The fall in the pound’s value undermines any financial case for nuclear energy
|Copyright: Joe Gough – Fotolia.com.|
The UK government’s enthusiasm for the construction of nuclear power stations is based on a May 2007 consultation document published by the Department of Trade and Industry (now BERR). This paper argued that nuclear offered a financially viable way of generating electricity, broadly competitive with fossil fuels. It correctly pointed out that the cost of nuclear energy is largely determined by how much a plant costs to build, not by uranium prices or by the price of disposing of nuclear waste.
Since the government’s paper, nuclear power has suffered two huge blows. First, the pound has declined in value against the euro. This makes the core components of a nuclear power station more expensive as they are priced in the European currency. Second, the construction of the new nuclear power station in Finland has descended almost into farce as costs have ballooned and progress has slowed. The Finnish power station is much the more advanced of the two new nuclear plants currently under construction in Europe. If Finland is any guide, nuclear power is far more expensive than anybody expected.
Taking these two points in reverse order:
The Finnish debacle
The French nuclear specialist Areva signed a fixed price contract with the Finnish consortium TVO. The value was about €3bn, in addition to the costs that TVO incurred readying the site for construction work and taking the plans through the Finnish approval processes. Areva has since taken several financial provisions in its accounts, reflecting the problems it has faced in completing the work to its initial budget. A provision is a way of recognising that a firm is going to make a future loss on a contract. So, for example, banks make provisions when it is apparent that a loan to a near-bankrupt company is unlikely ever to be repaid.
Areva is largely owned by the French state, although some of its shares are held by investment institutions and others. In the Anglo-Saxon world, having private shareholders would oblige the company to state the absolute size of these provisions. In France it is different and Areva has consistently refused to state their actual size. But the French press recently offered the opinion that total provisions may now be €1.5bn, suggesting that Areva thinks that the total cost of fulfilling the contract is already €4.5bn, a rise of 50% on the initial price.
This will not be the end of the matter. Areva has recently indicated that the final completion date of the plant will be sometime in 2012, making the station over three years late. Any further construction problems will raise the total eventual cost yet further.
Late December 2008 saw a flurry of comment from Areva and its customer. Areva has accused TVO of failing to expedite some of the crucial technical approvals. In particular it seems to be saying (if I understand the French correctly) that TVO has failed to pass requests for safety clearance on to the Finnish nuclear regulator). TVO has denied this, but Areva has nevertheless asked for the formal appointment of an arbitrator. The arbitrator will decide whether TVO should bear some portion of the cost of the construction overruns. Areva’s language is increasingly unbusiness-like. It now says that:
‘seul un changement majeur du mode de fonctionnement de TVO permettra de figer un calendrier de projet’. (Roughly translated – ‘only a major change in the way that TVO works will allow a solidification of the timetable of the project’.)
In other words, even the 2012 completion date will not be achieved if the current poisonous relationship between Areva and TVO persists.
So it is not unreasonable to expect that the current €4.5bn cost will rise still further, perhaps by billions of Euros. But let’s be optimistic for once and say that the total construction cost of this plant will be €5.2bn including the initial design work, the groundworks and all the other costs borne by TVO and not Areva. This figure breaches the highest of all the cost estimates produced in the UK government consultation paper. (The DTI described the degree of prudence in its high case as ‘extreme’. This turns out to be wrong.)
The value of the euro
If the Finnish construction costs were replicated in the UK, and the euro/pound exchange rate had remained at around £1/€1.50, the cost of the project would imply a cost to generate electricity of over £50 per megawatt hour. This is more than the current wholesale price in the UK (although the wholesale price has been much higher than this figure for most of the last 12 months).
In the last days of 2008, the pound/euro exchange rate has hovered around 1.03. At the time of the 2007 consultation paper, the government used a figure of almost €1.50/£1. This change has added over 40% to the cost of constructing a new power station. Expressed in terms of UK pounds, the €5.2bn prospective cost of the Finnish power station now implies a price in UK£ of about £5bn rather than about £3.5bn. This raises the prospective cost of electricity generated by the nuclear power station to around £70 per megawatt hour, or over £20 more than the current wholesale price. To be clear, at today’s electricity prices and exchange rates the operator of a nuclear power station built for the same price as the Finnish plant would lose £20 per megawatt hour. No rational electricity company intent on making a profit would contemplate making an investment in a nuclear station if these conditions persist.
The UK government Climate Change Committee issued a long report in December 2008 on how Britain might reduce its greenhouse gas emissions by 80% between 1990 and 2050. Nuclear forms an important part of these plans. Unsurprisingly, the Committee used a nuclear cost estimate of less than £50 per megawatt hour. The bad news from Finland is only slowly leaking out and, of course, the pound/euro rate changes sharply from day to day.
The net impact of these two changes
At the time of the 2007 government report, the potential operators of UK nuclear power stations estimated that the costs of running a plant would be less than £30 per megawatt hour, or considerably les than half the costs they are now likely to experience. Those electricity companies who so enthusiastically promoted nuclear power to the UK government would now be unable to make money at today’s power prices. In fact, they would lose hundreds of millions of pounds a year at each power station that they opened.
So will the nuclear ambitions die? We don’t know. The companies could invest in the expectation that power prices will rise substantially over the next few years. Or they could assume that the pound/euro exchange rate will revert to about €1.50/£1. Both are risky assumptions when considering a £5bn bet. Unless the construction of new stations is guaranteed by the UK state, nuclear construction will not take place in the UK at Finnish prices or current exchange rates. It would even be cheaper to build coal-fired power stations with carbon capture and storage.
The fall in the value of the pound also adversely affects the price of not just nuclear but also of other power generation technologies tied to the euro. Wind turbine prices, for example, have risen in price. The change in the exchange rate will hold back the development of many different types of low-carbon technologies. On the other hand, it provides an added incentive for electricity generation from tidal or wave generators, whose costs are partly denominated in pounds rather than euros.
 The Future of Nuclear Power: The Role of Nuclear Power in a Low Carbon UK Economy, May 2007 [accessed 1 January 2009].
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New book from Chris Goodall
- @kirstygogan @Roddy_Campbell MottMac said around £350/MWh based on 2009/10 numbers. Didn't predict speed of decline. But did anybody? 3 days ago
- @DrChrisJardine Not quite the approach I used. My method was to say if you used EdF's target return would large solar make money? Answer=yes 3 days ago
- @DrChrisJardine Chris,I politely differ. Put solar in field and works for 30 yrs.Nukes threatened by public opinion, fuel prices, accidents 3 days ago
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