Written evidence submitted by the Parliamentary
Office of Science and Technology|
In May 2010 the government announced that it would
allow the construction of new nuclear generators but stated that
they would receive no public subsidy. The definition used for
"public subsidy" excludes any support that is general
for low carbon generators rather than specific to the new nuclear
industry. The government has also stated that it does not rule
out taking on financial risks or liabilities related to new nuclear
In this context, there has been debate over what
can be defined as a subsidy. This document describes broad and
narrow definitions of the term "energy subsidy" and
considers existing and proposed support mechanisms for electricity
generation technologies including new nuclear power stations in
State financial interventions in the energy sector
have been common for many years. Governments have used subsidies
to enhance security of supply, reduce air pollution and emissions
of greenhouse gases, strengthen competitiveness, provide social
benefits and protect employment.
This sometimes involves supporting novel technologies until they
become competitive with established ones.
The International Energy Agency (IEA) define "energy
subsidy" broadly, as "any government action that lowers
the cost of energy production, raises the price received by energy
producers or lowers the price paid by consumers".
A similar approach has been used by the OECD to define subsidies
in general.110 Both approaches capture direct subsidies, such
as grants from governments to consumers or producers, but also
a variety of other interventions that directly or indirectly affect
prices or costs. Table 1 summarises government interventions that
fall within the IEA definition.
TYPES OF ENERGY SUBSIDY AS DEFINED BY THE
IEA110 AND EEA
An example of a simple and direct subsidy scheme
in the UK was the Low Carbon Buildings Programme, which provided
grants to consumers installing small scale generators such as
solar panels. Another example of a direct subsidy is the Deep
Geothermal Challenge Fund, which subsidises producers (rather
than consumers) by providing grants to support the development
of geothermal projects. There are a number of other government
interventions that fall within the IEA's broader definition of
an energy subsidy. These include the government's plans to provide
up to £60 million for the development of infrastructure at
UK ports for offshore wind turbine manufacturing, and funding
for the Nuclear Skills Academy and the Nuclear Advanced Manufacturing
Research Centre led by the University of Sheffield. Funding for
research and development across of wide range of energy technologies
is also provided through the Research Councils.
A narrower definition for subsidies is used when
countries report their economic activity in the form of National
Accounts. The UK and other European Union (EU) countries follow
European guidelines, in which subsidies are described as "current
unrequited payments made by general government or the European
Union to enterprises".
The Office for National Statistics (ONS) is responsible
for producing the UK's National Accounts. Like similar statistical
offices throughout the EU, it interprets the European guidelines
in order to do this, sometimes in consultation with the relevant
government department or Eurostat. Whenever the classification
is not straightforward it is referred to the National Accounts
Classification Committee (NACC) within the ONS.
The Renewables Obligation (RO) is an example of an
unclear, energy-related classification that was referred to the
NACC and deemed to provide subsidies. The RO is not a straightforward
subsidy to renewable generators because it does not involve a
flow of money from the government to the producers (generators)
themselves. Instead, it places an obligation on electricity suppliers
to buy a growing percentage of the electricity they sell from
eligible renewable generators. Eligible generators receive Renewable
Obligation Certificates (ROCs) for each unit of electricity that
they generate, which they sell in a marketplace to be bought by
suppliers who thus demonstrate their compliance with their obligation.
If suppliers do not meet their obligation in full they can pay
into a "buyout" fund, which is later redistributed to
suppliers in proportion to the number of ROCs they presented.
The National Accounts Classification Committee ("the
Committee") concluded that the Renewables Obligation is an
imputed tax and subsidy.
The renewable generators are effectively being subsidised by the
ROCs, which are funded by a "tax" on electricity suppliers
(and their customers, to whom the costs are likely to be passed).
As an imputed tax and subsidy, ROCs appear in the National Accounts
as money flowing to and from the government as taxes and subsides,
although these transactions do not in fact take place.
The Committee also concluded that the trading of
allowances within the European Union's Emissions Trading Scheme
(EU ETS) should be treated as an imputed tax and subsidy. In this
case, however, there has been disagreement at an international
level and Eurostat are yet to issue formal guidance to national
statistical offices on how they should be treated.
The EU ETS is not, therefore, treated as a tax or subsidy in the
UK accounts as yet. The Committee are currently considering classifications
for a range of other energy-related interventions. These include
the Carbon Emissions Reduction Target, the Renewable Transport
Fuels Obligation, and Feed In Tariffs for small electricity generators
(of less than 5 MW in rated output).
In addition to the costs of current subsidies, the
UK government has commitments to cover certain future costs related
to energy supply. These do not necessarily appear in the National
Accounts which, just like many balance sheets, include only those
liabilities that fall within a relatively narrow definition. To
support effective fiscal policy, and in the interests of transparency,
the ONS has published an assessment of "wider measures of
public sector debt",
which includes liabilities that are contingent on future events.
A significant example of contingent liabilities relates
to nuclear decommissioning. The Nuclear Decommissioning Authority
estimated that in 2004-05, gross decommissioning commitments for
its estate were £24.1 billion, and that these increased each
year to reach £44.5 billion in 2008-09. Of this latter figure,
only £5 billion will be recoverable under commercial arrangements,116
presumably with funds generated by the NDA's remaining magnox
nuclear generators. As contingent liabilities, these figures do
not appear in the UK's National Accounts, but are nevertheless
costs that the public sector will ultimately cover.
In May 2010 the Coalition government said that it
would allow the construction of new nuclear generators "provided
that they are subject to the normal planning process for major
projects (under a new National Planning Statement), and also provided
that they receive no public subsidy".
On 18 October 2010 the Secretary of State for Energy
and Climate Change, Chris Huhne, confirmed this policy and clarified
what is meant by "no public subsidy", saying:
(a) there will be no levy, direct payment or
market support for electricity supplied or capacity provided by
a private sector new nuclear operator, unless similar support
is also made available more widely to other types of generation.
New nuclear power will, for example, benefit from any general
measures that are in place or may be introduced as part of wider
reform of the electricity market to encourage investment in low-carbon
(b) I would also like to make it clear that we
are not ruling out action by the Government to take on financial
risks or liabilities for which they are appropriately compensated
or for which there are corresponding benefits.
In contrast, there are at least three ways in which
commentators have argued that new nuclear power will or may effectively
(c) Through the carbon floor price and proposed
feed in tariffs that form part of the government's programme of
electricity market reform;
(d) By agreeing fixed costs for decommissioning
and waste management costs, and;
(e) By limiting the liability of nuclear operators
in the case of an accident.
Each of these areas is explored below in the context
of both the government's stated position on new nuclear power
and the previous IEA and NAO definitions of subsidies.
The government recently proposed various reforms
of the electricity market to encourage a significant expansion
of low carbon generation. A white paper is due in late spring
2011 that will outline the associated legislative proposals. Two
elements of the proposals that some have argued would be subsidies
for nuclear power are the introduction of both a carbon price
floor (confirmed by the Treasury in the 2011 Budget) and a full
system of feed in tariffs for new electricity generators.
The carbon price floor will be imposed through amendments
to the climate change levy and fuel duty and will be introduced
in April 2013. It involves a tax imposed on top of the market
price for tradable carbon credits under the EU ETS, and is set
at a level that increases the price of carbon to a guaranteed
£16 per tonne of emitted carbon dioxide in 2013-14. The tax
will be adjusted such that the floor price increases linearly
to £30 per tonne by 2020. The aim is to provide an increased
and certain price for carbon and thus encourage investment in
low carbon rather than high carbon generation.
Producers of low carbon electricity such as existing
and new nuclear generators will benefit from the increased price
of electricity that the tax will presumably cause. According to
the IEA definition of energy subsidies, the intervention could
therefore be considered a subsidy. In the government's terms,
however, the intervention is not specific to the nuclear industry
and hence does not contravene its stated definition of "no
public subsidy for nuclear".
In addition to the carbon price floor the government
aims to introduce a system of feed in tariffs (FITs). These are
long term contracts that guarantee an increase in the price of
electricity for low-carbon generators above the wholesale market
price. Again, the aim is to encourage investment by providing
attractive and more certain rates of return to generators. The
specific design of the FITs is yet to be determined but in any
of the proposed forms it would, under the IEA definition, be considered
an energy subsidy since it increases the price of electricity
for low-carbon generators. Once again, though, if the intervention
is non-specific regarding technology it would not contravene the
government's stated definition of "no public subsidy for
Some have argued that the FIT system will need to
be designed differently for different technologies. EDF Energy,
for example, gave evidence to the Commons Energy and Climate Change
Committee saying that "a single flat payment is unlikely
to provide sufficient returns to deliver all ... technologies
and ... some renewable technologies in particular will require
higher payments until they become mature."
Indeed, it is for this reason that differentiation between technologies
was introduced into the existing Renewables Obligation in April
2009, providing greater payments to (more expensive) technologies
that are further from market and thus encouraging a wider portfolio
of technologies. If such differentiation is introduced into the
proposed FITs, it is possible that there would then be a specific
"subsidy" for the nuclear industry.
The Energy Act 2008 requires nuclear operators to
arrange financing to cover the full costs of decommissioning and
their share of waste management costs. Prior to construction,
operators must submit a Funded Decommissioning Programme (FDP)
for scrutiny by the Nuclear Liabilities Financing Assurance Board
and approval of the Secretary of State.
Currently, Section 48 of the Energy Act 2008 allows
the Secretary of State to propose a modification to the FDP after
it has been approved, and this may include adding additional obligations
on the operator. Additional obligations might be required, for
example, if there were issues with stored waste or if a new safety
feature were developed that ought to be installed.
Clause 102 in the Energy Bill 2010-11 would alter
this situation. It would allow the Secretary of State "to
agree to exercise, or not to exercise, the Section 48 power"
in a particular manner and over a particular period. This has
raised concern that the Secretary of State could guarantee, at
the outset, not to amend an agreed Funded Decommissioning Programme.
This would reduce risk for investors but potentially expose the
public to unforeseen decommissioning or waste-related costs. The
Shadow Secretary of State for Energy and Climate Change has said
that it "could leave taxpayers facing liabilities in the
future", and Friends of the Earth said that by shifting financial
risks to the public sector, it would represent a hidden subsidy.
In response, DECC said that it would not pave the way for taxpayer
funding, however, since the Secretary of State must aim to ensure
prudent provision for all the costs at the outset.120
The UK is a signatory to the Paris Convention on
nuclear third party liability and Brussels Supplementary Convention,
and has been since their inception in the 1960s. The Conventions
establish an international (largely western European) framework
for compensating victims of a nuclear accident and are implemented
in the UK by the Nuclear Installations Act 1965. The Conventions
have been revised periodically and most recently in 2004, and
the government recently published its proposals for implementing
these most recent amendments.
Significant among the proposals is a sevenfold increase
in the liability of nuclear operators from the existing level
of £140 million to 1200 million, which is 500
million more than required by the amended Conventions. Operators
will also become liable for a wider range of potential claims
and geographical scope. The increased limit will be phased in
over five years starting at 700 million and increasing annually
by 100 million. Although the government is proposing a greater
limit than the minimum required, the Conventions do in fact allow
countries to set an unlimited liability for private nuclear operators.
If an accident were to involve costs that exceed the defined limit,
the government and hence the taxpayer would presumably cover the
Furthermore, the government has indicated a willingness
to step in as an insurer of last resort if the operators cannot
find private insurance or other financial security to cover all
of their new and increased liabilities. It would do so for a charge
based on its assessment of the risks it would be taking on. This
would again involve the transfer of risk from the private to public
As indicated in paragraph 5, there are a range of
other support mechanisms that some consider as subsidies. For
the nuclear industry these include funding for the Nuclear Skills
Academy and the Nuclear Advanced Manufacturing Research Centre
led by the University of Sheffield. The Secretary of State has
that these forms of support fall outside of the scope of what
the government means by "public subsidy" for new nuclear
The following contains more of the written ministerial
statement by the Secretary of State for Energy and Climate Change
on 18 October 2010 that relates to public subsidies for nuclear
power. Hansard reference: HC Deb, 18 October 2010, col 42-46WS,
also available at http://www.decc.gov.uk/en/content/cms/news/en_statement/en_statement.aspx.
The Energy Act 2008 puts in place the framework to
ensure that operators of new nuclear power stations meet in full
their waste management, waste disposal and decommissioning costs.
Today I am laying in the House the Nuclear Decommissioning
and Waste Handling (Designated Technical Matters) Order 2010.
This order will give operators greater clarity over which liabilities
require monies to be set aside in segregated funds.
The Order will proceed under the affirmative procedure
and, if passed, will be followed by the Decommissioning and Waste
Handling (Finance and Fees) Regulations 2010.
The Order and the Regulations together complete the
statutory framework for the financing of nuclear waste and decommissioning.
Alongside the other announcements being made today
on steps the Government are taking to enable new nuclear power,
I should like to take the opportunity to reconfirm the Government's
policy that there will be no public subsidy for new nuclear power.
To be clear, this means that there will be no levy,
direct payment or market support for electricity supplied or capacity
provided by a private sector new nuclear operator, unless similar
support is also made available more widely to other types of generation.
New nuclear power will, for example, benefit from
any general measures that are in place or may be introduced as
part of wider reform of the electricity market to encourage investment
in low-carbon generation.
I would also like to make it clear that we are not
ruling out action by the Government to take on financial risks
or liabilities for which they are appropriately compensated or
for which there are corresponding benefits.
Specifically, within the framework of the Government's
policy under the Energy Act 2008, that new nuclear operators must
have arrangements in place to meet the full costs of decommissioning
and their full share of waste management costs, we will not rule
out taking title to radioactive waste, including spent fuel, at
a fixed price provided that price properly reflects any financial
risks or liabilities assumed by the state.
In addition, the Government are committed to the
Paris convention on nuclear third-party liability and the Brussels
supplementary convention. These conventions establish an internationally
agreed framework for compensating victims in the unlikely event
of a nuclear accident. The UK is already a party to them-and currently
caps operators' liability at £140 million. The UK is also
bound, with other Brussels signatory states, to contribute to
a fund that will compensate victims both in the UK and other convention
countries should a serious nuclear incident happen.
The Government will consult later this year on our
proposals to implement amendments to the conventions. These amendments
impose a more stringent regime for operators than the current
one, and alongside these improvements, the Government will be
consulting on whether to continue to include an upper limit on
operator liability, as permitted by the conventions. Accordingly,
in line with the policy I am outlining, and without prejudice
to the outcome of that consultation, the Government have not ruled
out the maintenance of a limit on operator liability set at an
appropriate level provided that it is justifiable in the public
interest, is the right way of ensuring that risk is appropriately
managed, and that, overall, any potential cost or risk to the
Government can be justified by the corresponding benefits of the
Arguably, few economic activities can be absolutely
free of subsidy in some respect, given the wide-ranging scope
of state activity and the need to abide by international treaty
obligations. Our "no subsidy" policy will therefore
need to be applied having regard to proportionality and materiality.
We will not rule out the Government providing support
to industry in the normal course of the business of government,
for example through the activities of the Office for Nuclear Development
in taking forward the actions to facilitate the deployment of
new nuclear power in a similar manner to the facilitation of other
energy types. The Government will continue to meet their international
obligations and support wider activity in the nuclear sector,
including support for research and development, supply chain and
The Government will also continue to provide funding
to the Nuclear Decommissioning Authority to ensure the efficient
and effective clean-up of the UK's civil, public sector legacy
21 April 2011
109 European Environment Agency, 2004, Energy Subsidies
and Renewables Back
UNEP and IEA, 2002, Reforming Energy Subsidies Back
European Environment Agency, 2004, Energy Subsidies in the
European Union: A Brief Overview Back
Eurostat, 1995, European System of Accounts 1995. These
guidelines are themselves based on the international System
of Accounts 1993, which the ONS indicates are being adopted
throughout the world. The full definitions relating to subsidies
may be found at
Gazely I,2006, UK Environmental Taxes: Classification and Recent
Stokoe P, National Accounts Classification, Office for National
Statistics, 2011, Personal Communication Back
Hobbs D, 2010, Wider Measures of Public Sector Debt: A Broader
Approach to the Public Sector Balance Sheet Back
The Coalition, May 2010, Our Programme for Government Back
HC Deb, 18 October 2010, col 42-46WS. Also reproduced in Appendix
Energy and Climate Change Committee, EMR Written Evidence No.25
Harvey F, 4 April 2011, Loophole in energy bill could see UK
taxpayers funding nuclear bailouts. Available online at:
DECC. Jan 2010, Implementation of changes to the Paris and
Brussels Conventions on nuclear third party liability: A Public
HC Deb, 18 October 2010, col 42-46WS. Also reproduced in Appendix