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.

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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.

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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.

One of the few co-operatively owned wind farms in the country has almost finished raising its funds. Investors have put up £3m to buy two existing turbines in the Fens. Locally owned wind farms should be encouraged as a cost effective means of cutting emissions.

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About 100,000 people in Denmark own shares in wind farms. Although most of the newest developments have been financed in conventional ways, the early growth of wind power was largely driven by cooperatives. Individuals bought their stake and receive income from their investment. The arc of 20 wind turbines that sits outside Copenhagen harbour is a good example: 8,000 investors own 50% of the venture with a local utility owning the rest.

The Danish example has been copied by a small number of wind farms in the UK. Two years ago, Westmill Wind Farm in Oxfordshire raised £5m to build a wind farm on a hilltop site in the west of the county. After the money was raised, Siemens, the equipment supplier, told the co-operative that it no longer had any turbines for sale, having committed all its output to the US market. Negotiations eventually resolved the issue and the wind farm is now being constructed. It has 2,400 shareholders, most of whom live within a 30-mile radius. Shareholders typically invested £2,000 each. Additional finance was provided by the Co-operative Bank.

In recent months another co-operatively owned wind farm has been raising cash. The closing date for the share offer is 30 November, but the business looks as though it has got the cash commitments that it needs. The Fenland Green Power Co-operative has the rights to buy two 2MW turbines that have already been constructed near Deeping St Nicholas in Lincolnshire. The rest of the wind farm is owned by EDF and these two turbines were promised to local investors as part of the package that got the planning permissions several years ago.

The economics of the venture make investment reasonably attractive to local investors:

• The risk is negligible. The turbines are already working, and have produced almost as much power as predicted before they were constructed. Modern turbines are extremely reliable and should need very little unplanned maintenance for the 25 years of their life.
• The two turbines should produce about 11,200MWh a year in total. If the energy were sold by an independent entity on the spot market, the current value of this would be about £500,000 a year. The Renewable Energy Certificates (ROCs) that the co-operative is entitled to will also be worth about £500,000, making a total of about £1m of revenue.
• Probably to assist with debt financing, the venture has gone a different route and has sold the ROCs and the power to EDF. Its actual revenue is likely to be about £750,000.
• Operating costs are low and the cash flow before interest is likely to be about £500,000 a year. About £200,000 is kept as a sinking fund to repay the investors at the end of 25 years.
• The total cost of the project is about £4.4m, of which £3m is being raised in equity. With the leverage from the bank loan, the cash return to investors will be over 10% within a few years.
• Shareholder investments will benefit from 20% EIS relief, raising the prospective return to investors to more than 15% per annum over the life of the project.
• The principal uncertainty is the price that is obtained for the power when the initial contract with EDF has finished in some years time.
• For an investment that has a highly predictable and secure cash flow, the returns to individual investors seem attractive and better, for example, than typical corporate bond issues.
• The return on the Fenland investment is likely to be slightly better than the UK average. The percentage of peak output achieved by the turbines has been about 32% compared to the UK average of around 28%. (A turbine has a maximum power, reached when the wind is high, but not so high that the turbine is closed down. 28% is the typical yearly output compared to the figure that would be reached if the turbine was operating at full power all the time.)

Local ownership and the impact on public opinion
Some of the antagonism to wind farms arises from the perception that they are owned by large remote companies with no interest in the area. A large part of the opposition can be defused if the local community is offered a chance to participate in the financial success of the venture. Boyndie Wind Farm in Aberdeenshire, Scotland is also partly owned by co-operative investors as a result of a deal with the local community when the farm was constructed.

Most surveys show that about 80% of the population favours wind farms. A figure of about 60% or slightly more would be happy to have turbines within view. This second figure means that a substantial fraction of the affected population is likely to oppose wind farm plans. If neighbourhood opinion-formers had a financial stake in a successful wind turbine, their opposition might be more muted.

The Westmill wind farm in Oxfordshire faced serious local opposition during the ten years or so it took to get through the planning process. As the first wind farm in the UK designed from inception as a local co-operative, Westmill was blazing a trail, and most local residents probably did not understand that it might eventually be possible to buy a share in the venture. Once the Westmill model (pushed by an organisation called Energy4All) is well understood around the country, it should help wind farm proposals through the planning process.

Government, companies, and co-operative wind farms
In his November speech on climate change (see this edition of Carbon Commentary), Gordon Brown talked about onshore wind farms. He seemed to suggest that the government would be sympathetic to any schemes that improved the local acceptability of turbines. Perhaps he was hinting that the government would do more to assist co-operatively owned wind projects.

BT has announced it will attempt to set up 120 wind turbines on its properties around the country (see Carbon Commentary Newsletter #4). Its chances of getting these ambitious plans approved would be significantly enhanced if it brought in local investors at each of its sites. It might even be able to reduce the overall cost of capital for its wind plans by using equity money from private individuals, who might be willing to invest with expected rates of return no greater than the cost of bank debt.

The cost per tonne of carbon dioxide saved is low for commercial wind farms. I calculate that the Fenland wind turbines will typically save a tonne of CO2 per £36 invested. This cost is higher than the £8 that climate care might charge, but far below the price needed to subsidise small-scale home renewables. In windy areas, large commercial wind turbines, funded by the local community, are the most effective means of cutting carbon emissions.