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UK nuclear program: companies reconsider investments

Nuclear Monitor Issue: 
Steve Thomas, Professor of Energy Policy, University of Greenwich

When, six years ago, Tony Blair announced that nuclear power was ‘back with a vengeance’, the endorsement it gave the so-called ‘Nuclear Renaissance’ was powerful. In part, this was because UK still had prestige in this area as one of the pioneers of nuclear and one that seemed to have turned away from new nuclear. In addition, the British government’s confidence in the new nuclear designs that were meant to fire the Renaissance was so strong, it promised that no public subsidies would be needed or offered to new nuclear orders.

Six years on, when construction on the first units should be starting, it is clear that orders are still at least two years away from being placed. The government has abandoned the promise of no subsidies, the credibility of the new technologies is weak and the potential suppliers and buyers of new nuclear orders are abandoning the British market.

The government planned to expedite the process of ordering by requiring the safety regulator to carry out a Generic Design Assessment (GDA) for several of the new designs. This would mean buyers could choose between several designs, all of which were ready to order with only site-specific design issues to resolve. The GDA would be completed in 2011. It was promised that more than one electricity company would build new nuclear so that there would not be an effective monopoly.

The promise of no subsidies was assumed to mean that new reactors would survive purely from the income from selling their power into the competitive electricity market. Many doubted this claim. Indeed, the Liberal Democrat, Chris Huhne, now Energy Minister and an enthusiastic supporter of the nuclear program wrote in 2006: ‘The reality is that nuclear is a tried, tested and failed technology. Investors have taken a shrewd view of the risk, and have decided not to build. The operating and running costs of nuclear power are far from attractive and these costs do not include the unknown future costs of decommissioning reactors and storing waste that remains radioactive for thousands of years.’ Under Huhne, the cracks in the ‘no subsidies’ policy that were apparent under the previous government are now clear. The promise of no subsidies has become no subsidies that are not also offered to other forms of low carbon electricity. Britain has experience of such subsidies. From 1990-96, the Fossil Fuel Levy raised about BP 6 billion (in 1996 BP and US$ had about the same exchange rates as currently, so US$ 9.5bn; the euro did not exist, but 1 BP was about 2.3 German Marks)  from consumers for non fossil fuel generation. More than 95 per cent of the proceeds went to nuclear and, to add insult to injury, much of this was spent building a new reactor, Sizewell B, which a year after its completion was effectively given away.

New nuclear reactors will now be offered a long term contract, perhaps 20 years, at prices that will have no link to any market prices and the government has put a floor on the European Carbon market price of €36/ton, far above any level the market has produced so that nuclear is guaranteed extra income above the contract price. Even this may not guarantee that the income to nuclear power plant owners will cover their expenses sufficiently for banks to be willing to offer the necessary finance.

On the technology side, four vendors entered their designs into the GDA, but two of these, a Canadian design, ACR, and the GE-Hitachi ESBWR, exited within a year. This left the French European Pressurised water Reactor (EPR) supplied by Areva and the Westinghouse AP1000. By mid-2010, the regulator had acknowledged that it would not be able to give generic design approval in July 2011 as originally planned. Interim acceptance would be given with a list of issues still to be resolved. The Fukushima disaster caused a further delay and interim approval is not now expected until December 2011.

Westinghouse, which has no customers for the AP1000 in UK (or the rest of Europe) has stopped work on resolving these issues and will not resume work unless a firm customer appears. The regulator, the Office of Nuclear Regulation (ONR) has targeted the end of 2012 for resolution of the remaining items on the EPR but this seems highly optimistic. The ONR finds itself in the uncomfortable position of being the first regulator to complete a generic review of the EPR. The US regulator is probably a year behind the UK regulator, while the three countries already building EPRs, Finland, France and China, have all chosen to resolve detailed design issues as they go. This seems to be one of the factors behind the appalling delays and cost overruns at the Finnish and French sites. Both are now running at least four years late and expected construction costs are nearly double the original forecasts.

In addition, the Finnish, French and Chinese designs all have significant differences because regulatory issues raised during construction have come too late for the agreed solution to be incorporated in part-built plants. So the UK design will differ from the three designs already under construction. As a result of the problems in Finland and France, the French nuclear industry led by the utility, EDF and the vendor, Areva embarked this summer on a program of design rationalization to reduce costs and improve buildability. The results of this exercise are expected to come too late to be embodied in any UK orders and if they are extensive enough to make a significant dent in costs, they are also likely to require regulators in UK and USA to re-open their generic reviews.

On the utility side, the expectation that subsidies would be offered led to a large number of European utilities expressing an interest so that if the subsidies offered were large enough, they would be at the front of the queue to receive them. The four European utilities with a strong presence in the UK (EDF, RWE, EON and Iberdrola) and the two UK owned companies (Scottish & Southern Energy (SSE) and Centrica) plus GDF Suez and Vattenfall all took positions. EDF (80 per cent) and Centrica (20 per cent) teamed up to buy the existing owner of some of the nuclear power plants in the UK, British Energy, giving them access to their existing sites. The German companies, EON and RWE, formed a consortium, Horizon, which bought options on land at existing nuclear sites, while SSE, GDF Suez and Iberdrola did likewise to form the NuGen consortium. However, by summer 2011, the consortia were cracking. RWE appointed consultants to look at selling all its UK assets in June and in October, it acknowledged that it was carrying out an internal review of whether to continue in the Horizon consortium. Given the firm policy to phase out nuclear in Germany by around 2020, it would be surprising if EON was not having similar thoughts. In September, SSE confirmed its withdrawal from the NuGen consortium.This leaves only EDF (Centrica has also been reported to have doubts) but given the shattered reputation of the EPR and ongoing attempts to redesign it, even EDF must be having second thoughts about building in the UK.

It would be nice to think that the government would belatedly see its policy was doomed and abandon it in favour of the German policy of energy efficiency and renewable but all the signs are that it will keep making concessions to shift the investment risk for nuclear away from plant owners on to consumers. The latest ‘rabbit from the hat’ was a claim by one of Huhne’s junior ministers, Charles Hendry that sovereign wealth funds from the Middle East and other oil-rich areas are "queuing up" to invest in UK nuclear power.

KPMG: carbon floor price not enough, more needed. Due to the huge costs and risks associated with nuclear construction plants will only be built with public support in the form of long-term power purchase agreements, according to David Simpson, global head of mergers and acquisitions at finance firm KPMG. But such contracts – Simpson expects the UK government to offer 35-year deals – could be illegal state aid under European Union competition rules. There has been no formal ruling. He said that, even if the law did not exclude those contracts, utilities’ shareholders would have to pay for their first nuclear plants, as investors would see the risks as too high to provide debt.

Yet Simpson said that if the consortia bidding to build plants in the UK used shareholder cash (assuming a €4,000/kW cost for 1,600MW plants), the net debt of all consortia member firms but one would exceed their market capitalisations. Utilities would also receive no income for years, until plants begin operating. It is also unclear whether utilities would have enough equity to begin follow-on plants – at a rate that would satisfy governments – well before initial projects were completed and generating income.

KPMG last year concluded that "Britain's new generation of nuclear power stations will not be built if the Government refuses them any more support." The study, commissioned by RWE npower, said it is still uneconomic for utility companies to invest billions of pounds in nuclear power and a carbon "floor price" is not enough for the big utilities to commit large capital investments. (WISE Amsterdam).
The Telegraph (UK), 17 July 2010 / PE, Professional Engineering, 3 October 2011

Source and contact: Steve Thomas, Professor of Energy Policy and Director of Research Public Services International Research Unit (PSIRU), Business School, University of Greenwich, 30 Park Row London SE10 9LS, UK
Tel: +44 208 331 9056
Email: Stephen.Thomas[at]