The cost of Hinkley Point C and the UK nuclear renaissance

15 May 2015

Tony Roulstone looks at the economics of the UK’s proposed 16GW nuclear programme and highlights opportunities for cost reduction.

Afinal investment decision for Hinkley Point C in Somerset, which would start the nuclear renaissance in Britain, has been just around the corner for several years. Delays were caused by Fukushima, contract price negotiations, State Aid approval from EU and seeking foreign investment in the £24 billion project.

Some say it will never be built. That seems highly unlikely for two reasons. First, there is a strong need for secure low-carbon energy in the next decade when AGR stations close. Second, political capital has been invested in new nuclear by both Labour and Coalition governments over the last nine years. If Hinkley Point C were not built, the other prospective nuclear reactors would not be built and a fundamental part of the government's energy strategy would be in tatters.
Hinkley Point suffers from the scale and cost of construction. The investment is too large for any company to fund. This is why EDF is seeking partners in France, UK, China and the Middle East.

Capital cost is the prime reason why the project requires a price of £92/MWh for project viability. Capital costs account for at least two thirds of the levelised cost of nuclear. The overnight capital cost of the two EPRs (£4850/kWe) is almost three times (in real terms) what was envisaged in 2006. This includes EDF's £2 billion one-off cost for licensing and consents.

The UK nuclear strategy has five ABWRs being built by Hitachi- owned Horizon and three AP1000s by Toshiba/GDF Suez-owned NuGen. Based on the experience of ABWR and AP1000 stations built elsewhere, they will be somewhat cheaper and perhaps quicker to build than the EPR. Modelling the mixed fleet of twelve reactors under conditions similar to Hinkley Point C results in mean energy prices of about £80/MWh (at 2013 economics).

It is unfair to compare these prices with 2014 electricity prices of £42.1/MWh. Current market prices are being set by older coal and gas plants. Coal will not be permitted in future, and the price of gas is temporarily low (below £2/mmBTU). Existing nuclear stations are competitive at these low prices because their capital costs have been written down and they have relatively low operating costs.

New nuclear should be compared with new gas generation, using future gas prices and carbon taxes. The Department of Energy and Climate Change assumes gas generation at £74-84/MWh, with what now seem to be heroically high gas prices of £7.4/mmBTU, three and half times the current value. Doubling current gas prices would imply power from gas costs of £55-60/MWh. Nuclear must become more competitive.

The UK nuclear strategy is conditioned by the experience of cost increases of AGRs, and of Sizewell B (under the nationalised CEGB and Nuclear Electric). New build is based on private investment with competing utilities, to:

  • Transfer risk to the investor;
  • Generate the large volume of funds required;
  • Create a market in nuclear construction and operation to control costs.

The project model developed for Hinkley Point C has made project costs more transparent and transferred risk to the investor. This has been at the cost of large contingencies and high interest rates, the effects of which are magnified by long build schedules.

The funding model is less certain. Hinkley Point C is not yet funded, despite having large government loan guarantees and being only the first project in a £100 billion programme.

Bilateral negotiation of 'strike prices' means no market is being created. The Energy Bill makes provision for technology-neutral price auctions but the scale of the financial risk for nuclear makes this very unlikely.

What can be done to get costs down? France built 54 reactors with two similar designs, rapidly, at capital costs of £1000/kWe (at 2013 prices). It and other large programmes suggest some opportunities for cost reduction:

  1. Reduce the number of designs. The UK is planning to have three, or perhaps with a Chinese design four reactor types. Each will have licensing and set-up costs, its own supply chain and infrastructure.
  2. Standardise on a low cost design. Standardising on a reactor which is simpler to construct and can be built quickly reduces capital and interest costs.
  3. Construction learning. Nuclear construction has poor productivity. Projects are not organised to transfer best practice and productivity lessons, to a large degree because of their extreme scale, complexity and long duration. Global experience shows just 3% cost improvement over a series of reactors. Only with long-term productivity initiatives (as in Japan and South Korea) are learning rates above 5% achieved. Reactor costs can fall by 30% for a programme with a single reactor type.

Applying this to the UK's 16GWe nuclear programme could save £34 billion over its lifetime, reducing average energy costs by 17%, from £80/MWh to £67/MWh.
Further reductions would require completely new reactor designs optimised for factory construction and site assembly. They would employ the same light water technology but be smaller in scale and perhaps simpler in concept. They would address the inefficiencies of building complex high-quality systems, by hand, with tradesmen with no experience of nuclear work, on open construction sites.

Such designs are, for the present, only a glimmer in the eye. The government should review its programme strategy to enable the large cost reductions that can be made with today's designs, so Hinkley Point C does not become a lone project like Sizewell B.

About the author

Tony Roulstone established and teaches on the Nuclear Energy masters programme at the University of Cambridge with research interests in the economics and safety of nuclear power. Previously, he was MD of Rolls- Royce Nuclear.

The cost of the UK’s new-build programme

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