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.

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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].

Nuclear power may or may not be an unfortunate necessity. But a look at Finland should temper any optimism about construction costs.

The government’s decision in early January 2007 to support (or, more precisely, not oppose) the construction of nuclear power plants in the UK prompted strongly felt responses from all sides. To the electricity generating industry, nuclear power represents an attractive way of reducing emissions. To most – but by no means all – environmentalists, the push for more nuclear power is both a mistake and a missed opportunity: a mistake because no country has yet shown that nuclear waste can be stored effectively, and a missed opportunity because nuclear baseload generation reduces the incentive to develop wind and tidal power.

This article looks at what we can learn from the building of the nuclear power station at Olkiluoto (OLK3) on the western coast of Finland. The ground works started here in early 2004 and the plant is now due to open in 2011. Does this project give us confidence that nuclear power stations can be constructed at a reasonable cost and to a reliable timescale?

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OLK3 is Europe’s first new nuclear reactor for over a decade. The UK’s Sizewell B plant was commissioned in 1995 and since then most nuclear construction has been in Asia.

There are four existing nuclear reactors in Finland, operating on two sites. These reactors generate about 25% of Finland’s electricity. The OLK3 project is located at an existing nuclear site and will provide a further 15% of total national power needs.

After regulatory inquiries lasting many years, construction was approved in 2001 and the preparatory site works started in February 2004. The contract with the French nuclear company Areva is a fixed-price arrangement that sees the Finnish owner paying about €3bn for the 1,600 MW plant.

The site was handed over to Areva in February 2005 with the expectation that the plant would be completed in the middle of 2009. Areva had quoted a construction time of 54 months, or four and a half years, from when it first controlled the site. At the moment of handover, construction appears to have been on schedule.

Since February 2005, there have been five separate announcements from TVO, the plant’s eventual owners, giving details of the delays on the project.

OLK3 owner’s expectations of completion date

This table shows that in the 34 months since the Areva portion of the project began, the completion date has retreated by 26 months. Put another way, a 53-4 month project still has 44 months to run after it has been going for almost three years.

The reasons for the delays
Close reading of the press releases of Areva and TVO, and media comment, suggests a list of substantial problems with the project:

• Finnish and foreign subcontractors have been unable to maintain the quality of their work. Few European countries have recent experience of the requirements of nuclear engineering and the construction expertise simply isn’t available.
• Some of the early concrete pouring was done at a time of year when it was likely to absorb too much moisture. This error was eventually noted by inspectors, who required a replacement of large amounts of concrete because of its high water content.
• The Finnish safety inspectorate has been more rigorous than Areva expected.
• Some of the huge metal castings have not been made to the quality and tolerances expected.
• The detailed engineering drawings for the project have been slower to produce than Areva hoped.

Until August 2007, TVO seems broadly to have accepted that Areva was doing its best. But in its press release of that month, TVO shows its first signs of irritation with the French company, suggesting that Areva had taken too long to tell it of the further delays it was experiencing.

Plan of the new Finnish nuclear reactor at Olkiluoto (OLK3)

The Finnish reactor is a prototype. It is the first of its kind that has been built, though it is a refinement of a previous design. Some of the delays do appear to be an almost inevitable result of the lack of experience of the company and its subcontractors. The less than adequate manufacturing of components and the problems with concrete may be a result also of inexperience. The French also appear to have been surprised by the problems of obtaining full engineering drawings and getting approval from safety inspectors.

It is still early days on this, Finland’s biggest construction project, but there is no public evidence so far of any fundamental engineering problems. Although construction has been severely delayed and overruns have been substantial, there is no basis for concluding that Areva cannot construct a safe and well-functioning reactor here.

The financial consequences of the delays
The full cost of the project was initially projected a €3bn, although some of this was to be borne by TVO. Because it is a fixed-price contract, Areva has borne a large fraction of the cost of overruns. Examination of Areva’s accounts and press reports suggests that the company made provisions for extra costs of about €750m in 2006 and probably a similar amount in 2007. So the total cost may currently be standing at more than €4.5bn.

There is conflicting evidence on whether Areva is having to increase the resources on the project to get it completed by 2011. In early documents, the company referred to employing a total of about 2,000 people on the site at the period of peak construction (which is probably this year). The number present in late 2007 was actually already 2,600, and only about one third of the labour force appears to have been Finnish, suggesting a need to import skilled workers from abroad. Other documents suggest large numbers of employees came from Poland, France, and Germany. As the project has progressed, the percentage of foreign workers on site has gradually increased.

The construction is financed by highly subsidised debt provided by a German bank as an export credit funded by the French state. (This arrangement is under EU investigation since export credits are usually only granted for sales outside the Union.) The interest rate – of less than 3% – is far lower than would have been granted if the banking had been done on commercial terms. The rate of bank interest matters greatly on long construction projects. If Areva is paid by TVO on completion of the power station, and the proper interest rate is, for example, 7%, then a year’s delay might add as much as 7% to the cost of the project. OLK3 is already three years late.

Add the various extra costs together, and the total bill for OLK3 will probably eventually exceed €5bn or even €6bn. If it had been financed on commercial terms, the cost would have been even greater. An overrun of this size is by no means unusual in nuclear construction (see Greenpeace’s analyis: ‘The Economics of Nuclear Power’ [accessed 14 January 2008]). At this price, the capital cost will exceed €3m per MW of capacity and may rise as high as €5m.

The implications for any UK nuclear power programme
The Finnish power station may or may not be representative of problems likely to be experienced in the UK. In the last few months, Areva has begun construction of a second power station at an existing nuclear site in Normandy. The projected cost is €3.3bn and the construction time is estimated at 60 months or less. In other words, Areva is sticking with the numbers it produced when it won the Finnish contract and not suggesting that the actual experience there is likely to be a better estimate of the real cost.

But whether Areva now feels it has learnt the lessons from OLK3 or whether it is simply being excessively optimistic, the UK represents an entirely new challenge. Construction costs tend to be high and overruns are almost inevitable. Labour productivity levels are low, and project management skills are woefully lacking. It would seem prudent for Areva to offer a price in the UK that is at least 20%, and possibly 50%, above the levels it charges in the rest of Europe.

Areva reports that it has had enquiries from eleven utilities interested in having the company build a reactor in the UK. The company expects to build four or six nuclear power stations in the UK. Would they make financial sense? If Areva does achieve a cost of €3.3bn in France and a construction time of less than 5 years, nuclear energy probably costs less than 2p per kilowatt hour. This beats any alternative technology. Onshore wind is certainly more expensive. But if the true cost is actually double or triple this figure (which it most certainly would be if the Finnish experience is the right guide and we added a premium for the UK) then both onshore and just possibly offshore wind look better in strictly financial terms. A decision by a utility to press ahead with Areva’s nuclear design (which is by far the most likely to be adopted in the UK) is, quite simply, a financial gamble on whether Areva’s Normandy cost projections are correct, or whether the actual UK figure will be the Finnish cost inflated by a UK premium and the commercial cost of capital.

This is before considering the unresolved question of how we store radioactive waste.