Until this week, we thought that Sizewell B was likely to be the most expensive nuclear power station built in the UK. Image source: World Nuclear Association.

The Guardian newspaper of Monday 19 October broke the story that the UK government is preparing to guarantee a minimum price for carbon dioxide emissions to encourage the development of nuclear power stations. Putting a high cost on greenhouse gas emissions from power stations will force up the wholesale price of electricity, ensuring a better financial return for nuclear power stations (and for renewables such as wind). The decision to create a floor price for carbon demonstrates that the full costs of nuclear technology are probably well above today’s wholesale electricity prices. We may well need nuclear power but we are going to pay heavily for it. The government’s optimistic noises from 2006 to the middle of this year about the commercial viability of nuclear power have turned out to be wrong.

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More generally, this note argues that the failure to incentivise nuclear construction in the current liberalised electricity regime may oblige the UK to introduce high guaranteed ‘feed-in’ payments for all low-carbon generators, including the very largest power stations. Guaranteed tariffs may be a more effective instrument for incentivising low carbon generation than the carbon dioxide price.

2006 government views on the costs of nuclear
In September 2006, David Kennedy, then a senior civil servant in the UK Department of Trade and Industry (now BIS) and currently the chief executive of the Climate Change Committee, submitted a paper to an academic journal on the economics of nuclear power.[1] The paper was published the following year. In the paper Dr Kennedy looked at the likely costs of building new nuclear plants in the UK. He then used these estimates to say what the wholesale price of power would need to be to encourage the building of new nuclear power stations.

Table 3 of his robust and cautious paper contained 10 estimates from independent external sources of what is called the ‘levelised’ cost of electricity from new nuclear. ‘Levelised’ figures spread the costs of a power station over its expected lifetime generation of electricity and account for matters such as the deconstruction of the power station at the end of its life. An interest rate is applied so that money spent now is given a higher weight than the money expended in sixty years’ time.

The ten estimates quoted by Kennedy were as follows:

The average was £30 per megawatt hour (mWh). This is equivalent to 3p per kilowatt hour. For comparison, current UK retail prices for electricity are about 13p a kilowatt hour.

Dr Kennedy’s paper went on to provide a more conservative figure that UK policymakers might use. He assumed a cost of £37.50 per kilowatt hour. The analysis also suggested a figure of £43.70 as an ‘extreme’ high case.[2] The wholesale price of electricity, at least as shown in medium-term contracts to buy and sell power, varies between about £50 per mWh and about £60.[3] Ofgem’s recent energy market scenario report also suggests a figure of about £60 for late in the coming decade when the first new nuclear plants might be starting to generate. So readers of Dr Kennedy’s paper would have assumed that nuclear power is profitable at current market prices and at projected future levels. Indeed, government policy-making from 2006 to 2009 has explicitly assumed that nuclear is ‘cost-competitive’ with other forms of generation such as gas and coal.

The views of the Committee on Climate Change, December 2008
By late 2008, the Committee on Climate Change (CCC) had a very slightly different view:

Current estimates of the likely cost of generating electricity from new nuclear are in the range 4-5p/kWh (£40-50 per mWh). These cost estimates are higher than typically produced two to three years ago, as a result of the significant increases in steel and other component prices, and of significant supply bottlenecks which have emerged as demand for new nuclear power station construction has come up against a limited capacity supply industry.

But fossil fuel price increases over that period have produced an even greater increase in the cost of fossil fuel based electricity, and the relative cost position of nuclear has therefore improved.

Less than a year ago, the CCC was saying that nuclear was the lowest cost generating plant for power generation even though its estimates were higher than Kennedy’s figure of two years earlier. ‘4-5p’ per kilowatt hour for nuclear compared favourably to more than 6p for gas generation and more than 7p for coal. Its view was unambiguous:

Nuclear power is competitive with both coal and gas-fired generation in the central fossil fuel price scenario even without a carbon price.

The Guardian’s news story
In October 2009, if the Guardian reports are accurate, the government is admitting that nuclear is not able to compete with fossil fuels except with protection from a high carbon price. The newspaper mentions a figure of €30 a tonne, compared to today’s price of CO2 emissions permits in Europe of about €13 a tonne. This levy will be added to the cost of using coal as a fuel for the power station and the effect will be to increase wholesale prices.[4] A €30 price for a tonne of CO2 will add about £20 to the cost of producing a mWh of coal-generated electricity.

During the course of 2009 the implied cost of nuclear power has risen from being no worse than competitive with gas and coal (at a zero carbon price) to being €30 (£27) per mWh more expensive.

Put at its simplest, the progression in nuclear cost estimates is therefore as follows:

* £20 for the carbon permits to produce a mWh of coal-fired electricity added to the current wholesale price of £50 or future prices of £60 per mWh. Assumes that that the €30 a tonne figure suggested by the Guardian is the level required to cover the ‘levelised’ costs of nuclear power per mWh.

For reference purposes, it may be helpful to know that the last nuclear power station built in Britain, Sizewell B, has levelised costs in today’s money of about £60 a mWh, or somewhat less than the apparent current projections of nuclear costs but higher than any of the government figures from the 2006-8 period.

Why is this important?
Nuclear power has gone up in price, probably by a factor of between two and three above what was expected even a few years ago. This is no surprise and even this blog predicted such figures early this year (see here and here). The continued problems at the new Finnish nuclear power station raise the strong suspicion that cost estimates will rise further in the future.

More generally, the Guardian report buttresses the case of those who say that the UK needs a guaranteed floor on the carbon price urgently. Today’s gas prices are very low by recent standards and depressed world economic growth may cause this to continue. The rational investor is therefore looking to build new combined cycle gas turbine power stations to profit from these low fuel prices. This runs the risk of either locking the UK into carbon-emitting power generation and/or shortages of power if the current glut of gas reverses unpredictably or if emissions targets oblige the generators to curtail production. But, as it stands today, the generators are queuing up to build unabated gas power stations. At today’s gas and carbon prices not only nuclear power but coal with carbon capture is looking very expensive.

The EU’s decision last week to back Powerfuel’s Hatfield coal gasification (IGCC) plant is welcome, but the project may only make financial sense with carbon prices at least as high as needed for nuclear power. Powerfuel’s proposed technology is still largely unproven at the scale envisaged and it may well turn out to be far more expensive than expected. There are many sceptics out there around the world saying that IGCC with capture will be even more expensive than nuclear. And offshore wind, today buttressed by a temporary increase in renewable subsidies in the UK, will need similar long-term incentives.

Are there any solutions?
My strong sense is that the woefully slow progress in developing new UK sources of low-carbon electricity might possibly be remedied by agreement between the main UK political parties on a high and semi-permanent carbon tax, probably of at least £40 a tonne. This may imply an increase in electricity costs of about 3 pence per kilowatt hour, a painful jump on already historically high levels.

Or – and this runs completely against the spirit of electricity market liberalization over the last twenty years – it may be simpler to copy the micro-generation feed-in tariffs scheme and offer a stable and guaranteed price for low-carbon electricity sources constructed in the next fifteen years, perhaps with higher prices for the first 10, 20, and 30 gigawatts of capacity constructed. The early rate might be £80 per mWh for nuclear, £90 for coal with capture, £70 for onshore wind, and £100 for offshore. The effect of this measure will be to unwind the working of the free(ish) markets in electricity generation and retailing. Few people may yet be willing to contemplate such a massive change, but even enthusiasts for liberalised energy markets must surely admit that the inability to incentivise the construction of nuclear, coal with CCS or even wind under the current system is indicative of a market failure of dangerous and unprecedented proportions.


Footnotes
[1] David Kennedy, ‘New nuclear power generation in the UK: Cost benefit analysis’, Energy Policy, 35.7 (2007), 3701-16.
[2] Kennedy 2007: 3709.
[3] Drax power station, by far the biggest in the UK, records in its latest financial statement of August 2009 that the average price it has sold electricity in the forward market for 2011 is £60.30 per mWh.
[4] This requires the assumption that coal power stations are pressed into service last: after gas and renewable (i.e. in economist’s language, coal stations are the ‘marginal’ producers).

Power Station 571 aka the solar panels on my roof.

People like me who buy solar panels tend to become unreasonably fond of them. Many homeowners come to regard these silent blocks of silicon on our roofs as part of the family. I’m also particularly proud that our panels are registered at Ofgem, the utilities regulator, as Power Station 571. The reason for going through the cumbersome process to convince Ofgem that my silicon should be listed alongside Drax and Sizewell B was to benefit from the government incentive scheme for renewable electricity generation.

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I am meant to get a cheque every year as a payment for the electricity that panels generate. But I have never had a penny. The large generators get paid reliably every month but my many attempts over the last couple of years to collect the money I’m owed – not a lot, it has to be said – have failed. It hasn’t been for want of trying. My file is full of faxes (remember them?) submitted and then resubmitted at Ofgem’s request, notes of endless telephone calls, and a futile attempt to appoint Southern Electric as my agent. The regulator’s excuses have been many and various: the faxes were lost, the computer system had been changed, the manager left, the numbers had to be checked, or Southern Electric hadn’t sent through some details properly.

Because I have a professional interest in how the government support scheme for renewables works, I have persisted long after a more rational individual would have given up. The latest excuse – provided today – is that one of the other ‘microgenerators’, as we are respectfully called, has emigrated to Australia meaning that a batch of approvals can’t be completed. I have a sneaking suspicion why this family left its beautiful silicon panels behind. Dealing with Ofgem would make any sane person eager to get as far away as possible. Perhaps as they got on the plane these hapless microgenerators gave a shout of relief as they left the regulator and its absurdly malfunctioning systems behind. ‘Don’t worry about the money – we never wanted it anyway – just use it to reduce the national debt,’ is what they probably said.

I went to the regulator’s annual report on the renewable payments scheme to see if there were any clues as to why us pioneers are suffering. What I read there was truly humbling. I may resent the ten or twenty hours I have spent in the last year chasing my £66.43. But Ofgem is upset as well. The report crossly says that the 1,000 or so microgenerators in the UK cost the regulator £600,000 last year in staff and office costs. That’s £600 per generating site, ten times the money they owe me. I may have been frustrated by the time I spent chasing my payment, but they appear to have spent days and days justifying why the money hadn’t been properly sent to Power Station 571. In fact, Ofcom unashamedly comments that cost of generators like me was substantially more than the value of the electricity we produced. Between the thousand of us we generated about 8,000 megawatt hours, or just about enough to cover the electricity needs of 200 homes or a large secondary school. But Ofcom has a section of five or ten people responding to our complaints and trying to find new reasons not to send us the cash. Reading between the lines, the regulator is trying to tell government that it is fed up with dealing with us and our miserable dribbles of electricity. Heaped on the superstructure of baffling incompetence is a new threat. Apparently, Ofgem is worried that some naughty microgenerators have been exaggerating their production figures. A new team of crack auditors is to be formed to visit places like Power Station 571 to ensure we are correctly completing our forms. Next year perhaps it won’t cost £600 to make life difficult for the average microgenerator, it will be £800, £900, or even more.

I therefore have a simple proposal to help all of us. Instead of locking us in continuous disputes about a few tens of pounds, Ofgem should close down its microgeneration section, and hand £300 a year to anybody who can show them a photograph of solar panels or a wind turbine on their roof. We gain, Ofgem gains, and the taxpayer gains. We might even get the family in Australia to come back.

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.