APPENDIX 31
Memorandum by Dr Dieter Helm, New College,
Oxford
1. INTRODUCTION
Nuclear new build is one of the technology options
under active consideration in the Energy Review. Much of the Review
process has been devoted to "whether" to encourage a
new nuclear build programme. Less attention has been devoted to
"how" this might be achieved. This memorandum focuses
on the latter question, and in particular on the extent to which
the government should actively seek to promote nuclear, as opposed
to providing the conditions under which the market and competition
determine the technology choice—in other words, between
"picking winners" and creating a "level playing
field". It outlines the economic characteristics of nuclear
projects and how a new nuclear project might be financed. Nothing
in this memorandum should be interpreted as advocating new nuclear
build: the author is strictly agnostic.
2. PICKING WINNERS
VERSUS CREATING
A LEVEL
PLAYING FIELD
Advocates of nuclear power argue that it is
the cheapest way of achieving substantial CO2 reductions and that
it increases security of supply. They additionally claim that
high fossil-fuel prices increase its economic attraction. If these
claims are correct, then provided CO2 and security are properly
valued by the market, nuclear should be cost-competitive. Thus,
if the market failures are addressed then nuclear will be the
technology of choice.
There is a straightforward choice for the government
in the Energy Review: it can either pick winners (nuclear, renewables,
energy efficiency, and so on), or it can use market-based policy
instruments to incentivise the private sector to invest in low-carbon
options and provide sufficient capacity to insure against shocks
to the system.
There is a strong presumption against government
picking specific technologies in the energy sector, and in particular
prescribing a given number of new nuclear power stations. The
reasons are well researched and understood: government does not
have an informational advantage over the private sector, and it
is very vulnerable to technology capture. The history of energy
policy in general, and nuclear policy in particular, is littered
with examples of "picking losers" rather than winners
(Helm 2004).
The economic advantages of the market-based
approach are considerable. Economic instruments are neutral between
the demand and supply sides, incentivising both, they encourage
R&D, and are largely immune from regulatory and technology
capture. However, the political desire to provide lobby and vested
interest groups with "pay-offs" points towards technology
specification. The 2003 White Paper "Our Energy Future"
attempted to straddle both, in effect picking wind (and excluding
other non-carbon technologies such as nuclear from the Renewables
Obligation), while at the same time putting emissions trading
"at the heart of energy policy". In the Prime Minister's
speech to the CBI in May 2006, Tony Blair specifically referred
to three technologies that are back "with a vengeance".
This points to "picking winners".
3. HOW TO
CREATE A
LEVEL PLAYING
FIELD
Not only is a technology-specific policy likely
to be inefficient, but it is not necessary. The two fundamental
problems which confront policy-makers now are climate change and
security of supply. There are market-based instruments to deal
with each of these.
In the case of climate change, the instrument
is some form of a carbon price, either directly via a carbon tax,
or indirectly through emissions trading. The difficulty at present
is that the Climate Change Levy (CCL) is only a crude carbon tax,
and the EU Emissions Trading Scheme (EUETS) expires in 2012, with
little prospect of its shape and levels after 2012 being agreed
for some time to come. Climate change is a long-term problem:
the CCL and the EU ETS are short-term measures. For investment
in new electricity generation (of whatever technology and especially
in the nuclear case), there is a mismatch in time horizons. The
solution is to address this mismatch directly, and there are a
number of proposals for how to do this. These include: carbon
contracts and longer-term carbon taxes, with a number of hybrids
between the two. Helm and Hepburn (2005) set out a credible, pragmatic
and deliverable scheme for introducing carbon contracts.
In the case of security of supply, recognising
that the private sector will not knowingly invest in providing
excess supply (necessary for security of supply), there is a need
to create a mechanism which rewards investors for providing this
additional insurance capacity. The current market structure has
no such mechanism, and this is likely to create endemic security
of supply problems unless remedied. The market-based solution
is to graft a capacity market onto current structures (ie NETA)
(Helm 2005a).
These two instruments create a level playing
field for the various technologies—including nuclear and
wind—to compete. In addition, there are a number of generic
actions across the energy sector which would also contribute to
levelling the playing field. These include: addressing the issues
of planning, and technology licensing. In planning, the issue
is the extent to which "need" has to be demonstrated
and the way environmental assessments are conducted. In the case
of licensing, there are advantages in taking a pan-European approach,
and to treating technology as generally as possible. In the nuclear
case, this implies an EU licensing regime, with particular reactor
types licensed across the EU (Helm 2005b).
4. HOW MIGHT
NEW NUCLEAR
BE FINANCED?
Financing nuclear power station investment depends
on costs and on the nature and allocation of risks. A nuclear
power station project can be disaggregated into a series of component
parts, each of which can be mitigated through fixed-price contracts.
These risks include:
In nuclear developments to date, there has been
cost-pass-through for most, if not all, of these costs and risks
via the Bulk Supply Tariff under the CEGB and the Fossil Fuel
Levy following privatisation. Residual risk was transferred to
customers, and this included construction and performance. Such
a regime led to weak incentives, and it is not surprising that
construction delays and poor performance resulted.
In the current nuclear market, fixed-price construction
contracts are offered by power station construction companies,
and with performance contracts. This is a major advance, transferring
the risk to shareholders. Given this development, there is no
reason for the government or customers to underwrite these costs,
and no case therefore for any form of a general nuclear obligation.
These are private sector risks.
On power sales, the current market is characterised
by a lack of long-term contracts and the absence of a capacity
market. However, this is in part a function of the years of excess
supply (and hence the expectation of continuing low or even falling
prices), and the lack of financial disaggregation, which would
allow long-term contracts to be broken up into many smaller commitments
by purchasers (instead of a small number of large industrial firms
taking most of their power on a long-term basis, now a larger
number can each take a small proportion). There is no obvious
reason for intervention in this respect: the price project developers
can obtain is a function of the underlying fundamentals of supply
and demand. There is, however, good reason to intervene to create
a capacity market to secure supplies, and this can be grafted
onto NETA (Helm 2005a).
The absence of a longer-term carbon price, referred
to above, is a major obstacle, exacerbated by the discrimination
in the Renewables Obligation (which excludes nuclear) and the
design of the CCL. As indicated above, the problem can be resolved
by an appropriate long-term (technology-neutral) market-based
instrument, such as carbon contracts or carbon taxes.
Fuel supplies are competitively provided and
can be readily contracted for.
Waste costs should be borne by the project and
properly provided for. The contractual counter-party here is the
Nuclear Decommissioning Agency (NDA). There are two separate issues
here: the level of the costs; and the fixed versus flexible contracting
to pay them. The NDA might approach this in a risk-averse fashion,
particularly since the final disposal route is yet to be defined,
but these can nevertheless be contractualised.
Finally, decommissioning costs need to be provided
for, and a segregated fund capable of meeting these liabilities
needs to be set up in a transparent way, on the basis of a risk-averse
analysis of the costs and a low discount rate to reflect uncertainty
about future financial market performance. This should be either
a licensing or new legal requirement.
The financing of a nuclear project should therefore
be left to the private sector to choose the right risk/return
trade-offs, and the task for the government is restricted to assuring
that the carbon, security of supply and waste and decommissioning
aspects are properly priced, and that, in the event of bankruptcy,
the funds necessary to deal with the back-end costs are ring-fenced
and protected for the purposes to which they are ascribed.
5. THE ROLE
OF GOVERNMENT
The role of government in a new nuclear programme
should be a restricted one. It should not designate market share
or provide cost pass-through by way of a nuclear obligation. It
should not pick technologies, nuclear or otherwise. It should
instead focus on the primary policy objectives—carbon and
security of supply.
The Energy Review should focus on the post-2012
carbon markets and the reform of the electricity markets (in particular,
NETA). The waste and decommissioning will, however, remain areas
of direct government intervention, and the failure to resolve
issues in relation to the long-term disposal of nuclear waste
remains a serious policy weakness and the government has yet to
answer the challenge laid down by the Flowers Report in 1976 to
demonstrate that it has properly planned for the safe long-term
containment of radioactive waste for the indefinite future (Royal
Commission on Environmental Pollution, 1976).
2 June 2006
REFERENCES: Helm,
D R (2004), Energy, the State and the Market: British Energy
Policy since 1979, revised edition, Oxford: Oxford University
Press.
Helm, D R (2005a), A New British Energy Policy,
London, The Social Market Foundation.
Helm, D R (2005b), "European Energy Policy:
Securing supplies and meeting the challenge of climate change",
paper prepared for the UK Presidency of the EU and presented at
the Hampton Court Summit, November 2005, available at http://www.dieterhelm.co.uk
Helm, D R and Hepburn, C (2005), Carbon Contracts
and Energy Policy: An Outline Proposal, available at, http://www.dieterhelm.co.uk
Royal Commission on Environmental Pollution (1976),
"Nuclear Power and the Environment" (The Flowers Report),
6th Report, Cmnd 6618, London: HMSO.
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