In today’s Independent newspaper (London, Monday 23 February) I argue that we may need to accept some new nuclear power stations. I put forward the view that the trench warfare between the pro-nuclear groups and those that support renewables means that progress towards ‘decarbonising’ electricity generation in the UK is too slow. We probably need to invest in many different types of non fossil-fuel generation as rapidly as we can if we are to meet the tough targets for UK emissions reduction so painfully won by groups such as Friends of the Earth. We no longer have the luxury of ruling out nuclear expansion.

***

In this note, I want briefly to expand on this opinion. There are two parts to my argument – the medium term and the long term.

First, the medium term. It’s well known that a large fraction of the UK electricity generation capacity is scheduled to close between now and 2015. The Large Combustion Plant Directive (LCPD) obliges the coal-fired power stations that have not installed flue gas desulphurisation (FGD) equipment to close once they have worked for an additional 20,000 hours. (There are 8,760 hours in a year). In addition, the first and second generation nuclear plants are reaching the end of their working lives.

Over the last couple of years electricity demand has begun to fall slowly. December 2008 saw electricity transmission on the National Grid down almost 4% from the previous year. Some of this fall will be related to declining levels of economic activity and some to the historically high prices being charged. We cannot be completely certain but it also appears likely that some of the reduction is due to successful energy efficiency measures.

Nevertheless, even with stable or gradually falling demand, the UK needs more electricity generating capacity as the old plants are retired. The country needs new power stations both to meet existing needs and because we are likely to see the beginnings of large-scale use of electric cars within a decade. We may need eventually to add about 15% to our electricity production to cope with the needs of car batteries. In the past the government has said that we need 25 gigawatts of new capacity within twenty years, and I think that this number is still broadly correct. (25 GW is approximately a third of all current UK generating capacity.)

Where is this new capacity going to come from? Without nuclear, we are going to struggle to avoid relying on new fossil fuel plants. By 2020-25, we will probably have viable carbon capture technology so that new power stations then will not be major carbon emitters. This is ten to fifteen years away. The current problem is a slightly different one. At today’s fuel and carbon prices, the most profitable way to generate electricity in the UK is to burn coal (almost pure carbon) rather than natural gas (which is mostly hydrogen).

A year ago almost to the day, I walked round Didcot A Power Station, one of the largest and most polluting of the UK’s coal power stations. It had barely worked all winter. The price of coal was high, and emissions allowances were trading at above €25 a tonne. RWE, its owner, could make no money from producing electricity from coal. Gas-fired stations were operating instead. The world price of coal then collapsed and now stands at little more than a third of its peak price.

The chart below shows a sample of recent US prices (www.eia.doe.gov), where the price decline is slightly less apparent because much of the coal produced in the US isn’t open to the impact of rapidly declining international prices. Coal for UK power stations is, with most of the tonnage bought from Colombia, South Africa, and Australia.

Click to enlarge

Similarly, the price of European emissions permits has sunk precipitously, although there has been a slight rise in recent days back to around €9. Taken together, these two forces mean that power station operators are making a fortune from burning coal. But why does this matter if much of the capacity has to close anyway in the next few years as result of the LCPD?

The problem is that the generating stations don’t actually need to close. The press always reports this incorrectly. The LCPD obliges plants without FGD to close. But even as I write this, the analysts at the UK’s big six energy suppliers will be carefully calculating the cost of installing FGD on plants like Didcot. It’s very costly, but small compared to the profits they are now making from coal. In the next few months expect several of the UK coal-fired stations without FGD to announce that they will install this equipment before the 2015 deadline, instead of closing as expected. There’s still plenty of time.

The current economic slowdown has given us this gloomy combination – cheap coal, inexpensive CO2 permits, and relatively low wholesale electricity prices. The implications for the UK’s CO2 emissions are awful. If Didcot and other plants stay open, we are setting back the decarbonisation of electricity by a decade. Offshore wind, everybody’s favourite candidate for low-carbon generation, cannot possibly compete with coal-fired generation at today’s electricity and CO2 permit prices. Wind is subsided by the ROC system but even with these subsidies, the realised price is not enough to persuade banks to lend to the giant £1bn+ projects off the Kent coast and elsewhere.

So, to summarise, in the medium term, we need nuclear as fast as possible because otherwise we get more coal. Nobody concerned about climate change can regard the 8 GW of coal plants without FGD staying open with anything other than horror. I haven’t done the calculation carefully, but the effect of this might be to add 10% to UK emissions, compared to zero or low-carbon alternative ways of generating electricity.

But what about the cost of nuclear power? This blog has had several articles in the last year that look at the price of the new Finnish reactor, now several years and several million euros over budget (see here and here). I can see no reason to believe that nuclear construction in the UK will not be dogged by similar problems as in Finland. The next generation of nuclear power stations (principally the Areva EPR) are likely to cost over £4bn and possibly as much as £5bn for 1600 MW plants. Although construction processes may improve and regulatory costs decline, the EPR will probably deliver electricity at over 7p per kilowatt hour, twice what it costs to produce coal-fired electricity today. This means, as some of the big six electricity companies seem to be telling government already, that nuclear will need guaranteed pricing. EDF told me that nuclear power will cost 4.2 to 4.5p per kilowatt hour but the other companies were quietly very much less optimistic. If today’s prices persist EDF may possibly build nuclear power stations without financial guarantees; the other potential operators simply will not.

Therefore I am afraid that not only will we need to encourage nuclear power but we will also need to give the operators guaranteed prices for their nuclear output, and at levels well above today’s standard wholesale prices. By the way, we’ve got into this mess simply because we didn’t invest heavily enough in onshore wind, tidal or wave power in the last two decades. The various virulently anti-wind bodies, such as the Council for the Protection of Rural England, should be ashamed of themselves. But it’s too late to do anything about it now.

Second, the longer-term need for nuclear. David MacKay’s book Sustainable Energy – Without the Hot Air has many telling illustrations. One of them is an Ordnance Survey map on which Sizewell nuclear power station is shown. Sizewell generates 3% of the UK’s electricity in an area of a few hundred hectares. To generate as much power with wind would require about 2,500 very large turbines. (All the wind turbines currently working in the UK deliver less electricity than Sizewell.) 2,500 turbines will use about 40,000 hectares of good hilltop land or about 0.2% of the UK. Personally, I would rather have the turbines than Sizewell, but I’m aware this opinion is not shared by the majority of the UK population.

Professor MacKay uses this comparison to point out how much land area is used by renewables and how many turbines and other devices we need to replicate the output of one large power station. The implication of his clear and rigorous analysis is that we will struggle to cover our energy needs (not just electricity of course) from renewables. To get to the Climate Change Committee’s target of no more than 20% of today’s emissions by 2050, we may need to accept nuclear. (In my book Ten Technologies to Save the Planet I try to show how it is possible to cope without nuclear, but I readily accept that the target is tough to achieve.)

Mark Lynas makes an analogous and wider point. He says that renewable technologies will generally have a much greater impact on ecosystems than nuclear energy. What is better, he says: vast biomass plantations with minimal biodiversity or a single nuclear plant? Hundreds of thousands of wind turbines or twenty nukes? In his view, the increasing pressures on the world’s ecology from human activities make it difficult to conclude that nuclear is the wrong answer. He’s not just talking about climate change, but the other main global boundaries of limited water supply, species loss, the abuse of the phosphorus cycle, and other problems.

I’m not quite sure I entirely agree with Mark Lynas, but I do think that the public debate needs to move beyond the ritualised and stale statements of both the pro- and anti-nuclear groups. Nuclear is costly, the new EPR technology is untried, and waste disposal and the proliferation of weapons grade fissile material remain serious issues. But we are making so little progress with other technologies that I reluctantly conclude that we also need to sponsor nuclear power in the UK.

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[1] 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.

Footnote
[1] The Future of Nuclear Power: The Role of Nuclear Power in a Low Carbon UK Economy, May 2007 [accessed 1 January 2009].

***

Governments in the past have invested in public works programmes as a way of getting economies moving. These investments have often resulted in permanent benefit to their societies. Take the massive projects set up by Roosevelt in the United States. The great hydro-electric dams of the American south and west were all funded by the public purse. They gave employment to many and provided cheap electricity for millions.

The government has decided to copy this far-sighted programme in this country. In the 1930’s hydro-electricity represented a good choice for producing electricity. Now the answer is nuclear and we have decided to make the construction of new power stations your government’s priority for a British version of the New Deal. British Energy’s new owners, Electricité de France have agreed with us a programme to bring forward the construction of two new nuclear power stations. These two plants will provide many thousands of jobs and allow us to construct the electric generating capacity that this country so urgently needs.

As is well known, EDF has strong links through their mutual shareholder, the French state, with Areva, the world’s most experienced nuclear construction company. EDF has kindly asked Areva to quote for these two nuclear power station and to go ahead immediately and construct them within the next five years, or, if this is not possible, as quickly as they can manage.

Short-sighted critics will complain that Areva’s track record is indifferent. They will point to ever-lengthening delays at Areva’s new Finnish power station. Only a fortnight ago, they will carp, the Finns announced that the plant won’t even start full testing until 2012, or almost 4 years later than expected. We should regard the fact that construction is going to take twice as long as predicted as good news, since it maintains employment levels for far longer.

Let me move on to the issue of employment levels. The Finnish plant was initially only supposed to hire 2,000 workers at the period of peak construction. There are now 4,000 people working there, showing what wonderful job creation schemes nuclear power plants represent. Of course, very few of these people are actually from Finland even though the Finns will pay much of the construction cost. More of the workforce actually come from Poland, easing unemployment worries in that country. The repeated concerns expressed by the Finnish nuclear safety inspectorate over the quality of the welding done on the crucial safety systems by the Polish subcontractors are entirely unwarranted. I think most householders in this country can confirm that most Polish staff are actually reliable and hardworking. If they can repair British central heating boilers, they can certainly manage to build nuclear pipework intended to carry superheated steam for sixty years.

Other moaning minnies have pointed out that Japan Steel Works operates the only foundry in the world that can cast the reactor pressure vessel and it already has a full order book for many years to come. This is the kind of unhelpful remark based on factual evidence that makes energy policy making in this country so difficult.

I also hear people grumbling about the cost of nuclear. But the Finns got their plant on a fixed price contract. A bargain at only €3bn, in fact. Like you, I have seen rumours that the actual cost will be well over €6bn, but we should not be worried because the French state is generously picking up the tab for the excess. In fact, the French are so unconcerned that they are helpfully refusing to tell the Finns just how much the cost overruns are. We can only hope that it will be similarly profligate when it comes to building our new nuclear power stations in the UK.

Although it may indeed be the case that the full cost of at least €6bn for each power station would buy far more power from wind turbines, there are fewer large companies eager to lobby us to allow this to happen. We have therefore decided that the best way forward is to provide immediate approval for EDF’s nuclear construction programme as part of our enhanced public works project. I can provide a binding commitment to you today that the public will – as usual – be consulted well after all important decisions have been made.