Nuclear Subsidies Largesse by other Names

A new inquiry into energy subsidies has been launched by UK’s cross-party Environment Audit Committee [1], but will it uncover all that are to go into nuclear energy?

by Prof Peter Saunders

A fully referenced version of this article is posted on ISIS members website and is otherwise available for download here.

Many ways to hide nuclear subsidies

Ever since it decided to commission a new fleet of reactors, the UK government has insisted that nuclear power is a safe and economical source of low-carbon electricity. It will not be too cheap to meter, as we were told half a century ago, but it will not require a subsidy and it will not be given one. That was what the Labour government said when it took the decision [2], and it’s what the coalition government is saying today [3].

Despite this unusual parliamentary consensus, it is hard to take the claim seriously. You only have to look at the published data on the costs of building nuclear power stations. The figures in the White Paper were obviously selected to make the case and were implausibly optimistic (see [4] The Real Cost of Nuclear Power SiS 47). There was solid evidence that in successive drafts, estimates had been adjusted to make the case appear even stronger [5]. The large US financial group CitiBank had carried out a detailed study and come to the unequivocal conclusion that without a large subsidy nuclear energy would be a bad investment [6].

Most observers expected the government to devise schemes to allow it to subsidise the nuclear industry while denying that was what it was doing. The denials would not have to be very convincing because the opposition in Parliament, whichever party it was, would be just as anxious as the government to justify the decision to go nuclear. For example, while the industry would be responsible for disposing of the nuclear waste, the government would take over this liability for a fixed price, and no one doubted that this will be at a very generous rate. There would also be some form of extra payment for low carbon energy in general, and the scheme would be arranged to favour nuclear. The new reactors are to be much larger than any existing generators, and National Grid will have to pay £160 m a year for backup in case one of them unexpectedly has to be taken off line. This cost will be incurred specifically because of the new nuclear plants, but it will be charged to all energy generators, thus making nuclear appear cheaper than it actually will be. The rationale for this, according to National Grid, is that [7] “increasing costs on larger users [instead of the taxpayer] could delay the commissioning of large nuclear plants by a number of years.” In other words, nuclear energy could not compete without this subsidy.

In the event of a serious incident, the owners of nuclear plants will be required to meet claims up to a total of £1 bn. This is insignificant when compared with the total cost of Fukushima, which has been estimated to be no less than £47 bn and possibly as much as £167 bn [8]. Paying for insurance to cover such a loss would obviously increase the cost of nuclear power, especially since Fukushima, it is no longer credible to insist that such an event cannot occur in a technologically advanced country.

There are many other ways in which governments can and do provide substantial financial assistance for nuclear power without openly admitting that these are subsidies, some examples are given by the Union of Concerned Scientists in the US [9] , and by ISIS in France (see [10] The True Costs of French Nuclear Power, SiS 53).

Down to brass tacks

The government may or may not have believed its claim that nuclear energy would be profitable, but the industry clearly did not. They knew they could not go ahead without a subsidy and that subterfuges like charging too little for dealing with the waste were not going to be enough to make up the difference. So while Centrica, Hitachi, E.On and RWE all expressed some level of interest, only Electricité de France (EDF) is currently negotiating with the government.

That leaves the UK in a very weak position; having committed the nation to nuclear without a plan B. The UK is falling behind other countries in developing renewables, and the government is not even standing up to the opponents of wind farms, many of whom are its own MPs. Many critics believe this is deliberate: just as the railways were deliberately privatised in a way that made it very difficult for a later government to take them back into public ownership, so the failure to promote renewables is intended to make the nuclear option the only available choice. Unfortunately, it also means the government cannot rely on the market to keep down the cost of nuclear power because there is no competition.

EDF has obtained planning consent for two reactors at Hinckley Point, which is on the Bristol Channel in the west of England. There are already two reactors on the site, one in the process of being decommissioned and the other scheduled to close down in 2023.

The government and EDF have yet to agree on the “strike price”. The term comes from the financial world but here it simply means the price that the company will receive for the electricity it generates, whatever the cost of other electricity may be. The price is fixed in real terms, i.e. it will increase with inflation but it will be paid whatever the wholesale price for other electricity is at the time. Since the contract will probably run for the unusually long period of 40 years, the exact figure chosen will be crucial. Clearly a strike price that is too high will be a massive subsidy for nuclear power. Forty years from now the chief alternative sources of energy will be renewables (with the necessary technologies probably imported from Germany and China, both of whom are actively developing them) and experience shows that the cost of generating electricity from renewables, unlike that of nuclear power, tends to fall substantially over time.

We must not confuse temporary subsidies to help new technologies like solar and wind to get off the ground, with permanent subsidies to support technologies like nuclear that will never pay their way (See [11] and ISIS’ comprehensive report [12] Green Energies – 100% Renewable by 2050).

Some numbers

What even the critics did not anticipate was how quickly an overt subsidy has appeared on the table. The negotiations are still going on, but here are some numbers to keep in mind. In 2008, EDF told its investors that it could produce nuclear power at £45/MWh, [13]. In 2012, the head of EDF, Vincent de Rivaz, said that EDF would be asking for a strike price “lower than £140/MWh.”. According to reports, the government is hoping to offer not more than £100/MWh. We have no way of knowing how the negotiations are going, but if they settle at £110/MWh, that would represent roughly a 2.5-fold increase in five years.

In the White Paper [2], the construction cost of a 1 GW plant was estimated to be £2.8 bn. We are now told that the two at Hinkley Point will cost £7 bn each. Again, a factor of about 2.5.

When asked why the current estimates are so much higher than those of five years ago, de Rivaz explained that it was because “a lot of things have changed: four years inflation, cost of commodities, steel concrete. And it was based on Flamanville.”

That’s not very convincing. Total inflation over the period has been about 11% and steel and concrete have risen only slightly more than that. As for Flamanville, the 1.6GW nuclear power plant currently being built in France, this was supposed to cost €3.3bn and begin generating electricity in 2012. The latest estimate [14] is that it will cost €8.5bn (£7.1bn) and go on line in 2016. EDF claims that an important factor in the high cost of Flamanville is the “first of a kind effect”, but they and others now estimate that the two Hinkley Point reactors will each cost about the same as Flamanville, which rules that out as an explanation.

The bid for the 2012 London Olympics estimated the cost to be about £3.4bn; by 2007 this had risen to over £9bn. The government eventually reported that the total cost had been £8.9 bn [15] and expressed its satisfaction that the project had come in “under budget”. The budget it was referring to was of course the figure quoted in 2007, not the very much lower one on the basis of which the decision to bring the Olympics to London was taken. In the same way, when EDF announced in March 2012 that cost of the Flamanville reactor was being “revised”, they also claimed that it was “still on schedule”, even though no electricity is to be produced until 2016, four years later than had been promised [16]. What they meant was that there had been no further change since the last postponement.

When governments are deciding whether or not to commit themselves to a project, there is an obvious incentive for all concerned to be very optimistic about how much it will cost, how long it will take, what it will achieve, and what sort of profit margins the suppliers will expect.

Once the decision has been taken and the contractors are making bids on which they will be expected to deliver, the time for optimism is over. The industry will be looking for prices on which they are confident they can make good profits, and if the government still wants to go ahead with the project, the most it can do is to argue at the margins.

That would explain how the cost of building a 1.6KW nuclear power station can be estimated at £2.8bn in 2008 and £7bn in 2013. The former was considerably lower than any other estimate we could find at the time [4]; the latter seems to be in line with what others are suggesting. That is not to say that the current estimate is correct; nuclear power plants have a habit of taking far longer to build and costing far more than was promised, as Olkiluoto and Flamanville demonstrate all too clearly.

Finally, according to recent reports in the French press [17], EDF is considering giving up on the European pressurised reactor (EPR), the design used at both Flamanville and Olkiluoto and planned for Hinkley Point, and replacing it with a range of smaller reactors. If the UK government goes ahead with the current deal, we could find ourselves having chosen an expensive and out of date design that even supporters of nuclear energy will regret.

Now what?

There is still time for the government to change its mind. It has lost ground but it can still follow the Germans – and others, even the French (Fukushima Fallout SiS 51 [18]) – and invest in renewables. It would mean a loss of face; but because the rush to nuclear began under Labour and has continued under the Conservative/LibDem coalition, neither side will be able to accuse the other of a U-turn. The harder problem will be to overcome the cosy relationship that has been built up over half a century between the government, the military and the nuclear industry.

But that is no excuse for not taking the right decision. Not only is nuclear energy hazardous, it is not even better on short term economic grounds (see our recent report [19] Death Camp Fukushima Chernobyl – an ISIS special report, SiS 55).If the government signs up to a poor deal now, our children and grandchildren will be paying the cost for the next 40 or more years.

Further Reading:

One Comment

  1. Hi Prof Saunders
    A minor error you wrote:

    “EDF has obtained planning consent for two reactors at Hinckley Point, which is on the Bristol Channel in the west of England. There are already two reactors on the site, one in the process of being decommissioned and the other scheduled to close down in 2023.”

    Actually, we have 2 powerstations, each with 2 reactors, totalling 4 reactors at Hinkley.

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