Posted by: B Gourley | September 20, 2007

Nuclear Fuel Bank: One Year Down

Last September, Senator Sam Nunn put before the International Atomic Energy Agency (IAEA) a proposal that would involve a donation of $50 million of Warren Buffet’s money to create a nuclear fuel bank. There were three strings attached. First, the international community would have to provide a two-to-one match in money, the equivalent value in low enriched reactor loads, or some combination thereof. Second, the IAEA would have to take the lead in setting up the administrative and logistics capacity to carry out the plan. Finally, it would all have to happen within two years. The first condition has not yet been met; the IAEA seems eager to accomplish the second; and the half-way mark has been reached on the third condition.

What is a fuel bank? It is a repository of low enriched uranium (LEU) nuclear reactor fuel that could be used as a supplier of last resort in case there were to be a supply disruption to a participating nation.

Why create a fuel bank? The idea is to eliminate incentives for additional countries to enter the business of making nuclear fuel, because the technologies involved in doing so are the same as those involved in producing fissile material for nuclear weapons. Eliminating the proliferation of technologies that are used in building nuclear weapons is seen as a means to reduce the likelihood the weapons themselves become more widely available.

How does it work? Nations that generate power by nuclear energy face uncertainties about whether their supply of nuclear reactor fuel will be cut off, and this uncertainty factors in as an implicit cost of purchasing fuel from one of the six exporting countries (the US, France, Russia, and URENCO [the UK, Germany, and the Netherlands.]) Therefore, when they consider the cost of purchasing fuel abroad versus developing their own capacity to enrich uranium, they figure in the implicit cost associated with this uncertainty. This makes the foreign fuel option more expensive than the market price of the fuel would indicate. Because nuclear fuel production is a decreasing cost  industry and one in which several challenging technical feats must be mastered, it is hard for new entrants into the nuclear fuel to be competitive with the global market price. However, if the implicit cost of risk is large enough, it might tip the scales in favor of domestic production. Therefore, the idea is to reduce the risk by assuring supply, and, thus, reduce the economic incentive to develop an indigenous uranium enrichment capacity.

Why is it necessary? The Nuclear Nonproliferation Treaty (NPT) states that countries have the right to pursue any nuclear technology for peaceful purposes. This includes uranium enrichment and plutonium separation processes that are also used to make bomb-usable material. Without this promise, the NPT has little to offer non-nuclear weapon states except a vague commitment that the nuclear weapon states will make a good-faith effort to disarm at some undefined point in the future, and it would likely not have the 188-strong membership it currently enjoys. The nuclear fuel bank is designed to appeal to a state’s desire to obtain nuclear fuel in the cheapest possible manner, and, for those who actually are seeking nuclear weapons, it eliminates the economically rational argument based on concerns of supply disruption.

It is not certain how real the risk of supply disruption is. It has not transpired in reality yet. Of the possible reasons for such a disruption, political eventualities seem to be the most feared. That is, a supplied nation falls into disfavor with its supplier, and is cut off by embargo. In the past, “flag swapping” has apparently been conducted to avoid this difficulty. That is, supplying nations might swap an equivalent amount of fuel so that the supplying nation can maintain its appearance of embargo against a nation, while avoiding the destabilizing situation of actually cutting the supplied nation off from nuclear power.  

A nation has several potential means to mitigate the risk of supply disruption. First, it can develop its own indigenous capability. This path, vertical integration in economic parlance, is extremely expensive, but, perhaps, also extremely reassuring. It is also what the international community is seeking to avoid. Second, theoretically a nation could diversify its source of supply. This turns out to be difficult because there are so few exporters, and, to a large extent, they share common values that might make a nation like Iran almost equally uneasy with any of them.  Finally, also in theory, a state could insure against such an eventuality. Of course, such an insurance program could not just financially compensate a state or utility company; it would also have to provide them with a supply of fuel. Otherwise, it would not be reassuring enough to have the desired impact. This is the goal of the various fuel assurances programs. 

The question of interest is how likely any of the fuel assurances programs are to have the desired effect, and what must be done to make them both feasible and effective? To what degree are states that are seeking uranium enrichment guided by concerns of risk of disruption? If it is a minor factor, what good is such a program? If the enrichment market stays in the hands of a few countries, will it be reassuring to countries of concern such as Iran and North Korea?

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Responses

  1. Thank you for one of the best summaries of this complex issue — and I’ve been keeping close track as the lead for this fuel bank concept at Sen. Nunn’s organization, Nuclear Threat Initiative. One of the biggest challenges, as your final paragraph indicates, is how to design a fuel assurance structure (of which fuel banks would be an essential part) that would be responsive to the needs of the anticipated new entrants to nuclear power production BEFORE they’ve made major commitments on their fuel cycle approaches. At the same time, the embryonic nature of these nations’ internal nuclear energy structures and stakeholder communities makes it hard for them to engage in the sophisticated substance and politics of creating such a structure. I’d be interested in your thoughts on how to engage that group more effectively in the design phase.

    I would also argue that Iran and North Korea are not the most important test cases as long as they hold, overtly or in their hearts, any ambition to proceed towards a weapons program under the false flag of a peaceful fuel cycle aimed at power production. If, however, they explicitly abandon such ambitions, the availability of fuel assurance structures — perhaps tweaked specifically for their circumstances — could be part of a package that helps provide a face-saving resolution.

    Thanks again for an excellent piece.

  2. very interesting. i’m adding in RSS Reader

  3. I was looking around for a good analysis of this issue and as the person above me has stated, you’ve presented a most satisfactory one.

    Great work.


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