New nuclear needs government help

29 June 2005

Research by independent economics consultancy oxera has found that a new generation of nuclear power stations in the UK is unlikely to be economically viable without public assistance.

Oxera’s analysis shows that, by 2025, a new build nuclear programme (based on eight 1GWe reactors) would be able to generate 22% of the UK’s electricity needs – around the level produced in 2003. According to Oxera’s modelling, industry could expect a return on equity of around 11% from such a programme.

However, director of Oxera Derek Holt said that such a level of return is likely to be insufficient to convince a private investor to accept the significant equity risk involved in financing new build. ‘These figures don’t indicate there would be enough of an incentive for industry to finance a new nuclear programme,” adding: “Our projected rates of return fall short of what most would consider a worthwhile investment.”

The report also pointed out that it was highly unlikely that such a programme would place lenders at risk: prices would have to fall by 33% in real terms for the project to default on its debts.

Government capital grants and debt guarantees are two of the support options considered by Oxera in its analysis that could make investment in a nuclear new build programme viable. According to the report, the construction programme could be financed with £3 billion ($5.4 billion) of equity capital. However, cumulative capital grants of £1.6 billion ($2.9 billion) for the fleet of eight reactors would boost the rates of return to 17.5% – which should provide enough of an incentive for private sector investment. Similarly, a programme of £3.2 billion ($5.8 billion) of debt guarantees could result in up to 14.5% returns, and up to 16.5% if the guarantees are doubled.

Unfortunately for the nuclear industry, such government subsidies are unlikely. At the end of May, chief scientific advisor to the UK government, professor Sir David King, told NEI: “There’s no doubt the government is not going to be investing in new nuclear.”

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