New Nuclear Build: Is it Expensive or is it Cheap?

The Energy and Climate Change select committee met this week to scrutinise plans for Britain’s nuclear new build programme. EDF Energy CEO Vincent de Rivaz gave a virtuoso performance tackling some thorny issues head on.

Reports in the mainstream media in recent days suggest the UK government is ‘Writing a blank cheque to cover construction risk.’ This was a claim made in a published letter to the Independent on Monday. However, Vincent de Rivaz refuted this in no uncertain terms saying, “We are not asking for the construction risk to be carried by consumers.” Instead, EDF Energy argues they are conducting an ‘open book’ approach with DECC, so the government is fully sighted on all the costs EDF Energy anticipates will be associated with the construction. These costs are key to the negotiations on the strike price, which will determine the price of electricity that consumers will pay, and the return on investment that investors can expect.

Is new nuclear is too expensive?
We still await the detail of the strike price, and the contract for difference, which will be published in full when negotiations are complete. However, in the absence of this fact, there has been no shortage of fiction. Again, in a blistering response to questions from MPs at the select committee today, de Rivaz emphatically denied the rumours of a strike price set at £140 as “total rubbish”. He argued that the strike price has to be auditable, transparent and the detail will be made public. However, these matters are still subject to intense negotiations.

As de Rivaz pointed out, “We are on the brink of delivering an infrastructure project similar in scale to the London Olympics. We are poised to deliver immense benefits in terms of jobs, skills and economic growth – locally and nationally…But like all investors in capital intensive infrastructure projects we need to have a compelling business case. In this respect our final investment decision requires more progress to be made.” Given a specific question by one of the MPs on exactly what assurances EDF Energy needed from government, the one word answer was, ‘stability’. Whatever government agrees to now, this has to be cast iron otherwise private capital will not invest. The risk of future governments trying to move the goal posts for political reasons was of course a central justification for the Infrastructure Planning Commission being independent from government ministers.

One thing is certain: Costs of decommissioning will be borne by the operator. Detailed proposals for the funded decommissioning plan have been submitted to DECC, as required by legislation in the Energy Act 2008. However, how exactly the fund will work is one of the key points being ironed out ahead of EDF Energy’s final investment decision. But as de Rivaz stated explicitly in the hearing, “EDF Energy will pay 100 per cent of the costs associated with decommissioning and management of waste associated with Hinkley Point C”. As required by the Energy Act 2008, the private sector will ensure that new nuclear power stations will have secure financing arrangements in place to meet the costs of decommissioning and waste management and disposal costs.

It is worth noting that the UK was an early pioneer in nuclear technology. A wide range of experimental and ground-breaking reactors were developed, which pushed the bounds of the technology at the time. Back then, little or no thought was given to decommissioning facilities at the end of their life and there was no public regulation then requiring whole life costing. In the early days, the primary purpose of Britain’s nuclear programme was military, not civilian. The military origins of the post-war UK nuclear industry led to the initial civilian nuclear programme and the development of gas-cooled reactors, which are inherently more difficult and expensive to decommission than the light water reactors which will be built to replace them.

Most of the older nuclear facilities in the UK, a mix civilian and military, are now held in public ownership by the Nuclear Decommissioning Authority. In current estimates the UK taxpayer will eventually foot a £49bn bill to decommission and clean up this legacy.

Although many anti-nuclear campaigners highlight waste as a critical issue, no other energy generation currently takes full responsibility for the waste it generates. The waste associated with fossil fuel generation in terms of thousands of tons of burnt coal ash, of particulate emissions affecting air quality and greenhouse gas emissions are external to the economics of fossil fuel and as such arguably constitute a  massive subsidy. The cost of decommissioning North Sea oil platforms, for instance, is subject to guarantees by government, (www.economist.com/node/21551081).

I believe this neatly answers a further question raised by an online blog debate between the European Wind Energy Association and FORATOM, which boils down to the question as to whether the costs associated with decommissioning will fall to the tax payer. Answer: no they will not.

On the broader question of subsidy: I would warn against throwing stones in glass houses. The bottom line is that low carbon generation such as nuclear and renewables has high upfront capital costs and low operating costs. Coal, gas and oil power stations are relatively cheap to build but can be expensive to operate due to the volatility of fossil fuel prices (although when these costs go up, they end up being passed on to the consumer). Therefore, left to the market, such as we have here in the UK, investors will always choose the low risk bet, which would be gas, rather than the riskier, capital intensive investment in low carbon technology. How can we therefore correct the market and get over this hump of initial investment that is needed in order to break free of the long-term instability associated with fossil fuels and their impacts?

Well, that is why we need the Energy Bill and Electricity Market Reform. The intention behind proposals in the Energy Bill, and specifically contracts for difference, is to give long term price stability for consumers (and value for money) and a reasonable return for investors, over the life time of the plant. This will apply to all low carbon technologies, to create a level playing field. It will be paid for by the private sector, which gets its money from consumers and does not constitute a subsidy for nuclear. Vincent de Rivaz indicated today that he believes the strike price will be the solution, not the problem. By this I guess he means he is confident that the strike price will demonstrate that nuclear is the most competitive low carbon technology, and the best low carbon technology available to the UK.

You can come to your own conclusions when the details are published later in the year.

You may be interested to read EDF Energy CEO Vincent de Rivaz’s opening statement to the Energy and Climate Change Committee here.

Kirsty Alexander
Head of Communications