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Friday, May 20, 2011

Handing China’s Nuclear Power Report Card to Zhou Enlai, Part II

Editor’s Note: This is the second of a two-part series on China's nuclear energy sector. Part I examines the program's practicality and safety.

Ruiwen Lee, MPA

As the first leader who pushed for China’s nuclear power in the early 1970s, then-Premier Zhou Enlai laid out four key principles for its development: practicality, safety, economic viability, and self-reliance (适用、安全、经济、自力更生). Forty years on, as the nuclear power industry begins taking off at an accelerated pace, these four principles continue to steer nuclear power developments in China.

This two-part blog post discusses the Chinese nuclear power sector’s performance under each of these principles. Last week we discussed the first two of these principles, practicality and safety. This week we look at the latter two, economic viability and self-reliance.

III. Economic viability: Economies of scale vs. technological lock-in
Given that China is coal-rich and has not instituted measures to internalize the negative health and environment externalities from fossil-fuel combustion, nuclear energy is yet to be price-competitive against coal. The estimated 0.05 yuan per unit supplied cost-gap implies that the cost of generating nuclear power remains an important factor in its economic viability.

Economies of scale in construction allow each subsequent unit of a particular nuclear reactor model to be built at a lower cost. This is important for nuclear power plants since the high construction costs are usually the factor working against its economic viability. The downside is that as older reactor designs become cheaper to build, newer models with greater efficiency and improved safety features are kept out of the market as a result of “technological lock-in.” Technological lock-in describes a situation whereby a technology, typically an older, less efficient one, gains such dominance in a market that it prevents newer, better technologies from being adopted. The market could become locked-in when there are increasing returns to adopting existing technology. This is due to a) decreasing costs from economies of scale and learning by doing, and b) increasing benefits arising from factors like network externalities.

Competition is fierce in the Chinese nuclear energy market today. Although the companies allowed to operate and hold majority stakes in nuclear power plants are all state-owned enterprises, they compete against each other for projects. Against the backdrop of the nuclear energy market, economic factors such as the cost of building and operating nuclear power plants are increasingly important in determining which type of reactors are built. It is in such a market that technological lock-in is more likely to occur.

Further, as Generation III+ reactors are being developed, China’s nuclear power market should avoid becoming saturated with or locked into older models so that it has the capacity to absorb newer models when they are released in the future. Of the more than 25 reactors under construction, 16 are the Generation II+ CPR-1000 model. While on the one hand economies of scale can be achieved by using many units of the same reactor model, there could be technological lock-in as newer, better models become less price-competitive to build and operate.

Similarly, small modular reactors (SMR) should be given ample room to compete in the market when they are introduced. Designed to be simpler and safer, SMRs could prove to be more effective in serving smaller load centres in remote areas and inland regions with small electricity grids that are not well-connected to the national grid. If plans to construct nuclear power plants in more remote areas are allowed to proceed before SMRs are introduced, nuclear operators might preclude SMRs from consideration in their eagerness to compete for market share.

IV. Self-reliance: Indigenizing nuclear power technology
Developing indigenous technology has been a key factor in the industry’s direction. Qinshan 1 in Zhejiang Province uses the CNP-300 reactor, designed by the China National Nuclear Corporation (CNNC). The CNNC subsequently developed the CNP-600 reactor, which is used in Qinshan 2, and is developing the CNP-1000 model, though it has temporary been put on hold. The CNP-1000/600/300 models are all fully Chinese and free from foreign intellectual property rights.

The most popular reactor design in China currently is the CPR-1000. The China Guangdong Nuclear Power Corporation (CGNPC) developed the CPR-1000 based on the French reactor design used in Daya Bay, progressively indigenizing it with each nuclear power plant it builds.

A major acquisition by the Chinese nuclear power industry is Westinghouse’s AP1000, with the CNNC and the China Power Investment Corporation (CPIC) investing in an initial two reactors each. Besides allowing China to become the first country to build an AP1000 reactor, the deal with Westinghouse is significant for the technology transfer involved. As part of the agreement, China will own the intellectual property rights to subsequent larger models it designs based on the AP1000.

Conclusion: Moving forward in a post-Fukushima Asia
China's nuclear power industry has come a long way, and looks set for an increasing role in the future. Having achieved practical use for nuclear power, the industry will continue growing in its self-reliance, while balancing the dual goals of improving economic cost and safety.

Of course, much of China’s nuclear power development plans going forward would be seen by the government, the domestic public, and the international audience through the lens of Fukushima. While predicting China’s intended nuclear power expansion trajectory in the light of Fukushima is difficult, it is fair to expect the government to now give greater emphasis to safety. However, as a consequence, the country’s diversion of resources and expertise to improving safety is likely to apply natural brakes to the growth of nuclear power. How crippling this will be to the industry remains to be seen.

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