Saturday, June 04, 2011

Nuclear Power vs Oil for Navy Surface Ships

Congressional Budget Office release a report entitled “The Cost-Effectiveness of Nuclear Power for Navy Surface Ships” in May 2011.

All of the US Navy's aircraft carriers and submarines are powered by nuclear reactors; its other surface combatants are powered by engines that use conventional petroleum-based fuels. In recent years the US Congress has shown interest in powering some of the Navy’s future destroyers and amphibious warships with nuclear rather than petroleum based fuel.

The argument now spreading out that the Navy could save money on fuel in the future by purchasing additional nuclear-powered ships rather than conventionally powered ships. Those savings in fuel costs, however, would be offset by the additional up-front costs required for the procurement of nuclear-powered ships.

To assess the relative costs of using nuclear versus conventional propulsion for ships other than carriers and submarines, the Congressional Budget Office (CBO) developed a hypothetical future fleet, based on the Navy's shipbuilding plan, of new destroyers and amphibious warfare ships that are candidates for nuclear propulsion systems. Specifically, CBO chose for its analysis the Navy's planned new version of the DDG-51 destroyer and its replacement, the DDG(X); the LH(X) amphibious assault ship; and the LSD(X) amphibious dock landing ship. CBO then estimated the life-cycle costs for each ship in that fleet—that is, the costs over the ship's entire 40-year service life, beginning with its acquisition and progressing through the annual expenditures over 40 years for its fuel, personnel, and other operations and support and, finally, its disposal.

CBO compared lifecycle costs under two alternative versions of the fleet: Each version comprised the same number of ships of each class but differed in whether the ships were powered by conventional systems that used petroleum-based fuels or by nuclear reactors.

Estimates of the relative costs of using nuclear power versus conventional fuels for ships depend in large part on the projected path of oil prices, which determine how much the Navy must pay for fuel in the future. The initial costs for building and fueling a nuclear-powered ship are greater than those for building a conventionally powered ship. However, once the Navy has acquired a nuclear ship, it incurs no further costs for fuel. If oil prices rose substantially in the future, the estimated savings in fuel costs from using nuclear power over a ship's lifetime could offset the higher initial costs to procure the ship.

In its January 2011 macroeconomic projections, CBO estimated that oil prices would average $86 per barrel in 2011 and over the next decade would grow at an average rate of about 1 percentage point per year above the rate of general inflation, reaching $95 per barrel (in 2011 dollars) by 2021. After 2021, CBO assumes, the price will continue to grow at a rate of 1 percentage point above inflation, reaching $114 per barrel (in 2011 dollars) by 2040. If oil prices followed that trajectory, total life-cycle costs for a nuclear fleet would be 19 percent higher than those for a conventional fleet, in CBO's estimation.

To determine how sensitive those findings are to the trajectory of oil prices, CBO also examined a case in which oil prices start from a value of $86 per barrel in 2011 and then rise at a rate higher than the real (inflation-adjusted) growth of 1 percent in CBO's baseline trajectory. That analysis suggested that a fleet of nuclear-powered destroyers would become cost-effective if the real annual rate of growth of oil prices exceeded 3.4 percent—which implies oil prices of $223 or more per barrel (in 2011 dollars) in 2040.

The amount of energy used by new surface ships—particularly those, such as destroyers, that require large amounts of energy for purposes other than propulsion—could also be substantially higher or lower than projected. Employing an approach similar to that used to assess sensitivity to oil prices, CBO estimated that providing destroyers with nuclear reactors would become cost-effective only if energy use more than doubled for the entire fleet of destroyers.

The use of nuclear power has potential advantages besides savings on the cost of fuel. For example, the Navy would be less vulnerable to disruptions in the supply of oil: The alternative nuclear fleet would use about 5 million barrels of oil less per year, reducing the Navy's current annual consumption of petroleum-based fuels for aircraft and ships by about 15 percent. The use of nuclear power also has some potential disadvantages, including the concerns about proliferating nuclear material that would arise if the Navy had more ships with highly enriched uranium deployed overseas. CBO, however, did not attempt to quantify those other advantages and disadvantages.

The CBO analysis sounds good enough but not complete because of two reasons.

Second, using direct cost of oil does not make much sense in such an analysis. It would have been more appropriate to use Fully Burdened Cost of Fuel (oil). After all, it is the FBCF that matters, not the average price of imported oil to US refineries used in the CBO analysis.

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