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Published: September 4, 2007


The Other Energy Crisis

As nuclear energy becomes a viable alternative to carbon-based fuels, security is a vital concern. Here’s how private markets might be able to help.

As both concern over global warming and worldwide energy consumption continue to mount, nuclear energy is back on the agenda. It is a renewable, non-carbon-based energy source, and its safety record since Three Mile Island and Chernobyl is much improved. To answer rising demand, 28 nuclear plants are currently under construction, 64 more are planned, and another 158 are proposed — and that activity is now raising new concerns. Much of the construction is taking place in regions that already have nuclear capacity, such as China, India, and Russia. But serious consideration of the nuclear energy option is also under way in countries such as Turkey and Vietnam that are new to the game.

The problem, of course, is that in order to produce nuclear energy, new plants will need access to commercially enriched uranium — and some newly nuclear nations are already fearful that they could be excluded by the only six countries that commercially produce it (France, Germany, the Netherlands, Russia, the United Kingdom, and the United States). That could be one of the reasons Brazil and Iran are already looking to develop their own uranium enrichment facilities, and they will probably not be the last to do so. Considering that the same process used to enrich uranium for fuel in power plants can also produce weapons-grade nuclear material, the international threat becomes obvious: The more countries develop their own enrichment capacity, the more countries can build nuclear arsenals, which could generate a multi-state race for nuclear weapons that would be extremely difficult to control. The paradox of nuclear energy, then, is that from an environmental and economic perspective, it’s beneficial for as many countries as possible to have access to enriched uranium for energy; but in terms of security, as few countries as possible should have enriching capacity.

The International Atomic Energy Agency (IAEA) may have one answer to the dilemma of how to ensure the supply of nuclear energy while minimizing nuclear proliferation: It is establishing an enriched uranium fuel bank to guarantee nondiscriminatory availability of that material. Although the IAEA and governments are grappling with many aspects of this emerging energy security crisis, no one is discussing a complementary initiative that could leverage the insurance and finance industries — and therein lies a unique opportunity. One solution to the dual security problem could be an innovative partnership between these industries and governments that would create the world’s first international nuclear fuel insurance fund.

The fund is a straightforward concept. Premiums, collected from all member countries, would be deposited in a mutual insurance company (MIC), which, in turn, would use some of the funds to build a cash reserve and to purchase supply options. The rest of the funds would go to a consortium of insurers and reinsurers that would provide layered financial protection to all participating countries. The IAEA member governments would serve as a financial backstop for the consortium. In the event of a fuel disruption, the MIC would exercise its options and work with fuel suppliers, fabricators, and transporters to arrange a timely fuel delivery or alternative electricity purchases off the energy grid (if available). The insurance consortium would compensate member countries and others involved in replacing fuel for any loss of efficiency beyond a previously agreed upon deductible. As with all insurance, the incentive for member countries would be that they all pay a little now against the day when one or a few might need a lot to cover losses.

The benefit of this idea is that it recognizes and embraces broad interdependencies. It does not rely solely on the existing enrichment states and the IAEA to guarantee the supply of enriched uranium, but allows additional suppliers to emerge within clearly established norms, such as multinational ownership of enrichment facilities. Furthermore, it applies to the whole nuclear fuel cycle — not just enrichment, but also conversion, fabrication, and transportation — and therefore addresses other potential supply risks, and it is an efficient market-based approach.

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  1. “A New Plan to Insure the Supply — and Safe Use — of Uranium in the Nuclear Energy Market,” Knowledge@Wharton Web site, April 18, 2007: A Q&A with the authors of this article that delves into the specifics of their proposal. Click here.
  2. Graham Allison, Nuclear Terrorism: The Ultimate Preventable Catastrophe (Owl Books, 2005): A good source for background on broader nuclear nonproliferation issues. Click here.
  3. Debra Decker and Erwann Michel-Kerjan, “A New Energy Paradigm: Ensuring Nuclear Fuel Supply and Nonproliferation through International Collaboration with Insurance and Financial Markets,” Belfer Center for Science and International Affairs Discussion Paper 2007-02, March 2007: A more in-depth description of the nuclear fund proposal and its feasibility. This was first published by the authors as “Ensuring Global Nuclear Fuel Supplies” in the International Herald Tribune. PDF download.
  4. Energy Information Administration, “International Energy Outlook 2007,” May 2007: The EIA’s annual overview of how much energy is being used globally and from what sources, as well as international energy projections through 2030 and outlooks for major energy fuels and associated emissions. PDF download.
  5. Nuclear Threat Initiative Web site: A nonprofit organization led by Ted Turner and Sam Nunn, with the goal of reducing the nuclear threat. Click here.