The United Kingdom stands out today amongst established nuclear countries because of its substantial planned nuclear reactor construction programme. In other developed countries, operating reactors are achieving life extensions to allow nuclear to continue playing an important part in satisfying power demand, without much in the way of new build. In the United States, nuclear plants are running up against cheap unconventional gas, which is souring their economics, while in Europe the increasing renewables share of power generation is proving problematic. With even the current operating reactors struggling to stay online, it’s not surprising that new build is out of the question, except, it would appear, in the UK.
The foundation of new nuclear in UK is a cross-political party consensus that maintaining a substantial (currently roughly 20%) share of nuclear in power supply is essential both to meet carbon emissions targets and to offer a degree of supply security unavailable with intermittent wind and solar power. All but one of today’s 15 operating reactors are AGRs dating from the 1970s and 1980s, for which life extensions beyond 2030 are unlikely on both technical and economic grounds. New build is therefore necessary to maintain nuclear’s market share and also to make sure that the lights stay on. Indeed, in the era of power sector liberalisation, there have been deep concerns that the market dis-incentivises investment in any major power generation assets.
Nevertheless, as noted in last month’s article, the planned UK nuclear programme is arguably sub-optimal in an economic sense and possibly a lot worse, verging on the absurd some might say. The cost to the power customer will be substantial and threatens to deepen both the problem of energy poverty (the poor in society unable to pay their rising bills) and UK industrial competitiveness. At the very least, the programme will impose unwarranted costs on the ordinary person in the street, such as the many “JAMs” (just about managing) citizens, as identified by Prime Minister Theresa May and her Conservative Party.
The problem is essentially at two levels, first the design (or lack of it!) of the power market and second, the nuclear element within this.
Market design deficiencies
Concerning the UK power market, there is a rising feeling within influential business and academic circles that the whole period since market liberalisation 1989 has been a costly failure in energy policy and that more recent policy changes don’t help. Indeed, they could make matters worse.
Rising energy prices have now become a big political issue. There have been so many twists and turns since 1989, with a “dog’s dinner” of measures, each aiming to hit one policy target or another. Costs to customers are clearly rising not because of market prices (natural gas prices today are relatively low despite the continuing conflict over Ukraine and problems in North Africa) but largely because of government support for low carbon energy sources. This is gradually feeding through to energy bills. The concern is that these costs will rise further as more offshore wind farms (and eventually new nuclear) come on stream. Both types of generation are able to command guaranteed index-linked prices through the contracts for difference (CfD) mechanism that are more than double current wholesale power prices.
Yet necessary investment is down in power generating capacity because the incentive required to bring in private capital has been forced out of the system. The UK government’s latest remedy is to implement a capacity payments system in which power plants are paid for having MW available as well for the energy (MWh) they deliver, in order to ensure that the lights will stay on. Whatever eventually happens, lower carbon emissions have been achieved at enormous cost to the long- suffering customer.
From the viewpoint of an economist, the CfDs and capacity mechanisms suffer from lots of problems. The informational requirements on the government are obviously very considerable. These include the ability to predict the path of future prices and the also the technologies and projects with which to negotiate.
Amazingly, government ministers appear to “know” that the price of gas is going up and that it will be increasingly volatile. A more realistic government should stop assuming that gas prices will inexorably rise when all the evidence is that gas to gas competition is breaking the link to oil prices. At any time, forecasting future gas prices is certainly hazardous, but it is much more so when there are major changes in the structure of world gas supplies. Yet this is what setting the strike price requires.
Politically there are therefore major issues ahead if nuclear and offshore wind projects go ahead today with what eventually seem to be very high strike prices. The guaranteeing of index linked prices and certain revenue to private companies, from a starting point way above the current wholesale price for 15, 20 or (in the case of new nuclear) 35 years are arguably indefensible.
Is this better than the arrangements the UK had under public ownership of electricity generation and supply before 1989? Where is the competition in the system, with performance incentives which allow suppliers and consumers a share of the benefits if the providers succeed in bringing costs and prices down?
There clearly remains very considerable uncertainty about how onshore wind, offshore wind, nuclear and gas will fit together in the energy mix, together with concerns about security of supply and fuel poverty.
The three policy objectives of energy security, competitive costs and reduced carbon dioxide emissions will remain, but for the period since the passage of the Climate Change Act of 2008, the clear priority in the UK (as in Europe) has been the reduction of emissions. Business in general is bothered both by level of costs and by the way in which energy policy has been politicised, adding to uncertainty and increasing risks. The level of lobbying by different interest groups, each trying to protect any benefits they have received rather than the national interest, has become completely intolerable. It seems the dirtiest form of power generation capacity (small diesels) has to operate in order to fill gaps in supply caused by intermittent renewables, receiving hugely inflated wholesale prices of several hundred pounds per MWh.
What the UK is now doing in terms of nuclear new build contradicts everything industry economists have been urging for years, which is to build a large number of standardised reactors on a limited number of sites, to be run by a highly competent single operating company. With up to 15 new units needed, surely the best option would have been to have a tender amongst the vendors for one reactor type, one vendor and one (heavily British-based one hopes) supply chain, and probably also a state-owned nuclear company to develop the programme and then operate the reactors.
Benefits of standardisation
Choosing one reactor design for the country would increase the likely local supply chain benefits but it would also arguably heighten certain risks. It would be picking a winner on a grand scale, which means that the evaluation and decision would have to be carried out carefully. One risk is that the chosen design may turn out to have a generic problem, costing a lot of money to put right, which becomes visible only 15-20 years after operation (for example like the pressure tubing in CANDU reactors). But assuming that the reactors in the mix are all evolutionary PWRs, the French programme in the 1970s and 1980s suggests that standardised reactors can be selected and achieve excellent economics without major issues developing later. Key criteria for winning any tender should be that the reactor has already been built successfully elsewhere and that the economics of operating it have already been demonstrated. As always in nuclear, there are lots of “paper reactors” out there, and even when plans get submitted to regulators, designs are often only half-complete.
If the UK had gone down the road of selecting a single reactor, it would have contributed to the obvious need for consolidation in the reactor supply business. Instead, by supporting four separate designs with different operating companies, it is essentially perpetuating a 1950s style industry structure, which makes no economic sense.
Unless these vendors can each build multiple units of their design elsewhere in the world (which currently seems highly unlikely), there will be little in the way of a learning curve and serial production benefits. In any case, such benefits seem much more difficult to capture internationally than within a single country. How much has the EPR project at Taishan in China gained from the experience in Finland and France, or the AP1000s in the United States from Sanmen and Haiyang in China? Very little, it would seem, so far at least.
The UK now has potentially four NSSS vendors, with questionable financing and abilities to deliver, each demanding what look like high strike prices on the CfDs.
Number one (EDF at Hinkley Point) has a reactor design (EPR), which is huge and apparently hard to build (even the Chinese are struggling at Taishan), while the vendor (Areva) has suffered severe financial problems. It is questionable whether UK power customers should be supporting this design as a lead reactor. Indeed analysts in Hong Kong are now questioning the financial return the Chinese will make on Taishan, compared with the earlier reactor designs employed locally.
Number two (Horizon at Wylfa) has a reactor design (ABWR) which has been built successfully in Japan, so (with support from the Japanese government who are keen to see the country keep a stake in new nuclear), the project may be doable at a strike price slightly below that for Hinkley Point (maybe around £85 per MWh). However, none of the ABWRs so far built are currently operating (nor are likely to do so for many years). In Japan, as BWRs, they’re low priority for gaining approval for restarts. And the two units built on Taiwan cannot operate because the government (actually the Taiwanese people too) say they’re not safe. Horizon as a group also has no experience of building or running reactors. It has recently signed up Exelon, a superb operator of nuclear stations in the United States, but will they put their shareholders money into the project?
Number three (NuGen at Moorside) has what (experts say) is a rather good reactor design (the AP1000), which has just successfully completed the UK regulator’s Generic Design Assessment process. But the vendor (Westinghouse), due to what it describes as “financial and construction challenges” at its AP1000 projects in the USA (two units at Vogtle and two at Summer), has filed for protection under Chapter 11 of the US bankruptcy code with the aim of undertaking a “strategic restructuring”, and the parent company, Toshiba, is fighting for survival. There have also been significant problems building the AP1000s in China, where the previous generation of reactors has been built on time and budget. There was a utility in tow (ENGIE), which had good experience in operating nuclear power plants, but it has decided to withdraw from the project, exercising an option to sell its share in the project to the beleaguered Toshiba. One possibility may be for SPI Corporation of China to get involved at some stage (as Westinghouse’s key partner in China), while KEPCO from Korea is also apparently interested.
Number four (CGN at Bradwell) has a reactor design (Hualong) that hasn’t yet even begun to go through the UK regulatory process and has never yet been built anywhere. Indeed, there are two different designs of this model under construction in China, with another in Pakistan, while the promoters (CNNC and CGN) seem incapable of agreeing to a common design for further exports.
Building 15 new units of four different designs in the UK is clearly technically possible, but the cost to the power customer is likely to be considerable, compared with the adoption of a single standardised design. The Germans have ensured worryingly high power prices by adopting a policy involving huge subsidies to renewables, yet the UK now seems set to do the same with nuclear.
Koreans to the rescue?
One alternative, which is now advocated by several serious commentators, would be for the UK to carry out a tender process its whole nuclear new build programme. Or perhaps allow Hinkley Point to go ahead but tender for the rest. As things stand today, this would probably be won by the Koreans, given their record (so far) of building a standardised reactor design (APR1400) at close to schedule and budget in both Korea and the UAE. The four units in UAE should be completed in 2020, just as the UK programme needs to step up. That could present opportunities for a bigger involvement by Korea in the UK than merely an investment at Moorside.
*Steve Kidd is an independent nuclear consultant and economist with East Cliff Consulting. The first half of his career was spent as an industrial economist within British industry, followed by nearly 18 years in senior positions at the World Nuclear Association and its predecessor organisation, the Uranium Institute.