Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 40-59)



  40. So that cost you believe, just to be quite clear about it, would internalise all the externalities that you have referred to?
  (Mr Kirwan) Yes.
  (Mr Ham) Mr Chairman, would it be helpful if my colleague from BNFL makes some comments since BNFL of course now owns the Westinghouse engineering capability?


  41. Yes.
  (Mr Mayson) Half the reactors in the world have been built from technology that BNFL now owns and, over the last 10 years, we have been party to a very successful programme of building ten reactors in Korea and they are a very good illustration of the benefits of building a series of reactors where the price has progressively fallen over those series of builds. With respect to future stations and particularly the advanced passive series of reactors, we have actually seen a change in the cost and that is as a result of basically three things. The first is that the number of components in these designs is dramatically reduced; the second is that the construction times have been substantially reduced and the third is that the building volume is dramatically reduced and that in effect reduces the capital cost, which is the major component, roughly to about 50 per cent of, say, the Sizewell B design. So, that in itself is a major reason for the very much reduced numbers that we are quoting. The three pence a unit that we are quoting is basically the first of a kind of, say, a single AP1000 build in the UK and the 2.2 pence is essentially the eighth of a kind showing the benefits of the series build of those reactors.

  42. If you have two generators each choosing different types of reactors, you will not get any savings, will you?
  (Mr Mayson) No, you would not, but clearly one of the mistakes that the UK has made in the past is by choosing different designs for each of its reactors, but there is plenty of evidence world-wide that building a series of reactors is the way forward.

Mr Berry

  43. Why will market forces not bring this about if there is a economic advantage? Why are you looking for government intervention and subsidy?
  (Mr Kirwan) Because the price today is 1.8p per kWh and although forward projections do not always turn out to be right, that is likely to remain the price for a long time into the future. So, as of today, nothing will be built and, as prices rise in the market, obviously the lowest cost form of generation will be naturally picked by the market which given that the first of a kind cost is pushing us towards 3p per kWh for nuclear, then gas is always going to be the one that is chosen unless there is some mechanism in the market that internalises the benefits of carbon free generation which the market does not recognise.

  44. So your argument is resting entirely on the fact that nuclear power stations do not generate carbon and that is the basic argument. We make this comparison about unit costs, for example, and it is a pretty sensible question. Either you are cheaper than alternative sources or you are not and, if you are not, you should not be there, all other things being equal. If you are cheaper, why is the market not delivering it? Why do you look to government to regulate, interfere, subsidise? I am usually told by business people that is what government should not be doing—backing winners. Here you are asking for massive sums of money. Are you asking the Government to rig the market because the market does not know what is good for it?
  (Mr Ham) Mr Chairman, I think our case has been that if Government wants to see the encouragement of CO2 free sources of electricity, there should be a reflection of that which is rational and coherent in the market. The industry is not asking for subsidies, the industry is asking for an even-handed approach to making rewards for CO2 free generation, if I may emphasise that point. The other aspect is that the argument for the industry does not just rest on the fact that it is CO2 free, it also represents the fact that it offers a significant portion of British energy in the future, electricity in the future, which would not be dependent on developments on, shall we say, the European gas grid, so it offers a major addition to security and diversity of supply of electricity.

Mr Lansley

  45. On page 8 of your submission to the PIU energy review,[1] you say, "It is interesting, though, to note that a recent application for construction of a nuclear power station in Finland was based on unit generating costs which, at 2.15 eurocents per kWh, were lower than those for gas generation of 2.6 eurocents per kWh", which is in contrast to what Mr Kirwan was saying about the relative costs. So, if it is interesting to note that, what is it about that that is interesting and, if there is something in Finland that is going on that is different from here, what is it that is different?

  (Mr Ham) Firstly, may I say that I am not an expert on Finland but I do know from the geography of the pipeline suppliers, they are much closer to the centres of marginal sources of gas than we are in Britain, so clearly this may have some lessons about what sort of price for gas can be extracted where a country is seen as dependent, over-dependent maybe, on that particular source of gas. That is one point that it seems to me it says. It also of course is the issue of exactly what levels of discount rate the Finns felt appropriate for that power, which I believe is likely to be financed by private industry which wishes itself to be independent of other sources of potential interruption to its suppliers. So, we cannot pretend to be experts on Finland but we do know that there are special factors in Finland and we do know that they are extremely good at running their nuclear power fleet very efficiently.

  46. So it is not a market discovery that they have made, it is a government determined discovery.
  (Mr Ham) I am not sure on the internal conditions of Finnish finance, I am afraid.

  47. So, it may be interesting to note it but we are not quite sure why.
  (Mr Ham) It is simply figures that are published by the Finns which indicate that simply being a great deal closer to major sources of gas does not necessarily mean you get tremendously cheap gas and judgments are taken by suppliers about whether they have their customers, if you like, what should one say, over a barrel or whatever, and that is not the situation we would like to see develop in Britain.


  48. On the other hand, in Finland they have grasped the nettle of waste management which Mr Kirwan did not really frankly address. I am a little concerned that future prices will not just reflect the cost of uranium, the generating kit and general running costs. Will there not be an overhang in the shape of and the cost of reprocessing the existing waste that you generated even if it were just over the years of privately owned British Energy?
  (Mr Kirwan) Chairman, you are absolutely right. British Energy now is faced with a liability to pay future payments relating to past electricity generation but that is there whether we build new build or not. We do not regard that as part of the cost of new build.

  49. The money has to be found from somewhere.
  (Mr Kirwan) Yes, it does have to be found and that is why we have made various proposals about how those liabilities should be dealt with reflecting the present situation in the market and the historical fact that most of those liabilities relate to the period when our current power stations were owned by government and not by British Energy.

  50. In the distant past, Mr Berry and I took evidence prior to the privatisation of the nuclear industry and, at that time, we were led to believe that this was all going to be done and dusted and it was taken care of and that it would not impact on the viability of British Energy post-privatisation. Were we wrong in assuming that?
  (Mr Kirwan) Chairman, I am sure you were not wrong at all.

  51. We do make mistakes though not very often!
  (Mr Kirwan) Privatisation took place against the background of financial projections prepared for the company by both the company and its advisers and also by government at the time and its advisers, which had to make a lot of assumptions not only about the cost and the efficiency of the power stations but also about the prices that could be earned in the market for nuclear power. In fact, all the assumptions about efficiency and output have been achieved and in fact bettered by the company, but the market prices have fallen by 30 per cent whereas, at the time of the prospectus being issued, even a five per cent fall was enough to reduce the dividend and in fact British Energy has had to halve its dividend. The market circumstances against which the privatisation took place and against which also those liabilities were left with British Energy has changed dramatically and totally unexpectedly. That has meant that British Energy's power stations today, its existing power stations, are in a loss making position and are unlikely to make a profit with prices as are currently foreseen. That is all to do with the current generation of power stations and the liabilities inherited from the past. That clearly has a bearing on the future because it affects the financial strength of British Energy, but it does not actually impact on the cost structure of new build power stations that are yet to be built. So, there are two distinct strands to the British Energy evidence.

  52. I will finish this point as my colleagues may want to come in, but I am not quite clear. What you are telling me is that you have liabilities which will have to be serviced in perpetuity almost.
  (Mr Kirwan) To finite time scales.

  53. But it is a fairly lengthy timescale, far beyond your and my expected lives.
  (Mr Kirwan) Undoubtedly.

  54. So the requirement to service these liabilities will go on for some considerable time. Is that reflected in the 1.6p per kWh charge that you have said you could run the present power stations at?
  (Mr Ham) The simple answer is "yes" in so far as a large chunk of those liabilities are the subject of fixed price contracts, so those are certain and, where they are not subject to any contract like the final repository, we use the best current cost estimates and we build in a full allowance for those costs. So, to the best of all knowledge that we have today, the answer to that is, yes, it is allowed for.

  55. I can see that even allowing for changes in circumstances of the kind we have experienced in the last six years since privatisation, you are saying that the target of 1.5p per kWh for existing nuclear build and 2.2p to 2.3p per kWh for future nuclear build can be achieved even allowing for liabilities as far as everything but repository costs which you have factored in.
  (Mr Kirwan) With a couple of just minor points in that it was 1.6p, not 1.5p. That is the operating cost including all of these future liabilities but we also have to handle liabilities relating to past generation and that adds another 0.25 pence onto the cost and that converts us from being profit making into being loss making. That last is not to do with current generation at all, it is to do with the inheritance of previous generation where we have to service previous liabilities. That adds a burden of another 0.25 pence raising our costs from 1.6 pence to 1.85 pence, thus making us loss making against income at 1.8 pence. New build, the costs that we have talked about, the BNFL cost estimates, Westinghouse cost estimates, include full allowance for expected long term storage and eventual disposal of spent field products and the decommissioning of power stations.

Mr Burden

  56. Just to get it absolutely clear on the issue of costs, I want to ask you something else about waste management. The aggregate cost which is 1.85p per kWh which is based on your inherited liabilities and current ones. When you have been doing your comparisons with your costs with any other generating source, why do you not separate out inherited costs and future costs when you do those calculations?
  (Mr Ham) I think the point here is that, when we talk about new generation, we are not talking about, if you like, a whole corporation's finances in relation to it, you are taking it project by project, so you are saying this is how the cost would be were it built by whatever organisation starting from zero, the incremental costs from now which if you did not build you would save, so those liabilities are already there.

  57. I understand that but when you do your comparisons with any other form of power generation, why is it that you do not build . . .? They have different hang-over costs, but they have them there yet you do not separate those out.
  (Mr Kirwan) With respect, there is no similar cost for any other generator. They do not have cash payments that fall to be made many years after they produce their electricity. Except in a very small scale way, coal fired power stations have very minor costs for managing the ash tips and dismantling the plant and the plant probably has a value that offsets that, so nuclear is unique in that timescale of payments.

  58. If we can just come back to the issue of waste management itself because there is something that I may have missed along the way that perhaps you can clarify for me. Twenty-five years ago, the Royal Commission on environmental pollution said that it had to be demonstrated beyond reasonable doubt that a method exists to ensure the safe containment of long life highly radioactive waste for the indefinite future, and the word "indefinite" was used there. In its report last year, it again emphasised the need to solve that issue to the satisfaction both of the scientific community and the general public. You say in your evidence that those technological solutions have now been found.
  (Mr Ham) May I intervene at this point and comment and both of my colleagues would like to say something on this. The industry's viewpoint is that the technical solutions to coping with waste long term now are found to have existed and I know that Richard will want to make some comments on the kind of progress that has been made over the last 10 years in that respect, but a very clear requirement/request from the industry is that there should be clarity of government policy in the waste area because clearly a large amount of waste which exists in Britain relates to legacy issues which do not relate to current commercial operation of nuclear power at all and those will need to be clarified. In terms of the progress that has been made over the ways, I think that Richard would like to make a comment on that.
  (Mr Mayson) As you are probably aware, over the last 10 years or so, we have been producing conditioned waste forms in the form of concrete blocks, vitrified waste and so on, that are suitable for very long term storage over many decades if not centuries and are suitable for ultimate disposal. It is from that perspective that we regard the technical solutions as being available and that therefore the issue here is one of public concern rather than of technological issues.

  59. In your evidence to PIU, the way you put it is that geological disposal is advocated as the most appropriate final solution and there you spoke of the barriers of socio-political and socio-economical issues. You have talked about the socio-political issue there, what about the socio-economic?
  (Mr Ham) I think we are really talking about the establishment of rock laboratories first, who pays for those in order to take these first steps. As I say, we really do not want to get into a lot of discussion about Scandinavia but we do feel that Scandinavians in this respect are further ahead in terms of establishing rock laboratories to carry out the sort of inquiry that needs to be done before you actually go full speed for these type of solutions.
  (Mr Mayson) Progress has been made overseas and the different contracting arrangements, the so-called pay as you go contracting arrangements, have proved to work in other countries and that kind of arrangement might be appropriate in the UK for the future.

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