Select Committee on Trade and Industry Written Evidence


Memorandum by Dr Dieter Helm, New College, Oxford


  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.


  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".


  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).


  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:

    —  construction;

    —  performance;

    —  power sales;

    —  carbon;

    —  fuel supply;

    —  waste; and

    —  decommissioning.

  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.


  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

Helm, D R and Hepburn, C (2005), Carbon Contracts and Energy Policy: An Outline Proposal, available at,

Royal Commission on Environmental Pollution (1976), "Nuclear Power and the Environment" (The Flowers Report), 6th Report, Cmnd 6618, London: HMSO.

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