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.
A. EXTENT OF
THE GENERATION
GAP
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.
B. FINANCIAL
COSTS AND
INVESTMENT CONSIDERATIONS
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.
C. STRATEGIC
BENEFIT
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.
D. OTHER ISSUES
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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