The Economics of Nuclear Power in China

It should come as no surprise that the first reactor built in the UK in the last 20 years will be built with the support of Chinese nuclear power firms. China is currently leading the world in the number of nuclear power plants under construction and even after a post-Fukushima slowdown, it still plans to more than double its nuclear capacity by 2015, and quadruple it by 2020.  It will do this in part by keeping nuclear power profitable.

On this blog we have often discussed the implicit subsidies in the power sector. Controls on the price the grid pays power producers and the price the grid charges users have led to lower returns for the electric power sector, thus implicitly subsidizing the cost of electricity for industrial producers.  In particular, thermal power producers have struggled to maintain profits when on-grid tariffs fail to adjust to rising coal prices.

In contrast to thermal power producers, Chinese nuclear power plants – owned by China National Nuclear Corporation and China Guangdong Nuclear Power Group – have delivered return on assets above the average lending rate and higher than the average returns of all industrial firms in China. Over the past ten years the average return on assets of nuclear power producers was 7.1 percent compared with 6.8 percent for the industrial sector and 3.1 percent for thermal power producers.  The gap between nuclear power and other forms of electric power generation has even strengthened since 2008.

ROA electric power

The higher profitability is encouraging more rapid growth in nuclear capacity. China has 59 plants planned and 30 reactors already under construction. Existing nuclear players are now planning on issuing shares to raise capital and support expansion plans. Thermal power producers are also eager to enter the nuclear power sector. How did nuclear power producers stay profitable while other producers have struggled?

The answer to this question is related in part to the nature of nuclear power but also China’s controversial system of price controls and subsidies:

First, nuclear power has lower input costs than most other forms of electric power production. The international price of uranium prices have increased almost as rapidly as thermal coal over the past ten years. However, uranium has a much greater energy density than coal and lower transportation costs, lowering the cost of fuel for nuclear power plants. Between 1998 and 2012, only hydro power producers were able to match nuclear power plants in terms of gross margins with gross margins almost three times higher than thermal power.

Gross margins electric power

Second, nuclear power producers benefit from more favorable pricing. In China, the National Development and Reform Commission (NDRC) controls the price at which power producers may sell their electricity to the grid. In order to promote the growth of cleaner forms of electricity (and save dwindling water resources) the rate thermal and hydro power producers receive for their electricity is set lower than nuclear, wind, and now solar power. Since 2007 the on-grid tariff for nuclear power has been between 10 and 25 percent higher than thermal power. This year, NDRC increased this gap further by lowering the on-grid tariff for thermal power, while keeping the tariff for nuclear power essentially stable.

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