The revised draft National Policy Statements on energy - Energy and Climate Change Contents


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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