Socio-Economic Assessment of Fusion Energy Research, Development, Demonstration and Deployment Programme

Providing safe, clean and affordable energy supply is essential for meeting the basic needs of human society and for supporting economic growth. From the historical perspective, the constantly growing energy use was one of the main factors, which drove the industrialised countries to the current level of prosperity. Meanwhile, in recent decades, the issue of global energy security became a topic of increasing concern in the international policy agenda. On the one hand, the world is facing the problem of exhaustion of most convenient and cheep fuel reserves. The situation is becoming worse, because of the constantly growing demand in developing countries, and the oligopolistic behaviour of major energy exporting countries. On the other hand, the society is becoming more and more sensitive to the environmental pollution problems, caused by the excessive consumption of fossil fuels. In the face of energy security challenge, national governments ought to implement adequate strategies aimed at liberalisation of energy markets, diversification of energy supply mix, enhancement of energy efficiency, encouragement of investments in energy infrastructures, and promotion of innovation in energy sector. In a longer term perspective, the latter point becomes increasingly important, because the world is relying currently on the consumption of non-renewable fossil fuels, and the development of new safe, clean and resource unconstraint energy technologies is vitally needed. In line with this strategy, the major world economies pursue the joint R&D programme on thermonuclear Fusion technology, which represents numerous advantages due to its inherent safety, avoidance of CO2 emissions, relatively small environmental impact, abundance and world-wide uniform distribution of fuel resources. Considering the importance of the projected environmental and economic benefits of Fusion, the questions are raised whether the current level of financial support is sufficient, and what could be the optimal strategy to proceed with the demonstration of Fusion technology, given the time span and potential risks of Fusion RDDD programme. To put these questions into the context, one has to consider the current trends in energy R&D funding, which has seen a drastic decline ( ~50%) over the last three decades. The liberalisation of energy sector poses additional problem due to the fact that free markets partially failure to provide public goods, such as basic science and R&D, because of the so-called spillover effects meaning that the firms are not able to appropriate the integral results of their R&D investments. Regarding the thermonuclear Fusion technology, the decision makers responsible for national energy policies and allocation of public R&D funds may face the following specific questions: What is the expected net socio-economic payoff (social rate of return) of Fusion R&D programme, including both internal and external costs and benefits? What are the reasonable economic arguments that could justify the increase in public funding of the ongoing and future Fusion R&D activities and would stimulate greater involvement of the private sector? What additional value can be obtained through undertaking a more ambitious Fusion R&D programme (accelerated development path), which requires bigger number of experimental facilities, increased funding, and more intense overall efforts of international scientific and industrial community? In order to provide sound arguments for policymakers seeking to optimise public R&D funding, a robust socio-economic evaluation of the whole Fusion research, development, demonstration and deployment (RDDD) programme is needed. At the present stage, prospective analyses of Fusion technology have been emphasised mainly on the investigation of technological issues, estimation of the direct costs of Fusion power and analysis of its potential role in future energy systems. Meanwhile, methodological tools and practical studies aiming at a more comprehensive socio-economic assessment of global long-term energy R&D programmes, such as Fusion, are still incomplete. The primary difficulty concerns the evaluation of positive externalities that may reveal through different types of spillover effects, including but not limited to knowledge, network and market spillovers. While the presence of these effects has been identified in the economic theory and confirmed by empirical studies, their quantitative analysis in the specific case of large scale energy R&D programmes represents some methodological lacuna and deserves further investigation. Another problem relates to the methodology of cost-benefit analysis, which oftentimes ignores the hidden value of R&D projects arising due to the possible flexibility in managerial decisions. In fact, throughout the course of any R&D project, its prospective cash-flows can be significantly improved by pro-active management of different implementation stages, e.g. expanding the production, if market conditions are favourable, or abandoning, if R&D process appears to be unproductive. As a result, the strategic value of any R&D project normally exceeds its net present value (NPV) calculated with the traditional discounted cash flow (DCF) method. Although this strategic approach to capital budgeting, known as Real Options, has been propagated recently in several publications dealing with appraisal of lumpy irreversible investments, its practical application in the context of Fusion RDDD programme has not been mastered yet to the required extent. A particular challenge consists in the need for adequate treatment of different types of uncertainty in the model structure, parameters and input data. Accordingly, the main objective of this thesis consists in complementing the existing studies with an in-depth analysis of the positive externalities (spillover benefits) of Fusion RDDD programme and calculation of its strategic real options value subject to different managerial strategies throughout demonstration and deployment stages. Net social present value of Fusion RDDD programme and potential impact of Fusion R&D activities on the economic performance of the involved private companies are estimated using an integrated modelling framework, which includes the following components: (1) assessment of technological potential for deployment of Fusion power plants based on the simulation of multi-regional long term electricity supply scenarios with PLANELEC model; (2) economic evaluation of Fusion RDDD programme and analysis of different implementation strategies using Real Options model; (3) estimation of the economic value of spillover benefits from participation in Fusion R&D projects at the microeconomic level with the help of financial evaluation model; (4) strategic evaluation of Fusion RDDD programme, taking into account both spillover benefits and real options value, and policy recommendations.