liability. Limited liability was initially introduced in order to prevent bankruptcy of operators in case of disasters, and to provide incentives to develop the nuclear industry in the first place.
But there is no actual need for this clause in nuclear liability law - as is clearly shown by the fact that there are active operators in Austria, Germany and Sweden, who face unlimited liability.
Quantifying nuclear power's real costs
The second issue with the socialization of costs is that it is unlikely to lead to a thorough quantification of the true costs of nuclear energy.
While we have seen some attempts to quantify the costs of nuclear disasters, a thorough analysis for most European countries remains non-existent.
The fact that these assessments have not been undertaken in most countries shows clearly that these potential costs are not integrated into the Cost-Benefit analysis of most countries' nuclear energy.
However, without this assessment we are unaware of the 'below-the-counter' subsidy that governments provide to the nuclear industry in case of disasters, and we are simply ignorant of the true costs of nuclear energy.
This makes a thorough comparison of the costs and benefits of nuclear energy extremely difficult if not impossible.
Solidarity does solve some problems
Despite the moral hazard and disaster cost quantification problems, there are three reasons for which the principle of solidarity makes sense.
If the installation State cannot afford to cover the additional liability above the payment of the operator, the installation state would need to default.
Clearly, the role of a confederation like Europe should then be to help the defaulting member, or to at least finance the losses that otherwise would not be covered.
If a neighbouring country is part of the electricity grid of the country in which the disaster happened, then it should also bear liability, either through paying part of the insurance premium or some of the costs of a disaster.
For example, while Germany reduced the number of its nuclear power plants, it increased its electricity demand from foreign nuclear plants. As a result, both risk and liability are transferred to an operator in another nation, while the benefits accrue to Germany.
Solidarity and poorer countries
Poorer countries tend to have lower insurance levels. As nuclear disasters nearly always turn into international problems, it should not be the case that the insurance cover in poorer countries is lower, since international spillovers to richer countries need to be covered, too.
So either poorer countries have to be able to cover spillover costs to richer countries, or international solidarity needs to plan for this eventuality.
So - the greater the degree of solidarity, the more room is given to free-riding and moral hazard, and the true costs of nuclear disasters remain unquantified.
And the less the degree of solidarity, the more likely it is that major disasters will lead to the default of either an operator or an installation state - and that those who bear the cost of a disaster may not receive full compensation.
The way forward
It is then clear that if the world continues to rely on nuclear energy, the optimal solution is a mix between the two.
Unlimited liability reduces moral hazard and allows society to recuperate as many costs as possible, while some socialization of losses may be necessary in case of large disasters.
If society chooses to operate with a technology that holds such immense risks, then it also has to accept at least part of the potential costs. These potential costs should nevertheless be minimized, which is done when moral hazard or free-riding is the lowest, which seems to minimally require unlimited liability on the operator side.
Diasaster insurance alone makes nuclear power uncompetitive
From this we can conclude:
- Nuclear energy becomes uncompetitive once the costs of completely insuring against disasters are fully integrated into its price.
- Without full insurance, disaster damages will have to be socialized. Given the limited budgets of governments it will necessarily be the case that not all disaster costs will be compensated. We must ask if this is morally acceptable.
- It is irresponsible to argue that nuclear energy is the solution for our CO2 problem. It makes little sense to rely on nuclear energy - which the 'green' economist E. F. Schumacher called an "evil of an incomparably greater 'dimension' than anything mankind has known before" - in order to reduce human-induced climate change, which is yet another evil of incomparably great dimension.
Fortunately there are other options available - such as wind, solar and hydroenergy - and we have to make full use of their potential, alongside other far-reaching changes in how we produce, store, distribute and utilize energy.
But first we must have a proper discourse on the true costs of nuclear energy, and fully analyze whether it really makes sense to include nuclear energy in our future energy mix.
Ingmar Schumacher is an Environmental economist, with interests in cultural economics, sustainability, social norms, intergenerational justice, endogenous preferences. He is Professor in Environmental Economics at IPAG Business School, Paris.
See his website for more discussion on nuclear energy and other issues in green economics: http://ingmarschumacher.wordpress.com/ .
- World Nuclear Association: 'The economics of nuclear power', October 2013.
- Moomaw et al. 2011: Annex II: Methodology. In IPCC Special Report on Renewable Energy Sources and Climate Change Mitigation [O. Edenhofer et al. (eds)], Cambridge University Press, Cambridge.
- Report: Calculating a risk-appropriate insurance premium to cover third-party liability risks that result from operation of nuclear power plants
- Madsen, T., J. Neumann and E. Rusch, 'The High Cost of Nuclear Power', 2009 Maryland PIRG Foundation.
- Thomas et al., The economics of nuclear power, December 5, 2007.
- Information on EC public consultation "Insurance and compensation of damages caused by accidents of nuclear power plants (nuclear liability)".
- European Commission, Nuclear energy information.
- European Commission, Energy Roadmap 2050, 14th March 2013.
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