Examination of Witnesses (Questions 221-239)
PROFESSOR JOHN
GITTUS
27 JUNE 2006
Q221 Chairman: Professor, welcome to
this evidence session on the security of gas supply in the UK.
We are very grateful to you for agreeing to come and give us evidence
and looking forward to hearing what you have to say, particularly
as I see I regard you almost as a parliamentary neighbour as it
were at Alstone (?) which is hardly a long way from Worcestershire.
Can I begin, as I always do, by asking you to introduce yourself
and say a little of your role in the energy debate?
Professor Gittus: I am a consultant
and I have been for 12 years. My main clients are in the Lloyd's
insurance market, where I give advice primarily on the insurance
of nuclear risks in every country. I advise a syndicate which
is the biggest commercial nuclear insurer in the world and has
been the most profitable syndicate at Lloyd's for the last three
or four years. I have other clients as well: GE Healthcare, who
I advise on the management of liabilities and, intermittently,
other clients. You have mentioned one, the Australian Nuclear
Science and Technology Organisation, which I am advising at the
moment.
Q222 Chairman: That is very helpful.
I have not given you notice of this question, but if I might throw
an off-piste question at you first—it was cricket yesterday,
it is skiing today—and just ask you one question about the
insurance of nuclear risks. The third party liability on nuclear
companies has been increased now; do you think the increased limit
is sufficiently high to meet the foreseeable risks from a nuclear
incident at a nuclear power station?
Professor Gittus: Yes. If you
asked me if it was sufficiently high to meet the risks from the
Chernobyl-style reactors, some of which are still operating, then
I would be more cautious, but nobody insures those. As far as
the ordinary nuclear power stations are concerned and other nuclear
installations, many of them in countries of the former Soviet
Union and of course in western countries, the answer to your question
is yes, that is adequate.
Q223 Chairman: I am trying to remember,
the current figure is £140 million going up to €600-€700
million.
Professor Gittus: Yes.
Q224 Chairman: Beyond that the risk
is picked up by whom?
Professor Gittus: The risk beyond
that is picked up by governments and one of the things I do is
to work out what these risks are statistically, and I can tell
you that the actual risk taken by governments is negligible. The
amount of premium that you would have to collect, supposing the
government were a commercial insurer and insisted on being paid
for that high layer, which is going to be, as you say, above €700
million, would be measured in perhaps hundreds or, at the most,
perhaps €1,000 per reactor, the risk is so low. It is not
that the consequences of such an accident would not be great,
and by definition it would cost more than €700 million because
up to that it will be commercially insured, but the probability
of it occurring is negligible.
Q225 Chairman: Can I just, for the
record, ask you about your academic background, which is in engineering
rather than statistics and finance?
Professor Gittus: I am a Fellow
of the Institute of Statisticians, and that is as a result of
some research I did on a new class of statistical distribution,
density distributions. I am a Fellow of the Royal Academy of Engineering,
but I have also got two doctorates, doctor of science degrees,
one in theoretical physics and the other in metallurgy. I have
been around a long time and that has given me plenty of opportunity
to gather qualifications.
Chairman: I am sorry for asking you those
questions, but they are very much in my mind at present and, having
you there, it seemed too good an opportunity to miss. We will
move to the questions actually back on the green run. Judy Mallaber.
Q226 Judy Mallaber: Professor Gittus,
you said that you were working for the Australian Nuclear Science
and Technology Organisation, and in your report you concluded
that nuclear power would be economically and environmentally preferable
to gas or coal in Australia and would offer better security of
supply than gas imported from overseas. Do you think the same
conclusions apply to the UK?
Professor Gittus: Broadly, yes.
I have not done a study in that kind of detail for the UK. The
work I did for Australia was commissioned by ANSTO, the Australian
Government nuclear body, and that gave me an opportunity to go
into some depth. I believe, from what I know of the position in
the UK, that the same conclusions would broadly be applicable—exactly
what you said, in fact.
Q227 Judy Mallaber: Why do you reach
those conclusions?
Professor Gittus: The study of
the economics, that is to say the actual cost of electricity from
power stations, which I did for Australia, was generic, that is
to say it would apply to any country. I set up a mathematical
model, by means of which I can calculate a forecast of what would
be the cost of electricity from different kinds of power stations,
given different input assumptions, so the price of gas in the
UK versus what it is in Australia or another country, the price
of uranium here against what it is in Australia and so on. I have
therefore been quite easily able to use that model out of general
interest to make calculations for the UK as well as Australia.
I have not published those, but I can tell you that they show
the same kind of thing. The basis of it is that although the capital
cost of a nuclear power station is very high, the actual cost
of the fuel is low. The opposite is true of gas, it is really
quite easy to generate electricity by burning gas as a way of
raising steam, as you might suspect, so the capital cost of a
combined cycle gas-fired power station is relatively low, perhaps
a third of that of a nuclear power station, but the cost of the
gas is much higher than the cost of the amount of uranium which
you need to generate a similar amount of electricity. It is a
balance, and when you compare the nuclear case, with its high
capital and low fuel cost, with the gas case which is the opposite
way round :low capital and high gas prices , you find for Australia
and also for the UK that nuclear is cheaper.
Q228 Judy Mallaber: What are your
conclusions if we do not have a new generation of nuclear power
stations?
Professor Gittus: That is something
that I did study in some detail. At the time of the last Energy
Review I had a contract from British Nuclear Fuels to look at
that question, and they included some of my conclusions in their
written submissions to that review, and that was four years ago
that that work was done. What I discovered then was that although
at the moment we have very high security of supply in this country,
and that is because we have enough uranium to keep our existing
nuclear power stations going until the end of life, enough nuclear
fuel that is, we have still got most of our own gas, we have coal
supplies which, if we mined them, would last us 200 or 300 years,
we have still got North Sea oil, so we are really quite uniquely
independent of external supply in the world; certainly amongst
the G8 countries we are the most independent at the moment, so
we do not have to rely on people selling us gas or uranium because,
as I say, we have got our own. I could see that as time went by
going on the DTI predictions of the amount of gas that we will
use in future not mine but those of a government department four
years ago and the way in which our supplies of gas were beginning
to diminish and were forecast to diminish further, we were going
to have to rely on non-European countries for gas. As a man working
in the insurance sector I am involved to some extent with just
the issue of how reliable is your supplier going to be? Supposing
you are in the business of importing anything—cars, gas,
what have you—from any country overseas, you can insure
yourself against the possibility that you will not receive the
supplies that you paid for. The premiums that are charged are
just a measure of the risk that the insurers run of having to
pay a claim; if the risk is high they charge a high premium. They
charge high premiums for trading between people in the UK and
the countries from which we get gas and oil. I am not now referring
to the premium that you might pay if you wanted to insure against
somebody stopping sending you gas, but for trade in general—I
mentioned motor cars. If you were a Russian car supplier and I
was a British car merchant, I could do a deal with you to buy
a million pounds worth of cars. I might send you the money before
I got the cars to insure myself against the possibility that you
would not deliver, so I would lose my money. I have to pay 4%
of that money to an insurer, which is £40,000. Alternatively,
you might send me the cars first and wait for the money, in which
case you, as a Russian supplier, could insure yourself with the
same company against the possibility that I would not send you
the money. The insurance premium for that would not be 4% or even
1%, but 0.1%. You would be able to enter into that insurance for
0.1% of the sum insured. These are facts, they do not rely on
some harebrained academic figures, they are on the basis of profitability
in the insurance trade. These premiums are based on past experience
and they are amended monthly as that experience accumulates. What
I did originally and have continued to do intermittently since—Australia
for example— was simply to use the risks implied by those
premiums to work out how frequently we might expect to be deprived
of imported gas or imported uranium or imported coal. The results
that I obtained convinced me that we ought to try and maintain
the present balance between nuclear power and gas—admittedly
we would have to import it from outside Europe—coal and
the Government's targets for renewables as we go forward into
the future. In a more recent paper, which I think you may have
seen, that which has been published by Platts Journal earlier
this year, I show that in fact when it comes to security of supply
and also environmental impact, a good plan—not the only
one of course for this country—would be to stick to the
proportions of electricity that we generate from nuclear power,
from gas, from coal and, as I say, the plan for the renewables
over the next 20 years. It would mean either extending the life
of our existing nuclear power stations, or replacing them as they
come to the end of life with new ones, because otherwise in 20
years' time we shall only have one nuclear power station operating,
Sizewell B. Therefore, in order to reach what I think is a desirable
end-point, based on my calculations, of keeping the present proportions
of those different sources of energy, we would have to do two
things: replace the ageing nuclear power stations as they come
to the end of life, which maintains the diversity that you get
from nuclear power, and make sure that we had a sufficient surplus
of electricity generation capacity, over and above the maximum
that we expect to have to use. Then if in the event one of our
sources of imported fuel were to dry up, for whatever reason—because
we did not pay for it or because they decided to stop sending
it to us—then we would have some surplus of generating capacity
from other types of power station to help make up for that loss.
Those are the two things; it is a very simple recipe which I concluded
and put in this Platts paper, which the Chairman has got there,
that we should do.
Chairman: That must rate as one of the
most interesting and comprehensive answers the Committee has heard,
but if we could make progress I wonder if I could just encourage
you to encapsulate your thoughts in slightly briefer responses,
otherwise we are at risk of going through lunchtime. Thank you
very much for a very interesting answer.
Professor Gittus: I am sorry.
Q229 Judy Mallaber: Just one further
question, how far are your pro-nuclear views, you have come to
the conclusion that we need to continue—the same just because
you think we have to have as high a proportion as possible of
our power determined and provided domestically, or would you be
less pro-nuclear if you felt that we had more secure sources of
our imports of fuel from elsewhere, if they were not coming from
areas where you are saying there is a high potential risk?
Professor Gittus: You are correct.
If I felt that our imports were going to be as secure as our domestic
supplies of fossil fuel, then I would not so strongly urge replacement
of our ageing nuclear power stations.
Chairman: We want to look at that question
in more detail later, but can I just bring in Roger and Lindsay
who have a supplementary each and then we will move on to have
a look at the issues of risk you have been exploring. Roger.
Q230 Roger Berry: You argue that
you are convinced in the case of the UK that nuclear power is
economically preferable, am I right?
Professor Gittus: That is correct.
Q231 Roger Berry: That raises the
obvious question that you will have heard many times, why then
is it that the private sector does not wish to invest in nuclear?
We have heard the answer from the industry and I would be very
interested to know what your answer to that question is.
Professor Gittus: My answer to
that is that in Japan, for example;I am coming at this obliquely
for a start.
Q232 Roger Berry: How about directly?
If it is clearly economically advantageous, if it is cost-efficient,
why has the private sector not, for many, many years, contemplated
investing in nuclear, and why as of today are they saying that
at present they have got no such intentions?
Professor Gittus: I do not know
why they are saying that today, but my belief is that they will
invest in nuclear power in this country.
Chairman: They are actually saying they
would like to invest given certain conditions, so what conditions
do you think are necessary?
Roger Berry: It cannot be that economically
obvious that it is the preferable option if the private sector
is not investing, can it?
Q233 Chairman: I am trying not to
lead you.
Professor Gittus: In my paper
for the Australian nuclear people I covered that and I am clear
that the recommendation that I made would apply equally in the
UK, and it is that there are two possibilities. One, which I think
is not necessary, is that we should follow the lead of the USA
and introduce effectively a Government subsidy for the first new
nuclear power stations that we build. Let me say at once, I do
not believe that is necessary, but that is the way in which, following
the Energy Bill of August 6 2005, the USA has gone.
Q234 Roger Berry: Professor, why
can you not answer my question directly?
Professor Gittus: I am going to.
Please, let me answer; I do not want to go on too long but I want
to set the scene. In my paper for Australia I considered the American
system and I also considered a scheme which is very much like
the one they are using in Finland, although when I wrote the paper
I did not realise that, it was only subsequently that I have discovered
that the Finns are more or less doing what I recommended. What
I recommended was that the risk of an overspend in the construction
of the power station should be taken not just by the vendor, say
in a turnkey contract—that would be the firm that was selling
it—or by the purchaser who was actually buying it, but that
it should be shared between the government and the stakeholders.
I put forward a plan for the way in which this risk might be shared,
and this plan is based on insurance principles because we are
talking about risk, financial risk, something I was talking about
a moment ago. I believe that that scheme would work in this country
as well. As I say, the Finns, because of the structure of their
power and finance industry are actually applying it in building
a French-style nuclear power station at this moment.
Chairman: This session is primarily about
gas and we are spending a bit long on nuclear issues.
Q235 Roger Berry: I am sorry, but
an economic appraisal of energy options I assume takes into account
the risk of overruns et cetera, that is how one does an
economic appraisal.
Professor Gittus: That is how
I have done mine.
Q236 Roger Berry: Exactly. The simple
answer to my question—if nuclear power is so obviously economically
the better option, why is the private sector not investing—is
what?
Professor Gittus: The answer is
that they are, in Finland.
Q237 Roger Berry: I am talking about
the UK.
Professor Gittus: Using a scheme
which I have advocated for the UK. I cannot answer the question—
Q238 Roger Berry: You cannot explain.
Professor Gittus: I cannot explain.
Chairman: With respect, we have had answers
to that issue from other witnesses and we are, Professor, talking
about gas now. Lindsay Hoyle.
Q239 Mr Hoyle: In fairness, Professor,
it is fair to say that the private companies are waiting for the
energy review and waiting for the Government's statement, that
is the simple answer, because we do know from evidence that there
are private companies who wish to build, subject to the green
light, so I think we can all deal with that, put that behind us.
What I am interested in is that you have actually said there is
enough nuclear fuel for the end of life in existing nuclear power
stations; does that take into account that there may be a review
of the life expectancy of all existing nuclear reactors in the
UK, extending their life beyond what is available at the moment,
and therefore how much surplus fuel would there be for that review,
if it takes place, of the extended life?
Professor Gittus: None.
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