Examination of Witnesses (Questions 174-179)
PROFESSOR KEITH
PALMER
6 JUNE 2006
Q174 Chairman: Professor Palmer, welcome
to this evidence session on nuclear new build. I am very grateful
to you for coming before the Committee to answer questions. Perhaps
I may begin by asking you to introduce yourself for the record.
Professor Palmer: Thank you for
the invitation, Chairman. I have spent something like 20 years
with one of the leading investment banks in London where I headed
up the energy finance practice. I was involved in the financing
of many different types of technologies, including renewables
and conventional. I did some work with British Energy and so I
have some familiarity with nuclear. Of course, there has not been
any nuclear build and so, like everybody else, I have not financed
one of those. Since 2002 I decided to make a career change. I
am a part-time academic and part-time business adviser. A significant
part of my time is spent advising UK regulators. I advise Ofgem,
the electricity and gas regulator, Ofwat, the water regulator,
and the ORR, the Office of Rail Regulation.
Q175 Chairman: The first million-dollar
question—I do not know how many million it is—is:
will the City invest in nuclear? Can we foresee the very heavy
upfront capital costs with sufficient certainty, particularly
as the two main competing reactor designs which we understand
would be under consideration, were there to be a new build programme
in the UK, have not yet been built anywhere in the world?
Professor Palmer: If people give
a categorical answer to that in simple words it would be misleading.
The situation I have set out in the paper[1],
which I believe was circulated to some Members, is that it is
a complicated jigsaw puzzle where one must know several things
in order to know the answer to the question. One must know the
cost of the competing supplies of energy. Nuclear will be economic
if it is cheaper overall than the alternatives, including conventional
generation, gas-fired combined cycle plant being the cheapest
conventional generation in this country for the foreseeable future.
Within that equation one must also know what value one puts upon
not emitting lots of carbon into the environment.
Q176 Chairman: All of these are issues
to which we will return in detail.
Professor Palmer: I am sure they
are, but the important point I try to make in the paper that was
circulated is that whether nuclear stacks up economically depends
fundamentally upon how much we as a society are prepared to pay
to have a non-carbon-emitting technology to replace a carbon-emitting
one. At certain prices for carbon avoidance nuclear can certainly
be financed by the City.
Q177 Chairman: It may help the Committee
to know that your paper was not circulated but summarised in the
papers ahead of the questions for this session. Can we be certain
about the capital costs? I have seen wildly different assumptions
about the risk, for example, and therefore the discount rate that
applies to construction.
Professor Palmer: The capital
costs themselves are not at all unmanageable. One needs to be
aware that all investments in energy tend to be very capital-intensive.
The companies that raise and deploy the capital through the City
are very large ones which usually have a track record of accomplishment
in providing the sorts of plant that they are accustomed to building.
It is true that there are new generations of nuclear on the table,
some of which have never been built and some of which have been
built only once and not completed, but it is also true that they
are developments of existing designs of a type of plant that has
been built a good number of times in many parts of the world.
I do not believe that the financial markets see the technology
risks as peculiarly great or difficult to handle.
Q178 Chairman: But I have seen capital
cost estimates which fluctuate wildly by two or three times from
the lowest assumption to the highest, depending on the discount
factor, decommissioning costs and the assumed level of capacity
at which the plant operates, never mind the regulatory risk of
things changing during the lifetime of the plant. Are you confident
that the market can deal with all those risks and deliver investment
in new nuclear build, if it needs to do so?
Professor Palmer: It is not the
cost risk in nuclear that is the problem for the City.
Q179 Mr Clapham: Perhaps I may ask
a question related to the ones put by the Chairman. In terms of
build throughout the world, are you aware of any state that has
built nuclear power stations without the support of either central
or regional government?
Professor Palmer: The United Kingdom
is a very unusual place; it is one of the very few countries of
the world which has a market in electricity. That creates an environment
that is a little different from everywhere else. It has been the
custom and practice in most parts of the world for all of the
risks involved in generation of nuclear, or anything else, effectively
to be absorbed either by the taxpayer through explicit subsidies
and support or cost-plus arrangements which place all of the risks
onto the customer. In the United Kingdom it is now the policy
to have a market which forces the cost and performance risks of
plant onto the private sector. The question is whether governments
need to put in place arrangements to moderate the risks that are
in some sense almost unique to the United Kingdom because it has
created a market environment. I do not believe that a strict comparison
with other places is directly helpful.
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