Select Committee on Environmental Audit Written Evidence

Memorandum submitted by Nigel Hawkins

  All the views expressed below are my personal opinions and they do not seek to reflect those held by any organisation for whom I have worked—or am working currently.


  1.  The National Grid's Seven Year Statement probably provides the best estimates of future electricity generation capacity requirements. However, the key factors are the extent to which nuclear plants will secure life extensions and whether any new Combined Cycle Gas Turbines (CCGTs) are built: high gas prices are a serious disincentive to invest in new gas-fired plant. Renewable energy projects will add a minimal amount to base-load generation capacity. Historically, electricity demand has grown at around two-thirds of GDP. Energy efficiency has—and probably will—continue to have a marginal impact on demand growth.


  2.  It is new base-load—not mid-merit or peaking plant—that is needed. The two main options are new nuclear or new CCGTs: the latter would increase the UK's exposure to high gas prices. Renewable projects are generally unsuited to providing base-load capacity. The per KWh costs are very dependent upon the assumptions within the financial model, especially in terms of the gas price assumption—it accounts for c60%-70% of a CCGT's generating costs. However, a new CCGT plant could be constructed within two years prior to any planning delays.

  In the presentation that I made to the nuclear conference held at Canary Wharf by the Westminster Energy Forum during the summer, I concluded that a new nuclear plant is capable—subject to certain financial and contractual obligations—of providing electricity at a price of between 2.3p and 2.8p per KWh over a 40 year period. My financial model assumes a 1,250 MW plant, whose capital costs were projected both from the data provided by vendors of nuclear plant and from other relevant figures. I also assumed that a new nuclear plant could be operational within four years of the first concrete being poured. Obviously, the lengthy planning process would involve a further lead time, although I believe that new nuclear-build should only be considered for existing nuclear plant sites.

  I doubt whether any renewable project—except large-scale hydro—can deliver power consistently at below 4p per KWh, unless particularly favourable assumptions are made and they are financed by major international energy groups, such as E.On and RWE: both of the latter would command a low Weighted Average Cost of Capital (WACC).

  I have not undertaken detailed comparative analysis, since the per KWh generation figures are almost entirely dependent upon the initial assumptions made. In any event, the UK needs a mixed portfolio of generation sources—and not just the cheapest option at a particular point in time. The Royal Academy of Engineering report, which was published in 2003, gives some comparative analysis, although the assumptions made are crucial, especially the 23p per therm gas price. The level of ROC payments is also very relevant for the financial viability of renewable projects.

  In the case of offshore wind, wave and tidal, I find it improbable that major projects from these sources can be developed within the next decade either from a technical or financial aspect.

  Past experience of new nuclear-build relates to the 1960s/1970s designs of AGRs—almost exclusively in the UK—and to the First-of-a-Kind (FOAK) PWR at Sizewell. Major engineering advances have been made in the interim. Hence, the experience of Asian new nuclear-build in recent years is more relevant. The construction performance has generally been good, although Japan continues to experience major problems—especially in PR terms—with its nuclear industry.

  My nuclear financing model, which formed the basis of my presentation to the Westminster Energy Forum conference on nuclear power, allows for waste/decommissioning costs on a per KWh basis. The Net Present Value (NPV) costs of plant decommissioning are minimal due to the very extended plant lifetime. I don't believe that insurance is a serious problem, since nuclear insurance is a very lucrative business for the insurance sector: the largest potential pay-out, Chernobyl, was uninsured.

  In terms of waste, I believe it should be buried at Sellafield, given the massive cost of cleaning up the site. It is accepted that a repository may be needed for HLW and MLW, most of which has been generated since the 1960s.

  As part of its licence to operate, any new nuclear-build owners would be required to undertake nuclear waste disposal as specified. This obligation is unlikely to be a major concern given that E.On, RWE, EDF and BE are the most obvious investors—directly or otherwise.

  In terms of physical and technical capacity—and omitting the difficulties of fund-raising—the two major constraints for renewables are planning, especially for onshore wind, and grid connections. In the case of the latter, it is still far from clear how National Grid's future regulated capex programme, which would be incorporated within its Regulatory Asset Value (RAV), should be boosted to allow for additional renewable capacity, especially of wind plant. It is also the case that, as renewables capacity grows, further back-up plant will be needed and some grid strengthening will be required: the experience of wind plant in the Schleswig-Holstein area of Germany is relevant in this respect.

  The relative efficiencies of different generating technologies vary considerably, depending on various factors. Aside from nuclear, gas efficiency levels are now edging towards 60%, whilst most coal-fired plant should be between 35% and 40%. I am not convinced that micro CHP, micro-wind and PHV can make any meaningful contribution to meeting UK energy demands over the next decade.

  3.  Financial institutions will compare generation investment alongside other investment scenarios in other sectors, both in the UK and overseas. However, over the last decade, many investors have lost considerable sums of money, especially from the collapse of various Independent Power Projects (IPPs). The failure of British Energy, following the introduction of NETA, also did damage to the quality of UK generation investments. There is also real concern about the financing of new renewables projects, especially as a start-up exercise.

  In my experience, financial institutions will study carefully any plans to build new nuclear plant. However, they will be disinclined to study too many hypothetical scenarios—they will look at the data when efforts are actually made to raise the finance. The quantum of funds should not pose a serious problem. Four new nuclear plants costing c£5 billion is relatively modest when set against Network Rail's £40 billion investment requirements. To be sure, the collapse of British Energy will not help the process but it does not mean it is insurmountable. Indeed, if big players, like E.On, RWE and EDF are involved, the financing should not be too onerous, providing a few key criteria are met—Government guarantees as per the Network Rail bonds and long-term Power Purchasing Arrangements (PPAs). CCGT investment would carry less risk, because of the smaller capex element. With the exception of a major tidal wave scheme, no renewables energy project is of the same scale as new nuclear-build.

  In terms of funds from Government, I believe that new nuclear-build can take place without overt Government financial support. A Network Rail-type guarantee for the bonds and long-term PPAs—possibly being a supply licence requirement—may suffice to keep the WACC in the 7%-8% range, with 80% debt and 20% equity. The Government would also need to push through the planning process—if necessary by amending current legislation. The requirement for long-term PPAs would be little different from the requirements currently imposed on existing energy suppliers through the Renewables Obligation. In my view, there would be no incompatibility with existing energy liberalisation policy but more a recognition that new nuclear is needed for the long-term benefit of UK plc.

  Given the small financing requirements for renewables projects, I do not think there would be a major impact if new nuclear-build were to take place. What would be more relevant is whether renewables could provide sufficient PPA comfort to convince lenders and whether the various infrastructure—such as grid connections—and economic issues can be overcome.


  4.  I don't think new nuclear-build requires Government financial support, save the Network Rail-type bond guarantee. However, new nuclear-build would provide the UK with a genuinely mixed energy portfolio and far less exposure to international gas prices, notwithstanding balance of payments benefits. Such a scenario is especially valid for base-load plant. Nuclear is also a very good hedge against fossil fuels, both in terms of prices and emissions. Unlike most other commodities, such as tea, electricity is quite essential for any modern economy—and therefore demands Government involvement. Given the very differing time profiles of the main generating sources, it is arguable that nuclear's attractions are too-long term for many investment horizons. By way of example, each FTSE 100 company is likely to have had three different Chief Executives between planning investment in a new nuclear plant and getting electricity from one.

  Carbon emission levels in the UK are principally a function of the output from coal and CCGT plants. The more power that is generated from other sources bar these two, the lower will be the level of carbon emissions. New nuclear-build would only have an impact on carbon emissions once it was actually in operation.

  New nuclear-build would make a major contribution to energy security long-term, both in terms of minimising the chances of power cuts but also in lowering the price risk factor. In any security of supply scenario, a solid base-load generation performance is crucial. Nuclear is also divorced from the many risks attached to gas imports. Some security of supply risks, such as a grid failure, are outside the generation environment. It should also be noted that the impact of sustained power cuts in the IT-dominated era of 2005 is immensely more serious than in the early 1970s despite the contraction of UK manufacturing industry.

  Clearly, the terrorist risk cannot be ignored for new nuclear-build, although it applies equally to current nuclear plant. However, if a nuclear replacement scenario were adopted, there should be no major difference from the status quo.

  5.  New nuclear-build is specifically aimed at producing large quantities of base-load electricity, something that renewables is simply unable to do. I don't believe that micro generation or any energy efficiency scheme—the latter has been tried for over 30 years—will produce the volume of additional power that is needed. After all, with all nuclear plants, except Sizewell, due to be decommissioned by 2023—subject to any life extensions—a considerable amount of new base-load capacity will be needed both to replace them and to sustain an economy growing at over 2% per year. I do not believe that renewables, with a few exceptions, can deliver a sufficient volume of power or can do so at economic prices.


  6.  As I understand it, the generation of nuclear power produces minimal carbon emissions: moreover, the construction of such a plant is unlikely to produce significant carbon emissions. I have no specific experience of uranium mining but I would expect that any carbon dioxide emissions would be minimal. Indeed, when set against carbon dioxide emissions in the US, China and India—none of whom have signed up to the Kyoto Treaty—any such emission levels from nuclear activities would be inconsequential. Of course, the totally unprecedented disaster at Chernobyl in 1986—a plant that would have failed Western Europe construction and operation practices—should be considered totally separately in terms of environmental damage.

  7.  I do not believe that the nuclear waste issue should be allowed to wield a veto over new nuclear-build. After all, nuclear plants have been operating in the UK for almost 50 years without a full resolution of this problem. I would argue that the UK would be taking a real risk by not building new nuclear plant—both in terms of security of supply risk and exposure to high gas prices. Whilst CoRWM's recommendations still have to be finalised, burying the waste at Sellafield still appears to be the obvious option.

20 September 2005

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