Insurance cost vs. nuclear power risk
By Juergen Baetz
Published: Sunday, May 1, 2011
BERLIN -- From the United States to Japan, it's illegal to drive a car without sufficient insurance, yet governments around the world choose to run more than 440 nuclear power plants with hardly any coverage whatsoever.
Japan's Fukushima disaster, which will leave taxpayers there with a massive bill, brings to the fore one of the industry's key weaknesses -- that nuclear power is a viable source for cheap energy only if it goes uninsured.
Governments that use nuclear energy are torn between the benefit of low-cost electricity and the risk of a nuclear catastrophe, which could total trillions of dollars and even bankrupt a country.
The bottom line is that it's a gamble: Governments are hoping to dodge a one-off disaster while they accumulate small gains over the long-term.
The cost of a worst-case nuclear accident at a plant in Germany, for example, has been estimated to total as much as $11 trillion, while the mandatory reactor insurance is only 3.7 billion.
"The 3.7 billion will be just enough to buy the stamps for the letters of condolence," said Olav Hohmeyer, an economist at the University of Flensburg, who is a member of the German government's environmental advisory body.
The situation in the United States, Japan, China, France and other countries is similar.
As Japan's disaster at the Fukushima Dai-ichi plant unfolds in the wake of the March 11 earthquake and tsunami, it is still unclear what the final cost might be.
Operator Tepco's shares have been battered, and analysts say Japan -- which already has the highest debt level among the world's industrialized nations -- might eventually have to nationalize the company, and take on its massive liabilities.
Tepco had no disaster insurance.
"Around the globe, nuclear risks -- be it damages to power plants or the liability risks resulting from radiation accidents -- are covered by the state. The private insurance industry is barely liable," said Torsten Jeworrek, a board member at Munich Re, one of the world's biggest reinsurance companies.
In Switzerland, the obligatory insurance is being raised from 1 to 1.8 billion Swiss francs ($2 billion), but a government agency estimates that a Chernobyl-style disaster might cost more than 4 trillion francs -- or about eight times the country's annual economic output.
A major nuclear accident is statistically extremely unlikely when human errors, natural disasters or terror attacks are excluded, but the world already has suffered three in just about thirty years -- Three Mile Island, Chernobyl and now Fukushima.
In financial terms, nuclear incidents can be so devastating that the cost of full insurance would be so high as to make nuclear energy more expensive than fossil fuels.
Governments could opt for a middle road, taking out more insurance to protect taxpayers from massive bills, but that would make the energy cost more. Ultimately, the decision to keep insurance on nuclear plants to a minimum is a way of supporting the industry.
"Capping the insurance was a clear decision to provide a non-negligible subsidy to the technology," Klaus Toepfer, a former German environment minister and longtime head of the United Nations Environment Programme (UNEP), said.
Several countries advocate nuclear energy as a cleaner alternative to fossil fuels, even though there still is no solution for the permanent disposal of radioactive waste.
China, which is under international pressure to lower its use of coal and cut its carbon emissions, is betting on nuclear power to feed its rising energy demand.
It has an industry insurance pool covering damages only up to 300 million yuan ($46 million), and the government has another 800 million yuan ready to compensate victims, too little to cover damages in any meaningful way.
The situation is not much better among the veteran users of nuclear energy.
In America, where no new reactors have been planned and completed since the 1979 Three Mile Island accident, the necessary insurance for nuclear operators is capped at just $375 million by law, with further claims funded by the utilities, up to a maximum of $12.6 billion.
France, a country dotted with 58 reactors, only requires an insurance of $134 million from plant operators, with the government guaranteeing liabilities up to $338 million. The figures were similar for Britain, Russia and the Czech Republic. In Germany, each reactor operator is liable with all its assets beyond the insured amount of $3.7 billion.
Damage estimates for a worst-case nuclear disaster differ widely because it is difficult to forecast the spillover effects of a meltdown -- death and illness from radiation, compensation for lost work and the economic impact of massive evacuations for years.
The cost of a nuclear meltdown at the Indian Point reactors 24 miles north of New York City has been estimated at up to $416 billion in a 2009 study. But that does not take into full account the impact on one of the world's busiest metropolises.
"Indeed, a worst-case scenario could lead to the closure of New York City for years, as happened at Chernobyl, ... leading to almost unthinkable costs," University of Pennsylvania's Howard Kunreuther and Columbia University's Geoffrey Heal said.
A 1992 study for the German economy ministry -- the latest official report available -- found the total cost of health damage to the population and other economic losses by a nuclear disaster could amount to $8.1trillion -- or about $11.25 trillion in today's money.
Nuclear power plant operators could insure a larger, more realistic part of the potential damage, but experts note that that would lead to rising electricity prices.
The insurance in Germany costs utilities $0.015 cents per kilowatt hour of electricity, a tiny part of the final cost for customers of about 33 cents, according to Bettina Meyer of think tank Green Budget Germany in Berlin. But insuring the full risk would amount to a prohibitive extra cost of about $3 per kilowatt hour.
"If you take all external costs into account, the conclusion is inevitable: Nuclear power is not economically viable," Hohmeyer said. "The risk is only bearable if you externalize it on the wider society."
But Dieter Marx, of Germany's Nuclear Forum, an industry lobby, says no industry has prices reflecting all of its risks, adding that the risk of a meltdown was very low.
"Ultimately, it comes down to the question of how big a risk the society is ready to bear," he said.
The majority of Germans and the political parties have concluded that the potential damage outweighs the benefits, and the country now stands alone among industrialized nations in its determination to overcome nuclear power.
Phasing out nuclear energy -- which like in the U.S. produces a quarter of the country's electricity -- was meant to happen slowly over the next 25 years. But in the wake of Fukushima, the government seems determined to speed things up, possibly pulling the plug on the last reactors within a decade, gradually replacing them with renewable energies.
"No society has to bear the potentially enormous risk of a nuclear disaster," Hohmeyer said.
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