Examination of Witnesses (Questions 166-206)
Peter Atherton. Malcolm Chilton. Peter Haslam. Jane
Smith. Matt Thomson
14 December 2011
Q166 Chair: We need to get on.
We have a tight timetable. Good morning to you all, and thank
you very much indeed for coming in. Some of you will have heard
some of the previous exchanges. We have a limited amount of time,
and we are grateful to you.
Could you start off by saying whether you think
the revised draft NPSs have improved certainty for investors?
Will they help to achieve the very high levels of investment needed
over the next 10 years?
Malcolm Chilton: Malcolm Chilton,
Covanta Energy.
I think NPSs will probably improve matters slightly,
but there are many other considerations for investors to take
into account. Investors will first be looking at the interim arrangements
while the IPC transforms into the new system. Is that going to
be carried out properly? There are some applications in the current
IPC system, including one of my own—in fact, I think it
may be the only application in the system—and if they are
dealt with expeditiously, in accordance with the IPC's rules,
that will help to create confidence.
There are many issues affecting investor confidence
other than the planning system. Although that is one of the key
issues, it is certainly not the only one. The availability of
investment for such projects is a much more difficult subject;
it is difficult to attract bank funding for renewable projects
at the moment. Part of that problem may be to do with things such
as the price of carbon or the price of electricity and how they
affect renewables. So there are a number of things.
From a planning perspective, yes, this system
and the new NPSs are helpful.
Jane Smith: On behalf of the UK
Business Council for Sustainable Energy, and indeed a number of
the other large energy associations, we believe that the NPSs
are absolutely key for providing the stable, long-term policy
framework that we all need to attract investment and deliver the
sustained, multi-billion pound investment programme that is needed
to deliver the Government's energy policy goals.
Malcolm mentioned the need for a seamless transition
from the IPC to the Major Infrastructure Planning Unit. But, if
we are to have a new national planning framework, which in principle
we support, and a radical rationalisation of planning policy statements,
that all creates a further period of uncertainty. So ratification
and designation of the NPSs become even more critical to delivering
that stable policy framework, particularly in the short term.
Peter Haslam: I'm Peter Haslam
from the Nuclear Industry Association.
I endorse what Jane has just said. We're keen
to see the National Policy Statements progress, and we think that
the streamlining of the current planning system is vital. The
UK needs to get on with building new energy infrastructure, including
new nuclear power stations. Therefore we want to see this implemented
as soon as possible.
Matt Thomson: Matt Thomson, Royal
Town Planning Institute.
From a planning perspective, the question of
whether the revised NPSs provide greater certainty for energy
investors is debatable. One of the key things that the NPSs need
to address, apart from giving energy investors as much certainty
as they can, is giving other investors as much certainty as they
can about the impacts that energy proposals might have on competing
uses for land. That is something we're looking at very carefully.
One of the key issues is that there is a lot
of reliance on the investment decisions that energy infrastructure
providers have made in the run-up to making a proposal. Such decisions
are based on their own criteria for the appropriate sites to site
a wind farm, or whatever. That doesn't really take into account
or give clear guidance on how the decision makers should weigh
up those investment criteria with the other criteria that may
be important to other sectors of the community or to other investors.
That is where the weaknesses are in the NPSs as they stand.
Q167 Laura Sandys: Two Ministers
have come to this Committee on several occasions and their position
was very clear. The UK was going to be one of the best places
to invest in the energy sector. From my understanding of the energy
sector, it is highly competitive and a lot of other major countries
are looking at the levels of investment that we require. First,
do you believe that we are one of the best or most attractive
countries to invest in? Secondly, do you think that capital will
be invested in the UK, or will the new markets take capital away
from us or create a much increased cost of capital?
Peter Atherton: Thank you. I am
Peter Atherton. I head up Citigroup's utility research team. For
the sake of my lawyers, I should say that I am speaking here as
an analyst, independent of whatever Citigroup's corporate view
may be.
Chair: You sound like a member of the
Government.
Peter Atherton: Sorry! We wrote
a report recently called The €1 Trillion Decade, which
looked at this very point. We wanted to tot up what the utility
sector—I am interested in the utility sector—is being
asked to spend across Europe over the next decade to do two things:
first, to replace, renew and replenish the existing asset base
as the assets get old and, secondly, to meet all these environmental
targets. The title gives away the outcome of that. We calculated
that the total bill is about €960 billion across the five
major European markets. The UK's share of that is about €320
billion. It is by far the biggest. The next biggest is France,
which is around €200 billion. Germany is around €180
billion. Several things flow from this. Will that capital be available?
Can it be produced at the time that it is being requested, and
what allocation questions are being taken on the boards of RWE,
E.ON, EDF etc.?
On your specific point about whether the UK
is attractive relative to the other European markets at the moment,
actually it is, interestingly enough, for two reasons. First,
our support mechanisms for renewables etc. are very generous.
There is not a lack of incentive to build. Secondly, in a lot
of European countries over the summer period, particularly in
Germany, Spain and the Czech Republic, you've seen a real car
crash between the utility sector and their Governments as those
Governments have started to pull back very heavily on subsidies
for renewables. That has happened in the Czech Republic. It has
happened in Spain. You've seen the nuclear tax imposed on the
German utilities, which has substantially increased the view of
political risk in those countries. The UK is in a slightly odd
position at the moment as we haven't built that much. Therefore
the utilities are still being encouraged to spend and invest.
The incentives are still looking good. However, from the investment
community's perspective, you have to bear in mind that 90% of
my institutional clients are pan-European, so what is happening
in these other countries very much impacts on their view of political
risk and therefore on the cost of capital.
On the sustainability of all these support mechanisms
for renewables, with the push to get the utility companies to
invest these vast amounts of money, the investment community has
become very concerned about whether it is sustainable and whether,
when the bills become due, the Governments of the day will stand
behind the decisions that were made several years ago. We have
seen that in Spain, the Czech Republic and Germany. That has substantially
reduced the appetite of investors for providing investment to
the utility sector or increasing the cost of capital; you can
do it like that. You can see it in the share price performance.
The utility sector has been de-rated by around 25% in the last
18 months. What does that mean in practice? It means that share
prices are much lower. Investors are requiring much higher yield
from the stocks and therefore effectively saying, "We want
much more of our investment back in returns now, in terms of dividends,
than we do in asset and capital growth." That practically
means that the companies have far less investment capacity today
than they thought they would have had 18 months ago.
Q168 Laura Sandys: So what you
are saying is that it is not a totally pretty picture out there,
and that we are going to be in a very competitive market—not
within the energy sector, but within other sectors—to raise
that capital?
Peter Atherton: There's an allocation
issue between bonds and equities, an allocation issue between
investors who have money to invest in equities, and an allocation
issue within the sector, absolutely. As I say, the attractiveness
of the companies that you are expecting to do the heavy lifting
on UK investment on renewables and new nuclear and so on is, at
the moment, very poor. The stocks that have been most de-rated
and most badly hit are E.ON, RWE, EDF and Iberdrola. Those are
stocks that have frankly been hammered, stock-price-wise, in the
past 18 months.
Q169 Laura Sandys: To go back
to the proper subject of the inquiry, do you feel that the NPSs
are a step forward in a positive direction, because planning is
often an issue?
Peter Atherton: In truth, I have
never had a discussion with an equity investor where NPSs have
ever come up. It's part of the mix, but what matters and what
investors are always concerned with is risk-reward. The really
big risks that people are looking at are construction risks and
power price risks, and then the rewards are offset. I warn you
that it is not a question of making the rewards more and more,
because the more you make the rewards, the less trust investors
will have that those rewards are going to be sustainable.
Q170 Barry Gardiner: Mr Atherton,
you have just upped the Government's estimate by £72 billion.
Dan Byles: No, that was euros.
Barry Gardiner: No, no, I have converted
it; Mr Atherton said €320 billion, and I make that about
£272 billion or £275 billion.
Peter Atherton: £40 billion
of the difference, in sterling, is water. We include water, because
we are looking at the total capex requirements, required by the
utility sector.
Q171 Barry Gardiner: But is that
amount out of your total, or is it out of the bit that you allocate
to the UK?
Peter Atherton: We include water
across Europe. In sterling, we would be talking about £260
billion, of which £40 billion is water. Our equivalent of
Ofgem's £200 billion is £220 billion.
Q172 Barry Gardiner: So it is
only a 10% uplift.
Peter Atherton: Yes. The mix will
be somewhat different.
Q173 Barry Gardiner:
I think your exchange rate is slightly different from the one
I was using.
Peter Atherton: Possibly.
Q174 Barry Gardiner: Can I ask
you this? You are an investment adviser, and I come along to you
and say, "Look, I've got £10 billion or £15 billion.
What I want to do is stick it all into CCS." On current evidence,
it isn't attracting a great deal of investment, is it? We have
one CCS investor. Are you actually going to say to me, "For
God's sake, don't do that; if you want to go and invest that sort
of money, there are lots of better places that you could be investing
it"? As an investment adviser, what advice would you give
me?
Peter Atherton: It would be very
simple; I would ask you what your risk-reward was. On a CCS project
that is entirely at your own risk, what sort of cost of capital
would you be looking at, given the scale of the new technology?
We are talking about a £1 billion-type project. You are looking
at 20% IRR or 20% WACC-type number, and if you can get that, great.
If you have a revenue line that you can predict, which will give
you that type of return, that is absolutely fine. The problem
is that you won't, unless the Government are willing to stand
behind it, or unless there is somebody who will guarantee it—in
which case, obviously, your WACC would fall, anyway.
Q175 Barry Gardiner: Let me be
more explicit in my question. Why is it that the investment at
the moment is not coming forward in the same way for CCS as it
is in other areas?
Peter Atherton: If you look at
the major utilities around the world, they are doing projects
on CCS, but they may not necessarily be doing it in the UK. Whether
the UK scheme is badly designed, or whether it requires too big
a move from projects of 50 MW to projects of a gigawatt that will
cost £1 billion—that might be part of it. But to be
honest, I don't have a strong view on that.
Q176 Barry Gardiner: What you are
saying to me and the Committee is: "I don't have a particular
handle on this, but it has to do with the mix between risk and
reward."
Peter Atherton: Always.
Q177 Barry Gardiner: And it ain't
there. The risk is too high, or it is perceived to be too high,
and the reward is too low, or it is perceived to be too low.
Peter Atherton: That must be the
case, or people would be doing it.
Q178 Barry Gardiner: So, in your
view, how could the Government go about amending that ratio of
risk to reward in CCS?
Peter Atherton: The most straightforward
way of doing it would be effectively to create a regulated asset.
You could do this with offshore wind as well if you really wanted
to change the risk-reward dynamics. You transfer the commercial
risk from the developer to the consumer/taxpayer. In that case,
the developer is going to be happy with a much lower return, because
the cost of capital comes down and he is guaranteed a return.
So if you make it a sort of regulated asset; you make it an asset
on which the developer is guaranteed a 6 to 8% return for 15 years,
or whatever the pay-back period is. That is the most straightforward
way to do it.
Q179 Barry Gardiner: So you nationalise
some of the risk?
Peter Atherton: You socialise
the risk, yes, absolutely.
Q180 John Robertson: Do you feel
the NPSs put enough emphasis on investment? Do they encourage
investment?
Jane Smith: Perhaps I can chip
in there. We think that they do; we think that the most important
thing and the reason why investors will invest is because they
need a stable policy framework. We believe that the NPSs are a
big step forward in providing that certainty. They also provide
a lot of valuable information for communities and their representatives,
in terms of the likely impacts and the likely mitigation measures
that come up with different technologies. That is key. It means
that when you get to a planning application consideration, you
can focus more on the local impacts. In terms of industry, we
are ready and willing to invest—indeed, we already are investing—and
the NPSs will be a big step forward in providing that stability
and that certainty while all the other reforms take place, not
least the electricity markets reforms. Those, of course, provide
further opportunities for incentivisation for a low-carbon economy.
Peter Haslam: From the nuclear
industry's perspective, we very much agree with that. It is vital
to have a long-term planning process that is streamlined and that
will enable projects to go through on time without undue delay.
In the past, there have been major delays, particularly on nuclear
projects, the last one being Sizewell B. It is very important
for the confidence of the utilities that that doesn't happen again,
and that they can see it won't happen again. We think that the
NPSs are a key element in putting together the framework that
will enable new nuclear build to take place. The other major part
of that framework, of course, is the market reform arrangements,
which we are expecting to be announced in the next few days, I
believe.
With that as the background, we are already
seeing substantial commitment to investment by the major energy
companies; for example, EDF bought British Energy, E.ON and RWE
set up Horizon, and GDF Suez, Iberdrola and Scottish and Southern
Energy have formed NuGen. Those are three consortiums that are
very keen to engage in new builds. We think that the industry
is recognising what Government are doing to create the right framework,
and clearly we need to see this continue. So far, the signs are
good.
Malcolm Chilton: It is a prerequisite
for investment, but it is not the key investment decision. It
may well make the UK a more attractive place to look at those
investment decisions. In my own industry, I recall an energy-from-waste
plant on the Thames that took eight years to go through its planning
process. I think most investors would see that as not really a
viable proposition. To be able to go through that process in one
to two years clearly is extremely helpful, but it is not the key
to an investment decision.
Q181 John Robertson: Mr Atherton,
you are obviously an expert in investment. CCS isn't getting the
investment that we'd hoped. Is it likely that it will get investment,
if it is not Government money? If it isn't, where will the investment
go?
Peter Atherton: It's clear from
what's happened with the UK process that it is unattractive to
most companies. There is only ScottishPower—Iberdrola—left
in, as far as I understand, so something has gone wrong there.
I have to say that this is not an area that I have spent a huge
amount of time looking at, because relative to the €1 trillion,
the CCS bid is de minimis. It is very largely a post-2020 issue,
whereas we are much more focused on the next five to 10 years.
Is it going to happen? With a lot of these problems, you are dealing
with some very, very frontier technologies: offshore wind, new
nuclear and CCS. Companies are being asked to do things far, far
faster than they would naturally do them. That is causing tremendous
tension and difficulties for a lot of the companies. CCS is a
really good example of that. Left to its own dynamics, it is a
10-to-15-year research project. As for implementation, "the
second half of the next decade" is how the engineers always
described it to me. We are asking people at least to go straight
to the very big pre-roll-out phase within the next few years,
which is a tremendous challenge.
Q182 Ian Lavery: The Government
have suggested four demonstration CCS plants. The first one will
be awarded in December next year and will cost about £1 billion.
The other three CCS plants will hopefully roll out between 2012
and 2014. From what you have said, there is very little appetite
for putting any private money into CCS at this point in time—I
think you mentioned decades. The Government's plans for the next
three plants are for the next two to four years. Would you agree
that the appetite is not there, and that if the private finance
is not there, the three remaining CCS demonstration plants will
not be built, and will obviously not be put in place? What is
your view?
Peter Atherton: There is no evidence
that the major, UK-based facilities have any appetite to build
those three; that is for sure.
Q183 Ian Lavery: If that is the
case and we are losing three plants, even though they will be
demonstration plants, there will be a loss of energy production.
How will that gap be filled?
Peter Atherton: Sorry, I didn't
really understand.
Ian Lavery: If we've got, in the planning
stage, three demonstration plants—other than the first one,
which will be funded by central Government—and there isn't
the private finance to develop them, there will be a reduction
in electricity generation. How will that be filled?
Peter Atherton: Oh, you're saying
that the plants that are going to shut under LCPD by 2015 may
have been converted to CCS. Our analysis is that, in terms of
megawatts, the UK is fine as regards security supply through the
closure of the LCPD plants, by and large, unless you get unlucky
with the AGRs. Don't forget that the UK has built about 7,000
MW; we have under construction about 7,000 MW, of course. We have
11,000 coming off, 7,000 of gas coming on. Then we have the renewables.
Don't forget, the reserve margin is already at 25%. The danger
happens under IED as you push into the second half of the decade.
Do you start losing some of the AGRs? What is the running regime
under IED? How reliable is the wind when it arrives? And so on.
You begin to run into some scenarios towards the end of the decade
where reserve margins can get pretty tight.
Q184 Ian Lavery: Is that lack
of appetite for CCS the same for CCS with coal as it is for CCS
with gas?
Peter Atherton: I don't want to
say that there is a lack of appetite for CCS, because E.ON, for
example, is doing stuff in various parts of the world, as are
other companies. What they are struggling to do is find an economic
way of doing it in the UK in the way that the UK Government are
asking them to do it.
Q185 Laura Sandys: As a follow-on
from that, what better model would there be to encourage investment,
if what the UK Government are requesting them to deliver is a
little bit more of a barrier than other regimes?
Peter Atherton: As I understand
it, some of the big problems with CCS is not just the cost of
building the plants, but the impact it has on the output of the
plant. If you lose 34% of your electricity, how are you going
to compensate the companies for that, as well as the cost of running
the plant? I mentioned before that, ultimately, if you want it
built, and if there is a public good to be had from doing this,
then, frankly, the public is just going to have to pay for it.
That's what it boils down to. Clearly, it isn't in the commercial
interest of the companies themselves to do that. Why would you
make your plant massively less efficient and massively more expensive
to run unless you get paid for doing it?
Q186 Laura Sandys: I want to broaden
things out a little more, specifically on NPSs. From an investment
perspective, do you see there being a conflict between the Localism
Bill, which gives localities, neighbourhoods and so on a much
stronger voice, and the NPSs? Are there issues of judicial review
and conflict of objectives?
Jane Smith: Perhaps I could start
and others may chip in. Certainly, if you look at the NPSs and
the Planning Act 2008 reforms, which the industry fully supported,
they already provide enhanced opportunity for communities to engage
much earlier in the process by making pre-application consultations
statutory. Indeed, communities can engage throughout the process,
so there is already a much greater opportunity for communities
and statutory consultees to engage and an enhanced role for local
planning authorities.
Clearly, the Localism Bill places further emphasis
on localism, although I have yet to go through it line by line.
We will need to work through that, but we certainly support the
concept of localism. Of course that needs to be balanced against
the urgent national need for substantial amounts of energy infrastructure.
In designing and locating potential sites, we always look at the
impact on both the environment and the local communities, and
we work closely with them and their representatives. So I do not
necessarily see that there is a big conflict.
Matt Thomson: May I chip in? I
tried to scan as much of the Bill as I could before I got here.
In comparison with what is actually in the Bill, the emphasis
on neighbourhood control of planning has perhaps been overstated.
From what I have seen so far, and I stand to be corrected, the
neighbourhood plans will need to demonstrate that they are in
accordance with other, more strategic plans, which presumably
include NPSs and proposals that are either already in the pipeline
or are already approved. The role for neighbourhood plans is much
more about giving the community the power to have, as it were,
the things that they need delivered in a way that works for them,
rather than stopping things that they need, which might have been
agreed in other forums. I think that there is perhaps less of
a conflict than we were concerned about, given some of the rhetoric
ahead of the Bill's publication.
Malcolm Chilton: Can I make a
comment, too? The new IPC applications require much more public
consultation than was normal in the past. To give an example from
the only live application at the moment, the public consultation
section is a 1,300 page document in its own right. The key is
whether negative local issues weigh heavily in the inspector's
final judgment, whether the politics of the situation outweigh
the strategic benefits for the country.
We have to wait and see, but if we're looking
at the total of renewables that we need to meet our 2020 targets,
we have to remember that much of that will be delivered from facilities
providing less than 50 MW, which come under this planning regime.
Most renewables are smaller than that; land-based renewables certainly
are. Localism may impact on such decisions, and I don't think
that has been properly thought through yet. One of the ways in
which that might be helped is by reducing the threshold for infrastructure
applications from 50 MW to 25 MW, which should be thought about.
Yes, there is a conflict when you try to build
infrastructure. There is always a conflict with local people.
I know that as well as anybody, because I do it all the time.
I have never tried to develop anything anywhere that didn't cause
local controversy. That comes with the territory. It is very difficult
to debate that issue locally and try to get people to see the
strategic benefits for the nation and set them against their local
interests. It is not something that a developer can do. I don't
think it's something that local planners do terribly well, which
is the reason for what we are now doing. We still have a long
way to go.
Q187 Dan Byles: We have talked
quite a bit about the investment regime and the impact on investment
in CCS. Can we go back to nuclear for a moment? Charles Hendry
has said that 16 GW of new nuclear has had some expression of
interest or is somehow in the pipeline. What does the investment
appetite look like for that? Do we really think, given some of
the concerns you have suggested about the problems that the people
who are expected to do the heavy lifting on this face in investment
terms, that we are going to get 16 GW of new nuclear online in
the time frames that the Government are talking about?
Peter Haslam: We believe that
we will; but that, of course, is crucial on the NPSs going forward
on track and being implemented on time and on the forthcoming
market arrangements. As I said in response to an earlier question,
there has been a lot of interest, and we now have three new build
consortiums that have already spent quite a bit of money on putting
together their operations to pursue new build. Although investment
decisions have not been taken yet, we are moving towards that,
but that will, of course, be crucially dependent on what the market
reform arrangements include.
Jane Smith: I think it is also
worth saying that to deliver this level of investment is challenging
but achievable. It is similar in stature to the nuclear programme
in France in the 1970s, when they went from approximately where
the UK was at that time with Magnox power stations and delivered
a substantial PWR construction programme over 10 to 15 years to
get France to 75% reliance on nuclear. So it is doable, but we
must have the right economic and regulatory models to go with
the robust and timely planning system to make that a reality.
Q188 Dan Byles: Do you think that
the NPSs look like they are giving us that?
Jane Smith: I think they are a
good step forward. Peter mentioned the electricity markets review,
which will clearly have a big part to play, but without the NPSs
and that stability, it is a big hurdle to get investors to actively
start moving things forward. We risk another hiatus while all
the other reforms go through, however worthy they are.
Q189 Dan Byles: Mr Atherton, do
you agree?
Peter Atherton: When was the 16
GW meant to be online by?
Dan Byles: The Minister suggested that
2025 is potentially in the pipeline.
Peter Atherton: The straightforward
answer is no. It is extraordinarily unlikely and extraordinarily
challenging. Equity investment in nuclear in the UK poses tremendous
challenges. There are five really big risks: planning, construction,
power price, operation and decommissioning. The planning is a
work in progress. The reforms will, I hope, condense the planning
process and it will be relatively low risk. The real biggies are
construction and power price. On construction, it is going to
be extraordinarily difficult to get non-recourse debt into new
nuclear in the UK. That basically means that it all has to be
done on balance sheet.
On the type of risk, if you get a Flamanville
or a TVO-type overrunning costs and time, that could wipe out
your entire equity investment in the project. There are a lot
of clever bankers working on this, so my colleagues in the corporate
finance departments will be coming up with all sorts of very innovative
ways of trying to deal with those risks. But the construction
risk is very profound and real, and somebody is going to have
to carry out whether we are going to offload it on to the consumer,
the taxpayer or others. Somebody has to carry the risk, so it
is a profoundly challenging risk.
You also have power price risk. Nobody has ever
built a merchant nuclear station in the world for very good reasons,
because nobody is insane enough to do it. The industry has said
to the UK Government, "We aren't going to do it," which
is why they are asking for carbon price floors, capacity payments
and so on. What is that about? It is transferring risk from the
developer to the consumer in that case. They are going to try
to offload the prices, so the energy market reforms will obviously
be very important. The corporate should take the risk of operation,
and decommissioning should be pay as you go. The energy market
review may go quite a way towards helping deal with the power
price risk. We have taken action on the planning risk. The real
big one that is going to be a tremendous challenge to get over
will be the construction risk.
EDF is in a slightly different position from
everybody else. It is 82% owned by the French state and the French
state has an industrial policy which wants to press forward for
the EPR. EDF might be willing to take the construction risk on,
but the other players will need construction risk help. The Americans
give it via federal loans, cheap loan guarantees etc., and their
prime nuclear stations are regulated. It is a regulated asset
and therefore the consumer takes those risks.
In the UK at the moment, it is still proposed
that the private sector takes those risks. Fine, if you've got
a track record or building two, three, four, five of them elsewhere
in Europe and they are all being delivered on time and on budget
then perhaps the investment community will take a view that that
risk is now manageable and quantifiable. But the only two that
are under way at the moment are late and well over budget. So
the perception is that that risk is going to be pretty high.
Peter Haslam: Can I just come
back on the question of construction risk? Peter is right that
the Finnish project at Olkiluoto and Flamanville are slightly
behind time and cost. However, that is not the experience worldwide.
There are numerous projects under way in China that are progressing
both to time and cost.
Q190 Chair: They probably don't
have many planning delays in China, do they?
Peter Haslam: That's one issue
they don't have. That's true. The key to this as far as the UK
is concerned is that we are planning to use international designs
that have already been constructed, so when they deploy them in
the UK, they will have had the benefit of the experience in building
them in Finland. One of the problems with Olkiluoto was that there
were design changes during the construction and that is something
that hopefully would not happen here because of the GDA process,
which enables the regulator to identify and tackle issues at the
first stage before building starts. So hopefully that problem
would not occur here. Although construction risk is obviously
an issue, I am not sure that it is quite as bad as people suggest.
Peter Atherton: I'm afraid it
is what it is. It is that bad. I'd be happy to be shown the error
of my ways, but as of today, what is the perception of that risk?
What is the price that I'm going to apply to the cost of capital
to take account of that risk? I think my description of how debt
and equity investors will view that risk is correct. Over time,
that will change because you get more experience. How much weight
will one place on what is happening in China versus what we can
see 20 miles across the channel in Flamanville? Most people will
look at Flamanville and TVO, rather than at China, but China will
be another data point, for sure.
Q191 Dan Byles: Is there any consensus
on the actual cost per kilowatt-hour of new nuclear build going
forward, looking at the full lifetime costs, including decommissioning
at the end?
Peter Atherton: Which one do you
want?
Q192 Dan Byles: And how does it
compare with projected CCS and offshore wind?
Peter Atherton: Everybody can
do the calculations in their own way. We have done our own.
Q193 Dan Byles: Hence my question:
is there consensus?
Peter Atherton: The biggest issue
is what cost of capital you use. Let me give you an example. On
our calculations using a 10% cost of capital, the required revenue
to meet that cost of capital for an EPR would be just under £70
a megawatt-hour. That includes an assumption of pay as you go
for nuclear waste. If you use a 15% cost of capital, which is
far more realistic, unless these risks of construction and power
price have been offloaded on to other people, it would be about
£93 a megawatt-hour.
Q194 Dan Byles: How does that
compare with offshore wind?
Peter Atherton: The only thing
that makes new nuclear look cheap is offshore wind, which is coming
in at around £150 a megawatt-hour. Solar is so far off the
scale we don't even both calculating it. CCGT gas—this is
based on €30 carbon, $100 oil, and 60p per therm—is
£60 per megawatt-hour and you enter in price coal just shy
of £80, nuclear in the £90s, using a 15% WAC, onshore
wind about £80, offshore wind about £150.
Q195 Barry Gardiner: Could we
have that in writing?
Peter Atherton: We have written
numerous reports on this that explain all our numbers and things.
I'd be very happy to send you an Excel model that allows you to
put in all your own assumptions and churns out the number at the
end.
Chair: That would be very helpful indeed.
Q196 Dan Byles: Out of interest,
do you take a different view?
Peter Haslam: Financial cost for
future generations is essentially a matter for the utilities rather
than the NIA. We are not experts on this. I noticed from the Government's
evidence that DECC asked Mott MacDonald to produce a report, which
looked at generation costs for the main large-scale technologies
in the UK, and that showed that, in the short term, gas-fired
CCGT was unsurprisingly the least costly. Looking further ahead,
it expected nuclear to be the least costly main technology on
DECC's central fuel and carbon assumptions. It has to be said
that Mott MacDonald said that there were many different ways of
looking at this and that all these things were fairly uncertain,
but its conclusion was that nuclear was the least costly long-term
option.
Peter Atherton: That sounds like
the sort of research that the IEA did recently, but it got to
those numbers by using a 5% cost capital for nuclear, which obviously
helps.
Chair: We haven't got a lot of time left,
and several colleagues want to come in, so can I appeal for quick
questions and quick answers?
Q197 Dr Whitehead: Could I briefly
return to the question of the 16 GW of new nuclear online by 2025,
which is the projection that was put to this Committee just recently?
It is important, because if that is the case, then the majority
of the non-renewable 18 GW gap set out in NPS1 is apparently filled
largely by new nuclear. That implies one new nuclear plant coming
on stream every nine months from 2018 to 2025. The Committee on
Climate Change projections from 2009 suggested, at most, one nuclear
power plant every 18 months after 2018—assuming the 2018
target was met. What has changed between those two points to cause
the assessment to be double the speed than was suggested in 2009?
Peter Haslam: I'm not familiar
with the case that you have from 2009, but there are three consortia
that are separately taking forward proposals for new builds. Their
belief is that they can build new nuclear power stations to enable
16 GW to be available by 2025—assuming that all the other
arrangements that we discussed earlier are in place. Utilities
think they can do it.
Q198 Dr Whitehead: I find that
a little surprising in the light of other estimates, but are there
particular things from the past year that have caused a sudden
change in estimate of speed of deployment over and above those
estimates that were generally thought of as optimistic a year
ago?
Peter Haslam: I think the only
change is that the utilities have looked carefully at what is
required to put this together, and they believe that it will work.
Q199 Christopher Pincher: Following
on from that, there seems to be some disagreement as to whether
the 16 GW 2025 nuclear capacity can be reached. We had DECC officials
at this Committee a few weeks ago, and they said that there is
a sufficient skill base in the country to decommission Magnox
plants, which is currently going ahead, and also to meet the demands
for new builds. Do you concur with that, or do you think that
skills will need to be imported from other countries? Will that
be factored into the cost price of the build?
Peter Haslam: There is a strong
skills base in the UK, which has been undertaking the decommissioning
of the first generation of nuclear plants. That will be used in
building new plants as well. There will be a transfer of some
staff from decommissioning sites to new build sites. There are
a lot of Government initiatives under way at the moment to improve
the skills base—the National Skills Academy for Nuclear
has been set up, for example, and Cogent is doing quite a bit—and
there is a recognition that a large skills base is required to
undertake all this work. The Government are hoping to ensure that
the UK provides as much of that as possible.
Q200 Christopher Pincher: That
seems to be a recognition that it is not fully fillable by domestic
skill.
Peter Haslam: Well, I think we'll
have to wait and see.
Q201 John Robertson: Investment,
we are told, is governed by three things: planning, construction
and power price. We have been told today that CCS is really not
a good investment, and we have been told that nuclear energy is
not great, but the UK is a good country to invest in and it would
appear to be being invested in. So, where is this investment going?
Is it down to subsidy of new build, or are we going to go down
the road of a new dash for gas and we won't worry about our CO2
commitments? Where is this investment going?
Malcolm Chilton: I can tell you
where some of it is going, at least. My company is looking to
invest £3 billion. That is not much against the total of
£200 billion but it is something in the energy-from-waste
sector in the UK, which has a very sound policy base.
Q202 John Robertson: Is it subsidised?
Malcolm Chilton: No; PFI funding
may have been a partial subsidy to the industry in the past, although
that's very much in decline now. I wouldn't say it was subsidised,
no.
Q203 Chair: Does it qualify for
ROCs?
Malcolm Chilton: Not normally.
If certain technologies are used, it can qualify for ROCs, but
those technologies are not really developed and there are few
examples of anyone trying to do that. It is relatively un-subsidised.
Q204 Sir Robert Smith: Should
it qualify for renewable heat?
Malcolm Chilton: I think if it
is in CHP mode then it certainly should. Not to qualify would
be discriminatory, really. I actually think not qualifying for
ROCs to be somewhat discriminatory, but that is the situation.
Q205 Chair: Relatively un-subsidised
sounds a bit like slightly pregnant.
Malcolm Chilton: The only subsidy
is PFI funding, and those projects that don't have PFI funding
are not subsidised.
Q206 Dr Whitehead: So that comes
back, however, to the same improvements in the waste industry
as the carbon floor price would be in the energy industry.
Malcolm Chilton: Absolutely, and
I think it is a very good example of how a predetermined tax over
a period of time can really bring about seismic change in the
way an industry behaves. I think a gradually increasing carbon
tax—or however you have chosen to do it—over the 10
years between now and 2020 would have a dramatic effect on outcomes,
both for renewables and, I suspect, for nuclear as well.
Chair: I think we're probably reaching
the end, unless any of my colleagues has a burning question that
they need to ask, because I am aware you have probably got important
engagements to go to. Thank you very much for coming; it has been
a very, very useful exchange and I am sure we want to keep in
touch with all of you.
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