China and the UK - arbiters of the future of nuclear?

22 October 2013

Both China and the UK share pro-nuclear government policies, favourable public opinion and strong economic drivers for nuclear new-build. The possible involvement of Chinese investors in UK new-build could be based on these synergies.

By Steve Kidd

With 30 of the world's 70 reactors currently under construction around the world, nobody can doubt that the Chinese programme has become vital to the future of nuclear power (see Nuclear in China- now back on track?). After a pause owing to the Fukushima accident, the reactor approval and construction programme is now very much back on track. The authorities in Beijing have reasserted control after there were worries that too many provinces were pushing for nuclear projects at the same time, therefore stretching all available resources (for example, in regulatory scrutiny or in the supply chain).

Looking longer-term, the country building large numbers of increasingly standardised reactors is also likely to become a major force in the nuclear export market. There are already signs that the Chinese reactor vendors and their attendant supply companies are working in this direction. Yet it is still early days for them, as their number one priority must be safely and efficiently increasing domestic nuclear generating capacity to the forecast 58 GWe by 2020. Thereafter, although a strong Chinese entry into the international nuclear market may be unwelcome to the other vendors, their efficiency in construction and low-cost supply chain may conceivably help solve nuclear's fundamental problem -- the chronic rise in reactor construction costs, which is bedevilling future prospects everywhere.

Looking even further ahead, it is also likely that China will be the driving force behind the next generation of nuclear reactors. Whilst today's projects developing these remain mainly in government-funded research centres, these are unlikely to achieve commercial application. It is only when companies actively building large numbers of reactors start getting interested in bringing forwards better technology (and are, of course, prepared to fund this) that rapid progress will be made. It is becoming increasingly apparent that light water reactors (whether PWRs or BWRs) have a number of deficiencies. It was always previously thought that pressure on uranium resources would eventually be the driver for moving onwards to something superior, but nowadays it will more likely be fundamental reactor economics. Today's reactors have arguably become too big and complex to build economically in many increasingly liberalised power markets around the world. There must be good technical solutions to this somewhere and the Chinese will likely be at the centre of finding one.

The UK, by contrast, is rather at the other end of the nuclear spectrum. An early pioneer of civil nuclear power in the 1950s, attention was increasingly placed (at least until recently) on plant decommissioning and waste management matters. There is a huge nuclear clean-up programme in the UK, led by the Nuclear Decommissioning Authority (NDA), which will eventually cost up to £100 billion. This may easily give the impression of civil nuclear power as a sunset, rather than sunrise, industry. This has been reinforced by the likely closure of all the UK's operating reactors (excepting the one PWR at Sizewell) by the late 2020s. Things only began to change in the early 2000s when the UK aligned itself to the need for significant reductions in carbon emissions and the Blair Administration eventually realised that this couldn't be achieved by renewables alone. Previous government policies of sitting on the fence regarding new nuclear build have now been ditched in favour of strong cross-party support for building a new generation of reactors, to maintain the nuclear share of electricity at around the current 20%. Delivering on this mooted programme in full still faces a number of hurdles (see below) but it can be argued that, along with the Chinese programme, achieving it has become crucial to the future of nuclear worldwide.

Despite 40 reactors currently under construction outside China, prospects for new build are not good in either North America or Europe, where the commercial industry has its 1950s roots. In both regions, the major battle will now be to keep the current fleet of reactors in operation. In North America, a combination of cheap shale gas and encroaching renewables generation has chipped away at whatever economic advantage nuclear once had. There may be some further new reactor projects beyond the two pairs of Westinghouse AP1000s in Georgia and South Carolina, but five operable reactors have experienced closure decisions within the past 12 months. Further shutdowns within the US fleet of 100 reactors will undoubtedly occur and one plausible scenario is for the number to drop to 75-80 units by the mid-2020s (even including new units). As such, the US will likely be surpassed by China in terms of nuclear generating capacity in about 2023-only ten years from now. This depends on a lot of things falling properly into place, but is a sobering thought.

Things are not any better in Europe. Germany is phasing out nuclear by 2023 and it's hard to see anything stopping this. Belgium and Switzerland have imposed operating life restrictions on reactors which also point to eventual phase-out. Even in France, the future of the current fleet of 58 reactors is now under active discussion, with the government seriously considering a reduction in the nuclear share of electricity supply to 50% by 2025. This would obviously involve closing many further reactors beyond the Fessenheim units (expected to close in 2017) and not building anything new beyond the single EPR at Flamanville (currently under construction). There are certainly prospects for further units in Finland and the Czech Republic, and for initial units in Belarus and Poland, but each of these programmes face some obvious hurdles and are in themselves limited in scope.

The UK, by contrast, holds out the prospect of a substantial new build programme of potentially up to a dozen reactors by the early 2030s. If the optimists are right, the UK could have a reactor programme in the 2020s of similar magnitude to South Korea and Russia today, aiming to commission roughly one new reactor each year. To have one of the pioneering nuclear countries building reactors again would undoubtedly be a significant shot in the arm for the international nuclear industry, and could conceivably become a model for a revival in the industry elsewhere. There is also a possible link with the Chinese. There are excellent prospects that Chinese companies will make investments in at least two of the three organisations considering building in UK, which could eventually spread to a closer working relationship as time progresses.

Yet whether the full UK programme goes ahead as summarised above still remains in some doubt. On the positive side, there are few negative political or public acceptance issues to be overcome, while there are available sites at existing nuclear stations. The country also clearly needs to invest in some new generating capacity, with a looming crunch in the supply-demand power balance threatening to force the lights to go out. Some foreign observers depict the lack of an indigenous UK reactor technology supplier and the high degree of foreign ownership in the electricity supply industry as weaknesses, but they are actually strengths. The openness of the UK to foreign involvement should create the level of enhanced competition that stimulates greater efficiency and lower costs. Economics is undoubtedly the key to the UK programme going ahead and having (probably state-protected) local companies involved may not be helpful to this.

EDF Energy (who has the first project at Hinkley Point) and the UK government have now finally reached agreement on the commercial terms, namely the guaranteed electricity price for the 2020s and beyond. The UK has a liberalised power market but this is undergoing a number of important reforms to guarantee sufficient generating capacity going forward and at affordable prices for consumers. There can be no explicit subsidy for nuclear (this would in any case face problems with European Union rules) but the government has a responsibility to ensure that the market allows new investments to be made in competing generating technologies, which includes renewables and gas as well as nuclear.

EDF will now finalise the investment contract and agreements with equity partners for Hinkley Point and this should happen by the middle of 2014, with the first reactor planned to come into operation in 2023 Assuming that all goes ahead (it is hard to see what will happen in UK if it doesn't), this should open the door to deeper commitment from the other two interested consortia, Horizon and NuGen, with their own projects. And the sooner the better, as each of the three groups (particularly EDF) have already spent significant sums of money and need to see that their involvement will eventually yield to a reasonable financial return.

EDF is naturally wedded to the AREVA EPR for Hinkley Point and this partly explains the planned Chinese involvement in the project, since there are two AREVA EPRs currently under construction at Taishan. EDF has worked closely with the China General Nuclear Corporation (CGN) for many years in China and has a 30% stake in the Taishan project. CGN and the China National Nuclear Corporation (CNNC) have signed letters of intent to take a 30-40% equity stake in Hinkley Point and it is hoped that this will soon be finalised. AREVA is also expected to take a 10% shareholding. Clearly there are many lessons to be learned from the Taishan project (still very much on schedule) which could help prevent the adverse construction experience of the EPRs in Finland and France reoccurring in the UK, and having CGN closely involved could be valuable.

Looking at further potential Chinese involvement in the UK programme, Horizon is now owned by Hitachi and will no doubt build the ABWR, once is licensed (this process is only just beginning). The Chinese have no experience of BWRs, but in the NuGen consortium (jointly owned by Iberdrola and GDF Suez), it is believed that one or both partners may wish to sell out. This could open the door to Westinghouse and its Chinese partner the State Nuclear Power Technology Corporation (SNPTC), who would obviously build the AP1000. This has the advantage of already having passed down most of the licensing road in the UK, while Westinghouse is very keen to find a European project for its technology (the only other option currently is the two additional units planned at Temelín in the Czech Republic).

The UK programme may therefore still be somewhat uncertain, but it should happen, somehow. When it does, it will be significant not just in magnitude, and because it marks the return of an established nuclear country into nuclear, but because it could become something of a model for other countries. Nuclear projects have never before been developed in a liberalised power market; the UK market reforms and the discussions between EDF and the UK government are being watched very closely elsewhere. Even if construction periods and the attendant capital costs can be controlled rather better in the future, nuclear projects are inherently risky owing to their large scale and the long time periods involved. So the price which will be achieved for the power once the reactor finally starts up is crucial, as there is unfortunately nothing else coming in on the revenue side, other than millions of kWh of nuclear electricity.

Thinking expansively (and trying to avoid entering fantasy land) could the UK conceivably also become somewhere where the next generation of a reactor could initially get built? It will build light water reactors first, but if China is involved, and the theory about it developing new designs is correct, maybe the UK can move beyond LWRs before 2030. The general cynicism in the industry about Generation IV reactors always lying 20 years in the future may be over-pessimistic. The key is having strong industry players directly involved in the development process, which can see clear commercial advantage in moving forward. China is attached to a fuel reprocessing strategy not because the world will run out of uranium, but because it feels uncomfortable about importing so much uranium without getting its full energy value. So the Chinese have every incentive to seek something better, which will also offer other advantages.

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