Examination of Witnesses (Questions 40-59)|
TUESDAY 13 NOVEMBER 2001
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?
(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
(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.
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 doingbacking 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
45. On page 8 of your submission to the PIU
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
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
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
(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.
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
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