May 18, 2011

Cost Effectiveness of more Nuclear Powered Navy Ships

Congressional budget office report - The Cost-Effectiveness of Nuclear Power for Navy Surface Ships (28 pages)

The U.S. Navy plans to build a number of new surface ships in the coming decades, according to its most recent 30-year shipbuilding plan. All of the 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. 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.

There were previous Navy analysis of nuclear power for navy ships back in 2008

The Navy analysis compared individual ships equipped with the two types of power plants without regard to the phased introduction of ships into the fleet. The Navy study did not account for the fact that even if oil prices were assumed to grow quite rapidly, the potential savings from moving to a nuclear-powered fleet would accrue largely in the future—because the new ships would require decades to be fully phased in to the fleet. Nor did the Navy’s study account for the time value of money—the analysis did not compare costs calculated in terms of their present values. If it was, indeed, cost-effective to gradually shift a class of ships to nuclear power, the savings would increase as more nuclear ships were built over time. However, under CBO’s present-value approach, the savings in fuel costs associated with the ships that entered the fleet in later years were heavily discounted because the savings accrued so far into the future.

A nuclear navy would be able to economically operate at a faster tempo as there would be almost no incremental fuel penalty for running the ships at a high capacity. The nuclear ships are also faster and able to keep up with the nuclear aircraft carriers and submarines.

CBO Projection of Oil Prices

CBO regularly projects oil prices for 10-year periods as part of the macroeconomic forecast that underlies the baseline budget projections that the agency publishes each year. 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 2021.3 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. Specifically, total life-cycle costs would be 19 percent higher for a fleet of nuclear destroyers, 4 percent higher for a fleet of nuclear LH(X) amphibious assault ships, and 33 percent higher for a fleet of nuclear LSD(X) amphibious dock landing ships.

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. Similarly, a fleet of nuclear LH(X) amphibious assault ships would become cost-effective if oil prices grew at a real annual rate of 1.7 percent, implying a price of $140 per barrel of oil in 2040—about the same price that was reached in 2008 but not sustained for any length of time. A fleet of nuclear LSD(X) amphibious dock landing ships would become cost-effective at real annual growth rate of 4.7 percent, or a price in 2040 of $323 per barrel.

CBO’s analysis was also based on several assumptions about the reactors the Navy would use if it chose the nuclear power alternative and the implications of the reactors for a ship’s size. CBO assumed that the Navy would design a new reactor for use in the destroyers and LSD class ships because existing reactors would not be optimally sized for those ship types. CBO further assumed that in the LH(X) amphibious assault ships, the Navy would use one of the reactors that power its aircraft carriers.7 Yet even if the Navy outfitted the destroyers and amphibious dock landing ships with a new, smaller reactor, the use of nuclear power would require an increase of about 2,000 tons in the DDG-51’s displacement, or weight (an increase of 20 percent relative to the current size of that ship), and a similar increase in the LSD(X)’s displacement (an increase of 11 percent), by CBO’s estimates. The LH(X), in contrast, could accommodate a nuclear reactor without any substantial increase in the ship’s displacement.

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