Nuclear power as a topic rouses strong reactions: its advocates laud it as a cheap and environmentally-friendly way to produce electricity, whilst its opponents see it as an expensive, unsafe technology. Business for the international nuclear power industry has been quiet for some time; for example, no new nuclear plant has been built in the USA for twenty years. The industry is expecting a revival, as Western countries reconsider the use of nuclear power to cut carbon emissions, and countries with developing economies seek to update their power network.

It is no surprise that the nuclear power industry has turned its attention to China, where economic development has not been matched by a corresponding development in power output. Intermittent power shortages, in commercially important areas such as Zhejiang and Guangdong show that the supply of electricity has not been meeting demand. In 2003, as part of the Chinese Communist Party's 10th Five-Year Plan, it was announced that growth of the power grid should become more in line with growth in the economy. So if GDP is to quadruple by 2020, then the current electrical output of 350 million kilowatts must expand at a similar rate, to around 800-900 million kilowatts.

It is clear that coal, which is currently used to create about 75 percent of China's electricity, cannot be used to meet this target. Although coal is a resource that China has in relative abundance, the sheer quantities of coal that would have to be extracted from the ground would be enormous. Even if China's mining industry were able to produce enough coal, transporting it across the country would be a logistical nightmare: already over half of China's rail and waterway network is being used to transport coal. Then there are the potentially catastrophic short-term environmental effects of burning so much coal. In order to wean itself from its coal dependency, China will have to draw upon numerous different sources of power, and it is for this reason that it is taking the nuclear option.

Part of China's energy grid produces electricity via nuclear means, but compared to the nuclear power programmes that exist in the West, Chinese nuclear power is relatively young. Construction of China's first two nuclear reactors - Daya Bay near Guangdong, and Qinshan in Zhejiang - began in 1987, and they went into commercial operation in 1994. China now has 10 operational reactors, with a further five under construction. Many of China's nuclear power plants have been built using foreign components; the Daya Bay reactors use units supplied by a French company, Areva's Framatome; and the main contractor on Qinshan units 4 and 5 was Atomic Energy of Canada. Whilst the Chinese have taken advantage of foreign technology, they are by no means dependent on it. Qinshan unit 1 was both built and designed by the Chinese. Nuclear power in China is already a mix of Chinese and foreign expertise.

China has declared a nuclear power spending spree on a scale that the world has not seen for 30 years. It currently has around 8 million kilowatts of installed nuclear output, and by 2020 it wants to have that output to grow to 36 million kilowatts. This increase will increase the proportion of Chinese electricity from nuclear sources from just over one percent to five percent.

Five percent might not sound like a lot, but due to the enormous size of China's electricity network, making the transition of a few percentiles is a major undertaking. To meet the targets, two or more nuclear plants will have to be built every year until 2020, a construction project that currently has a budget of US$50 billion. Even just a fraction of this gargantuan budget would give a welcome boost for the international nuclear power industry.

Bidding backlog

In 2004 the Chinese government approved two plants in Sanmen and a further two in Yanjiang. Since then, an auction with open bidding has been underway for the contracts to build these plants. There are three major contenders: France's Areva, Russia's Atomstroyexport and the American based, but British owned, Westinghouse. The bidding has been competitive with each of the companies offering designs of third-generation plants that incorporate their latest technology. All of these companies enjoy strong governmental support from their home countries in terms of both finance and regulation. For example, the US Export-Import bank has approved US$5 billion of loan guarantees for Westinghouse's bid, and it is predicted that Areva will arrange a similar guarantee with the French Coface Company.

Although China is already able to build its own nuclear power plants, this foreign input is crucial because it brings fully up-to-date, usable technology. What China expects to get out of these foreign built plants is not only hi-tech reactors, but also some insight into the technology itself, so that they will be able to construct such plants themselves in the future without outside help. So not only are the bids being assessed in terms of their price and the level of technology offered, but also for their potential for technology transfer.

The auction has been characterised by a series of delays, with the Chinese government having postponed setting a date for a decision several times. Arnaud de Bourayne, President of Areva China, explains that the delays are due to the Chinese needing more information: "After submitting the proposals, the Chinese identified a number of aspects that had not been previously identified. It has taken them much more time to evaluate the different proposals, and to ask for more information and options than was expected. The reason is because the offers had so many values and merits. Now we're in the position where the Chinese have all the information that they need, so they should be able to make a decision. I don't know exactly how things will develop, but we're still in the game." He predicts that a decision will be made very soon.

On the other hand, Sze Ping Lo, the campaign and communications manager of Greenpeace China, says that the auction's delays are because the Chinese government isn't as set on nuclear power as they appear. "There's a lot of media coverage that China is planning to build this number of nuclear power plants. This is thanks to the energy of the public relations departments of the nuclear companies in France and the USA. I think that none of these plans are being realised. Even the tender that the Chinese government is giving out has not been approved so far. They haven't decided whether to use the Westinghouse model or the Areva model. The decision was going to be made last year, and they've delayed it and delayed it. I think that there are legitimate concerns for the Chinese government to see whether nuclear power is the right way to go ahead. The Chinese Government might not be as naive as the industry thinks that they are, and they going to be considering the costs." Whatever the exact causes of the delays are, there remains the fact that the auction leaves the Chinese government with plenty of options to choose from. And with such tough competition between the bidders, the Chinese are bound to get a good deal. One option available to them is not to grant contracts on all four plants. This might happen, as Lo suggests, because they are uneasy about the total costs of nuclear power, but it could also happen because the desired technology transfer might be possible with only one, two or three plants.

The auction has got the nuclear power industry excited, and justifiably so, but foreign power companies should realise that there are limits to how deep they can enter the Chinese market. One reason for this is that cost considerations could impede the progress of nuclear power in China, and another is China's ultimate goal of acquiring an autonomous nuclear power programme.

The price of power

A disadvantage of nuclear power is that nuclear plants are more expensive to build than other kinds of power plants. The pay off is that, once built, the plant is able to produce power more cheaply than by other means such as coal. This is not the case in China. A recent report by

Merrill Lynch said that in China the average cost of a kilowatt of electricity from nuclear sources is US$1450 compared to only US$440-570 for coal. "The Chinese energy market is going through a massive liberalisation and it is doubtful that nuclear power stations can compete with a conventional coal fire plant or with renewable energy sources such as wind power," says Lo.

Considerations of cost are more likely to stifle growth in China's nuclear sector than anything else. Why build expensive nuclear power plants when pre-existing plants can produce electricity cheaper? China's plan is for the long-term, and in the future electricity from coal is set to become more expensive and nuclear generated electricity is to become cheaper.

"Thermal coal electric power generation in China has traditionally been attractively priced, as thermal coal was itself cheap," says Joseph Jacobelli, a utilities analyst at Merrill Lynch. "It is only in the past couple of years that domestic coal prices have risen tremendously given strong demand coupled with transportation bottlenecks. Also, unlike most OECD/NEA countries, nuclear electric power generation is relatively new to China with the first plant having been commissioned just over a decade ago. I expect the cost per kilowatt to come down over the next 10 years as more equipment and parts are sourced domestically."

If the price of nuclear generated electricity remained high, the growth of nuclear power would falter, leaving foreign companies with no market to enter. In the long-term, the price of nuclear generated electricity is going to become less of an issue. What is to going to limit foreign involvement in China's nuclear industry is the eventual fruition of its own nuclear technology.

Going it alone

Although the Chinese expect to make technological gains by purchasing foreign reactors, the greatest advances are expected to come from their own domestic research programme. Whilst western research in nuclear power slowed down as its popularity waned, China has come to the fore as a world leader in new nuclear technologies.

Its most famous contribution is what has become known as the "pebble bed reactor", which instead of storing uranium in concentrated rods, stores it in small graphite balls. Pebble bed reactors will be cheaper and easier to build than conventional reactors, and it is claimed that it is impossible for them to leak dangerous material. This technology is pioneering, but it is 10 to 20 years away from being commercially available, which is why China is still importing nuclear technology from abroad.

If there is a worldwide renaissance in nuclear power, then Chinese nuclear power companies may well become competitors with the foreign companies that they originally bought technology from. As domestically developed nuclear technology comes to fruition, and Chinese engineers become more experienced, China will eventually be able to offer new technology at low prices - a proposition that will be especially attractive to poorer countries that may want access to nuclear energy.

Jacobelli is confident that this will happen, but not for some time. "Over the next 10 years, as China develops its nuclear power industry and the domestic manufacturers' expertise in this field rises, then other countries would certainly consider developing this form of power generation. Publicly, Vietnam and Indonesia are two countries that are seriously looking at developing one or more nuclear power plants in the next decade. Chinese electric power equipment manufacturers would obviously be less competitive on a 15-20 year view until they build a solid track record. My guess is that Chinese technology would spread but Korean and Japanese manufacturers would have a solid advantage in the near term."

On this view, China is set to become, in time, a contender in the international nuclear energy market. The difficulty that the Chinese face, as is always the case in China, is resource-based. China is currently self-sufficient in terms of uranium, but as the number of nuclear power plants grows, that self-sufficiency is going to turn into dependency. And it is here that the long-term foreign winners of China's nuclear industry can be found. Australia is set to profit most. A high profile agreement between China and Australia, made in April this year, allows for China to tap into Australia's extensive uranium reserves. It is for this reason that total nuclear autonomy is beyond China. If anything is going to limit the growth of nuclear power in China, it is a reluctance to become dependant on another country over another vital natural resource.

China-Australia uranium deal

Two agreements signed in April this year allow a supply of Australian uranium to China's growing nuclear power production and collaboration on nuclear equipment and technology.

The deal signifies an important step in China's move away from its coal- and oil-dependent energy supplies towards uranium to provide electricity for its growing number of factories and fuel the 40 to 50 nuclear power plants it is expected to build over the next two decades. The decrease in the reliance on fossil fuels would mean less greenhouse gas emissions and reduced pollution which brings environmental benefits for China as it plans to quadruple its nuclear energy production by 2020.

But critics of the agreement have claimed that monetary gains have been put before regional and global security issues. Supplying materials which could be used to build nuclear weapons to a country that has a history of not keeping its promises is dangerous. There are concerns that once the Australian supply mixes with Chinese uranium it will be difficult to distinguish whose is whose, and if China reprocesses its share to fuel military programmes, Australia could be implicated in supporting its military activities.

However, China already has a significant supply of nuclear materials to draw upon if it wanted to produce more weapons. A 1999 report by the Wisconsin Project on Nuclear Arms Control estimates China has four tons of plutonium and 23 tons of highly enriched uranium - enough material for 20,000 nuclear weapons.

Despite safeguard measures that China will not use the uranium for building nuclear weapons, past international efforts at safeguards have not stopped some nations from using uranium for nuclear weapons programs. The adequacy of these safeguards and international monitoring of nuclear power plants has also been brought into question - China can choose which facilities are monitored by the International Atomic Energy Agency and can withdraw any of them at any time. Environmental experts also express concern over the dumping of unresolved nuclear waste.

The deal means China is in a better position to support its growing energy needs and extend its regional influence, but despite assurance from the Australian government that strict measures are in place to keep China to its commitments, it is evident the international community remains wary of China's true intentions.

As a signatory to the Nuclear Nonproliferation Treaty, China is only allowed to use the uranium for peaceful non-military purposes. Australia holds approximately 40 percent of the world's known low-cost uranium deposits and China is its second-largest trading partner behind Japan.