Measuring the true cost of power production

13 April 2018

The social and environmental impacts of electricity provision affect individuals, economies and countries in ways that are not captured in market prices, but yet are too important to be neglected, according to a report issued today by the OECD Nuclear Energy Agency (NEA). Despite their importance, full accounting for these costs remains difficult, it says.

The report - The Full Costs of Electricity Provision - is a collaborative effort by the NEA Division of Nuclear Technology Development and Economics, under the oversight of the Working Party of Nuclear Energy Economics.

"Market prices and production costs are important measures of the economics of electricity. However, over at least the past two decades, there has been a growing recognition that these values do not represent the whole story," the report says.

The document analyses plant-level production costs, grid-level system costs, climate change impacts, air pollution, the costs of major accidents, land-use change and natural resource depletion, and the security of energy and electricity supply. It also gives an overview assessment of security of energy supply indicators and considers employment generated in the electricity sector as well as the impact of energy innovation on economic performance and growth.

How to internalise?


"Once the different subsets of full costs receive the appropriate attention they deserve, well-understood instruments for internalisation can be applied," it says.

Chapter 1 presents the applied economics behind practical policy decisions, which continue to fall into three broad categories. These are price- and market-based measures; norms, standards and regulations; and information-based measures.

On the first category, the report says that in many circumstances "the simple application of a Pigouvian tax to any externality that can be identified is neither practicable nor desirable". Nevertheless, taxes, prices, subsidies, the allocation of property rights and the reduction of transaction costs are "key measures in the policy makers’ arsenal" to reflect the full costs of electricity provision, it adds.

Such instruments should be used in a "qualitative and predictable manner to steer electricity provision into the desired direction over the long term", the report says.

The second category are the "default measures of policy making", the report says, and have already been widely adopted. "They have the added advantage of leaving the pollution rent to the polluter. However, in the area of air pollution and greenhouse gas emissions in particular, a review and eventual tightening of emission standards seem warranted," it adds.

The third category is "at the heart of modern internalisation". Support for research and innovation belongs here, it says, as does taking part in the policy-making and rule-setting processes.

"When discussing full costs, one must underline the role, importance and responsibility of governments in this area. The gap between full costs and private, market-based costs is related to the inability of private actors to take into account all relevant information about welfare effects, as feedback mechanisms between private parties and appropriate incentive structures are lacking," the report says.

"Transaction costs is the catch-all term that economists have coined to refer to barriers to arrangements that, in principle, would be mutually advantageous since the gains of winners would be larger than the costs of losers. These transaction costs are not an unavoidable factor of economic life but can be dramatically reduced over time through both information and incentives," it adds.

The report is a "small pebble in what one would hope to see becoming over time a large and expressive mosaic", the report concludes.

"Disseminating and synthesising knowledge on some of the most salient features of the full costs of electricity provision is part of the process of arriving, through the progressive internalisation of social costs, at better policies and more sustainable electricity mixes," it says.

Researched and written
by World Nuclear News