Chris Huhne's statement on nuclear, October 18th 2010

Chris Huhne’s announcement of a further consultation on the government’s National Policy Statements on energy gave him  a chance to clarify the stance on the provision of ‘subsidy’ for new nuclear power. His parliamentary statement says that

  • there will be ‘no public subsidy for new nuclear power’
  • this means ‘no levy, direct payment or market support for electricity supplied or capacity provided’
  • Unless, and this is a very big unless, ‘similar support is also made available more widely to other types of generation’
  • And, moreover, he is ‘not ruling out action by the Government to take on financial risks or liabilities for which it is appropriately compensated or for which there are corresponding benefits’.

What lies behind this new declaration? It suggests that the government will actually be prepared to provide financial support in the form of

  • a guaranteed  carbon price (because this will affect all electricity generators equally)
  • and/or guarantees for capital raising, probably in the form of credit insurance (because such insurance would ‘appropriately compensate’ the government for the risk)

Carbon price

This web site has previously suggested that the carbon price necessary to get new nuclear construction in the UK may be as high as £110/tonne of CO2. (A similar figure is probably needed for offshore wind, which is currently being subsidised through the alternative mechanism of Renewable Obligation Certificates – ROCs).

This high figure is driven by the cost of the construction of the new Areva EPR reactor in Finland and its implications for what a similar reactor would cost in the UK. Areva recently announced that it now made provisions against the cost of finishing the Finnish contract of €2.6bn, implying that the total cost of constructing the OL3 plant is thought to be at least €6bn.If EDF and the other potential operators of new nuclear in the UK believe that UK reactors will cost this much, then the floor for the carbon price will indeed need to be at least as high as £110 a tonne.

Areva’s latest financial presentation admits that the second EPR site at Flamanville in Normandy is likely to cost almost as much as the Finnish reactor. But the two other reactors being built at Taishan in China look as they will be constructed at much lower cost. Areva’s own estimate for the total bill in China is about €1,500 per kilowatt, or about €2.5bn for the 1.6 gigawatt plant, about 40% of the Finnish cost. If the construction cost were similar in the UK the required carbon price to incentivise EDF would be very much lower than the £110/tonne of CO2 that I suggested earlier. The figure would be nearer £50/tonne.

Will the cost of UK reactors be more like Finland or China? Does the huge reduction in EPR cost in China arise because of lower local labour costs or because Areva has effectively learnt the lessons of the utter financial disaster at OL3? Will Areva continue to reduce the cost of the EPR as it gets more skilled at managing costs downwards? These are the critical questions that face EDF’s nuclear team in the UK.

Here’s what the respected nuclear industry construction cost sceptic Professor Steven Thomas said The future of the EPR is clearly in doubt. Construction work on the two orders in Europe has gone appallingly wrong, the process of getting generic safety approval (in the US) is long-delayed and continues to throw up serious unresolved issues, and estimated costs are continuing to escalate at an alarming rate’.

Credit insurance

The UK has previously indicated a strong preference for a high carbon price to provide the umbrella under which nuclear power stations can obtain financing. The US has favoured credit insurance, with the government taking a risk on the construction costs. The last few weeks have seen setbacks for this policy as the potential nuclear operators have backed away from nuclear construction, partly in light of the high price for the insurance.

The Calvert Cliffs 3 project was a flagship for the federal government’s quarantee programme. (Credit insurance quarantees the lending backs repayment of the debt from constructing a nuclear power station). It collapsed in early October as the consortium backing the plant finally faced what had long become obvious: the likely cost of the government loan guarantee (said to be more than 8% of the construction cost) was crippling. Add in the recent clear declines in electricity demand and rising shale gas production and it seems to no longer make financial sense to use new nuclear power in the US. The other three or four projects negotiating for federal guarantees are also likely to fall away.

The upshot of all this is that the UK government’s promise not to ‘subsidise’ new nuclear is looking increasingly incompatible with rapid progress on construction of Areva EPRs (or the Westinghouse equivalent) in the UK. If we want nuclear, 'subsidy' is inevitable.