28 October 2013

£92.50: The Price of Nuclear Renaissance?

Ten years ago Her Majesty’s Government took a decision to begin the closedown of the Civil Nuclear Industry in the UK and created a new organisation to direct and oversee the close down, decommissioning and remediation of civil nuclear sites.

Ten years ago Her Majesty’s Government took a decision to begin the closedown of the Civil Nuclear Industry in the UK and created a new organisation to direct and oversee the close down, decommissioning and remediation of civil nuclear sites. The Nuclear Decommissioning Authority (NDA) came into being on 1st April 2005 to start this long and challenging process.

Tynan-tbtOne year later, in May 2006, at the CBI annual conference, the Prime Minister of the day, Tony Blair, announced his support for a new generation of nuclear power stations. Mr Blair warned, “Failing to replace the current ageing nuclear plants would fuel global warming, endanger Britain’s energy security and represent a dereliction of duty to the country”.

And so the first murmurings of a civil nuclear renaissance in the UK could be heard amongst the increasingly voluminous and increasingly expensive lifetime plans for decommissioning of existing and legacy nuclear facilities. Government crystallised it’s thinking in a white paper in 2008: ‘Meeting the Energy Challenge’ and went on to establish a series of facilitative actions designed to stimulate nuclear new build activity in the UK.

The big Utilities stepped up: EDF, EON, RWE, Centrica, Iberdrola, GDF Suez and Scottish and Southern Electricity (SSE). Alliances were formed: EON and RWE joint ventured to create Horizon Nuclear Power, Iberdrola, GDF Suez and SSE created NuGen, and EDF partnered with Centrica to form NNB Genco. A competition between state-of-the-art technology providers for new nuclear reactors ensued: US-based Westinghouse Electric Company with its AP1000 Pressurised Water Reactor (PWR), French nuclear engineering giant, Areva with its EPR (European Pressurised Reactor), the Canadian Candu ACR1000 reactor and GE Hitachi with its ESBWR (Economic Simplified Boiling Water Reactor).

All four technologies were entered into a process of Generic Design Assessment (GDA) established in 2008 by the UK Nuclear Regulatory bodies. The Candu and ESBWR reactors were withdrawn in the early stages of the process and the Areva/EDF EPR and the Westinghouse AP1000 carried on to achieve interim design acceptance confirmation (for the AP1000) in December 2011 and full design acceptance confirmation for the EPR in December 2012.

Meanwhile, through the duration of the GDA process and to this day, the three developers; EDF/NNB Genco (sites at Hinkley Point in Somerset and Sizewell in Suffolk), Horizon Nuclear Power (sites at Wylfa on Anglesey and Oldbury in Gloucestershire) and NuGen (Moorside site at Sellafield in West Cumbria) were attempting to attract additional investors to help fund these huge infrastructure developments. With costs for each development easily exceeding £12-15 billion and with a global economic recession and post Fukushima nervousness, finding investors for these schemes was proving to be an immense challenge. Utilities reviewed their strategies for the UK; RWE and EON withdrew from Horizon and sold the company to Hitachi of Japan, SSE withdrew from NuGen and Centrica withdrew from NNB Genco, leaving EDF to face the challenge of new build on its first development site at Hinkley Point.

Realising that future revenue streams for electricity from new nuclear stations are crucial for developers to make final investment decisions, Government introduced a draft bill to Parliament in 2012 that proposed a restructuring of pricing for electricity in the electricity market. This bill, known as Electricity Market Reform (EMR) is due to achieve Royal Assent later this year (2013). Key to this reform is the agreement of a Contract for Differences (CfD) whereby the price of electricity is fixed at a “strike price”. In simple terms, Utility companies will pay back any excess of the market price over strike price and likewise, receive a payment when market price is below strike price. There are two big advantages to this mechanism; firstly the strike price can be fixed for a long period, giving a high degree of certainty for return on investment, and secondly consumers can benefit from a stable price of electricity.

However, this certainty and predictability itself comes at a price, and on Monday 21st October 2013 the price deal between EDF and HMG for EDF projects at Hinkley Point and Sizewell was announced at £89.50 per megawatt hour, rising to £92.50 if the Sizewell scheme does not go forward. This price will apply when the new stations start generation early in the 2020’s. The current wholesale price for electricity is around £45 per megawatt hour.

How is such a price justified? Proponents will claim that ever increasing demand for “greener” electricity has to be met by a significant baseload generation technology and that nuclear power is the obvious choice. High capital costs are offset by significantly lower costs for operation through the 60-year life of the stations, however the investment risk has to be paid for and this is reflected in the price needed to attract that investment. Opponents will say that uncertainties over ultimate waste disposal from the stations and decommissioning costs add an unacceptable cost burden to the consumer and that greater emphasis should be placed on other forms of renewable energy.

Ultimately the domestic, industrial and commercial sectors of our economy demand electricity at the press of a button irrespective of whether the sun shines or the wind blows, and given that over 40% of the UK electricity generating capacity is currently met by coal-fired power stations, we will need to take tough decisions if we want to move to a low carbon economy, stabilise electricity prices and secure our own supply of energy for the UK.

So, EDF will move forward to a final investment decision at Hinkley Point, Horizon need Hitachi to take their Advanced Boiling Water Reactor (ABWR) through the GDA process, which could take 4 years, and NuGen will need to decide on which technology it will deploy at Moorside (Sellafield) before it can even apply for planning permission. All of this means that we will not see a new nuclear power station generating electricity in the UK until sometime in the 2020’s. And who will actually construct these stations? Commitments are being made by the developers to support UK manufacturers, however to what extent? Outside of civil construction, where will the high value components and fabrications be made?

New nuclear reactor technology for the UK is likely to be French, American or Japanese and so how much of these big infrastructure schemes will truly be “Made in Britain”? Well, the Nuclear Advanced Manufacturing Research Centre (Nuclear AMRC) based on the Advanced Manufacturing Park in Rotherham, South Yorkshire, and part of the High Value Manufacturing Catapult, will sit at the heart of Supply Chain development for the UK Civil Nuclear Industry. Its mission is to help UK manufacturers win work and it will do this through two major programmes: firstly a “Sharing in Growth” programme that will help UK manufacturers increase their competence, capability and cost-effectiveness to secure lucrative contracts at home and abroad, and secondly, an innovative advanced manufacturing R+D programme at its 8000m2 state-of-the-art facility on the Advanced Manufacturing Park. With a total investment of £68m over 5 years, the Nuclear AMRC is destined to play an exciting role in a new era of civil nuclear power for the UK.

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