Taxed out of existence?15 September 2016
A potential nuclear decommissioning tax levied at German power generators by the country’s government is causing a stir and its ripple affect could be felt for years as Rumyana Vakarelska reports.
Germany’s nuclear operators, RWE, E.ON, Vattenfall Europe and EnBW, are facing a bill for €23.3 billion to set up a state- run fund to pay the costs of developing a final repository and packing and disposing of nuclear waste – including a €6.2 billion risk premium seen as a nuclear tax.
The proposal follows on from a German federal law adopted in July 2011, which stipulated that the country should permanently shut all of its nuclear power reactors by the end of 2022.
Germany’s nuclear utilities have already been putting aside funds annually for decommissioning and spent fuel storage, costs that they carry on their balance sheets. Currently, the four nuclear utilities have a total of €38.3 billion set aside in such provisions. In 2015, a German government report concluded that this would be sufficient funds to cover decommissioning and spent fuel storage, even if the cost is higher than initially expected.
KFK, the 19-member commission reviewing the financing of Germany’s nuclear phase out, has proposed that part of these provisions will remain with the utilities, who will retain responsibility for dismantling their reactors and packaging the waste. However, it recommended that a state fund be set up to cover the repository costs, requiring an immediate payment of €12.4 billion. A second payment of €4.7 billion to the new state fund will cover costs such as interim storage and packaging.
The decision presents two problems for utilities. First, the commission recommended that a 35% (€6.2 billion) ‘risk premium’ be added to the €17.1 billion payment, bringing the total to €23.3 billion. This was to avoid a situation in which German taxpayers might have to pay for decommissioning and spent fuel storage if a utility were to go out of business. According to the KFK, paying tax into a state fund will help utilities close the gap between provisions set aside and costs.
Secondly, the utilities have provisions to fund the decommissioning, but that does not mean they have cash to transfer. They will have to convert other assets into a form that can be transferred to the fund.
RWE responded to the proposal, earlier this year, saying that it did not object to a state fund but that the amount the KFK was proposing was too much. Moreover, RWE said the proposal will “overburden companies’ economic capabilities.”
In a separate joint statement, nuclear utilities Vattenfall, EnBW, E.ON and RWE said the new tax will also affect the energy companies’ economic capabilities and that KFK’s plan would go against the best interests of their employees, customers and shareholders. The companies say they are willing to negotiate with the government on the level of the risk premium for decommissioning and fuel storage and disposal.
The next step for the German Ministry of Economics and Energy is to report its recommendations to the government, which will seek parliamentary approval for the proposals by the end of 2016.
If the potential levy remains at its current €23.3 billion (€17.2 billion of existing provisions and the risk premium of 35% or €6.2 billion) it means that for their risk premiums E.ON will have to pay €2.66 billion and RWE €1.64 billion into the fund, according to an independent analyst’s estimate. Earlier estimates were higher.
Some KFK members wanted a risk premium of 50%, but agreed to compromise on 35%. “Through the new tax, the decommissioning costs for utilities are put aside”, said Tobias Muenchmeyer, deputy director, political unit at Greenpeace, Germany. “KFK has found a good industry friendly solution in the form of a recommendation, which I expect the Ministry of Economics and Energy to follow on.
“The suggested decommissioning tax is a good deal for the industry as in this way the utilities are buying themselves out of liability in the future”, Muenchmeyer continued. “In this way, KFK wanted to protect the interests of the four utilities, meanwhile envisaging that the society should not pay for any extra costs”.
According to the Greenpeace analyst, all costs are based on detailed studies and forecasts of future interest rates, as interest rates might not always be so low. “The difference of back end costs are easier to calculate for interim storage facilities, but not for a final one”, he added.
“There is not yet a single final storage facility in the world for which the price has been calculated, [nor do] we know exactly by when it will become operable – currently by 2050, but this could well move towards the end of this century,” Muenchmeyer added.
High estimates, taxpayer concerns
Why is the decommissioning cost estimate growing? Last year, consulting company Warth & Klein Grant Thornton estimated in a German government-commissioned report that the total cost for decommissioning reactors and for disposing of spent fuel would be about €47.5 billion. But there was more: the consultants said costs could be as high as €77 billion, although they thought that utilities would be able to cover those costs because they have assets that could be sold to raise the necessary money.
In contrast, the German government and KFK said in the recent report that they are concerned utilities would not be able to sell assets if they were to become bankrupt and that the government would have to use taxpayers’ money to cover disposal and decommissioning costs.
The KFK argued that a state-run fund would solve that problem, because the money would be deposited rather than simply put aside on an annual basis. KFY also argued that adding the risk premium to the cost estimate, would ensure that extra money were available in the event disposal and decommissioning costs are more than expected.
It is not clear at this point whether the final plan would require government approval only, or would also have to be approved by one or both of the two branches of parliament, the Bundestag and the Bundesrat, The German Federal Ministry of Economics and Energy said that will depend on how the plan would be structured.
Along with the strong macroeconomic imperative behind the German nuclear tax, one argument was made in favour of the risk premium again and again – the taxpayer should not pay a higher decommissioning tax in the future.
Regine Gunther, director general of policy and climate for the World Wildlife Fund in Germany and a former KFK member, said in a statement the amount of the risk premium is “an acceptable compromise”. He added that “they [the German utilities] should not pass their financial obligations on to the taxpayers as, given the ongoing difficult financial situation of the nuclear power operations, this is a real danger.”
It seems that, at least partially, the added nuclear decommissioning premium is a political levy.
Will a levy come?
The fund and the levy “would be extremely painful for the big four [German] utilities, which are not in great financial shape to have to find €17.2 billion and I assume most of this will come from E.ON and RWE”, said Stephen Thomas, emeritus professor of energy policy at the University of Greenwich in London.
“EDF had to do something similar a few years ago when their segregated fund was set up, but it was in a better financial shape then than RWE and E.ON; although not now, especially when EDF has taken a Final Investment Decision to build Hinkley Point C on 28th July, 2016,” according to Thomas.
“As to why Germany has a high cost estimate, I think that has a lot to do with how imminent decommissioning is”, he said. “In the countries where it is imminent, like the UK and Lithuania where the Ignalina nuclear power plant’s two RBMK-1500 units were shutdown and decommissioning started in 2009, the estimates are high because there is little scope to make more provisions and little scope for the funds to earn interest”, said Thomas.
“My overall opinion of most European utilities is that they are not facing up to their liability and hoping that life extensions, an end to real escalation of decommissioning and delaying the process until the funds have grown sufficiently will help”, he added.
Planning for an immediate transfer to the state fund, instead of undertaking a step-by-step approach until 2022 as had previously been expected, may also lead to a rating agency downgrade for the German utilities, said a nuclear power analyst.
However, this is more likely to happen after the final decision on where the extra funds will come from and in the knowledge of whether the German government would compensate the utilities for the €6 billion top-up elsewhere, according to the same analyst.
Two ways to do this have been suggested. One would be through tax breaks or payments in the nuclear lawsuits for closing the nuclear power stations. The other is a court settlement with the government taking over the payment of a partial or the full amount of the top up, in exchange for the utilities dropping their lawsuit for compensation for an early nuclear exit.
Political and economic reasons
The tax will impose a sharp financial burden on German utilities which were already reeling from lost revenues caused by the closure of nuclear generation capacity in the country earlier than was necessary based on the operational lives of the country’s reactors, according to a nuclear power analyst. “Effectively, it is a political tax to fund a political decision,” they said. “This is not to say that it is the wrong decision, but it is not one based on either an economic or technological imperative.”
The nuclear industry has a long history of cost and time overruns. In this sense the tax is probably prudent on behalf of the German government as it will go some way toward covering potential unforeseen costs in the disposal of spent nuclear fuel from the country’s nuclear power plants, the analyst noted.
“Similarly, the demand for €17 billion of the tax to be paid immediately will give the government financial certainty to deal with unexpected costs associated with this issue,” said the analyst.
From the government’s point of view – with a hard deadline for the end of nuclear generation by 2022 – the tax could prove quite effective. It will fund the fuel disposal and certain decommissioning work in an efficient and clear manner, the analyst said.
“The wider question of what impact this tax will have on the country’s electricity sector and on investment in power generation assets by the country’s utilities remains to be seen. This is a very large amount of money and it could well be that it causes a knock-on effect of lower investment in power assets by German utilities,” according to the analyst.
The German tax appears to be unique. “I am not aware of a similar tax anywhere else, although there are examples of one off energy sector taxes,” said the nuclear power analyst. “The UK imposed a windfall tax on the country’s privatised utilities in the late 1990s after a run of high retail electricity prices. Sweden imposed a tax on nuclear operators – which was repealed earlier this year – but this was not specifically for nuclear fuel disposal.”
The Swedish tax was levied in a different manner, according to the analyst. “It is probably the closest example within the nuclear sector to what the German government is proposing. Other taxes in the European nuclear sector are levied in a different manner and these proceeds are normally not specifically dedicated to spent nuclear fuel disposal as is the case with the German tax.”
Will the tax have an impact on nuclear new build programmes in neighbouring countries? The answer is “probably not”, as Germany is already highly discouraging of new nuclear construction among its neighbours, particularly Poland and the Czech Republic, according to the nuclear sector analyst. “In both cases, [Germany’s attitude] is so far being ignored to varying degrees. The specific imposition of a domestic tax on German utilities should have only limited effect outside Germany as no German utilities are involved in the Czech, Polish or indeed Hungarian nuclear construction programmes”, the analyst said.
Clearly, the tax will further discourage any new nuclear construction in Germany, were the country to ever change its mind on the use of civil nuclear power, the analyst added. However, Germany has not gone as far as Austria in its efforts to limit new nuclear build in Europe. Austria previously took legal action against Slovakia, when the latter was considering a move towards new nuclear.
Austria has also initiated a legal challenge in the European Court arguing against the construction of the Hinkley Point C plant in the UK. Austria believed it could challenge Hinkley Point C because of the use of UK state subsidies in its funding structure. The proposed plant in Somerset in Western England will be 65.5% owned by EDF and 35.5% owned by China General Nuclear Corporation (CGN) should it go ahead in light of recent developments. The plant will receive a guaranteed payment for the electricity it produces, at a set ‘strike price’, for 35 years.
In the so-called Contract for Difference (CfD) bill payers will ‘top up’ the payment to the strike price if the market price is below the strike price level. In theory bill payers will benefit if the market price rises above the strike price, but that seems less and less likely as market prices have been falling. The CfD was approved by the European Commission in Brussels, although Austria has challenged that – but it is also not clear whether the UK will have to abide by EU State Aid rules once an agreement on leaving the Union is in place. Hinkley Point C also has to have a programme in place to fund waste management and decommissioning.