Energy and Climate Change CommitteeWritten evidence submitted by Dr James Lawton (NUC 06)

Former Positions held with National Power:

Director of Research;

Director of Corporate Planning; and

Director of Trading on the Electricity Pool.

Executive Summary

Considerable progress has been made in devising contracts for electricity generators. However there has not been the same focus on ensuring that we develop the least cost Power System (Generation and Transmission). The economic advantage of using nuclear power to provide all base load electricity needs to be acknowledged and its ability to operate flexibly needs to be taken into account. This memorandum highlights steps that would speed up investment in nuclear and ensure that the most cost-effective use is made of it. A procedure is proposed that would identify the most economically viable solution to CO2 abatement and set it within the context of the UK’s international competitiveness:

EdF’s monopoly of sites restricts investment opportunities and stifles competition and needs to be broken.

Competitive tendering is needed to keep pressure on prices and provide insurance against construction delays (EdF’s automatic purchase from Areva is unacceptable).

All generators seeking a guaranteed return on new investment should be required to go to international tender for their plant.

There is an urgent need to adopt a method for identifying the least cost option for the ongoing development of the Power System.

Once the details of a strike price and capacity payments are settled, investment in the UK’s Power System will be a copper bottomed investment opportunity, which HMG should set in motion through a PPI investment at Wylfa.

1. Introduction

DECC has made significant progress in identifying possible structures for a contract market for electricity that will give confidence to long term investors in electricity generation. However, there is no parallel activity reporting to DECC to provide a rolling plan for developing the Power System with the mix of generation technologies that will produce electricity at the least cost while meeting environmental constraints. Plunging forward with huge long term financial commitments without an answer to this question would be financial irresponsibility on a massive scale.

These issues are addressed under four headings:

Nuclear Options.

Competition amongst Nuclear Providers.

Economic Optimisation and Marginal Cost of CO2 Abatement.

The Wider Picture.

2. Nuclear Options

(i)At the Select Committee on the 15 May this year Mr Hendry pointed out that nuclear power is our cheapest source of low carbon energy and the representatives of EON and RWE explained that off-shore wind power is the most costly renewable resource in the Bill and currently too costly for wide scale use.

(ii)It follows that it makes economic sense to aim to install at least enough nuclear generation to provide all our base load requirements—currently around 22GW. Historically, base load demand has remained around 50% of average demand and around 33% of maximum demand. If DECC’s aim to further flatten the load demand curve is met, the proportion of base load electricity will rise. Thus the opportunity for using nuclear to reduce costs will increase with time. Why is this cost minimising strategy not prioritised in DECC’s planning? On the contrary, the only firm objective is the uncosted aim to produce 15% of our electricity from renewables by 2020—most of which would have to come from very expensive off-shore wind.

(iii)True, wind power in all its forms may well drop in price over time. But, the same can be said of nuclear as new suppliers contend in the expanding global market for nuclear plant. Speculation over future plant price levels is irrelevant to decisions about plant purchases to be made in the immediate future, for these only today’s tender prices matter.

(iv)The question of future supplies and costs of uranium is a relevant issue which needs to be assessed and fuel acquisition strategies need to be drawn up. Between 2005 and 2007 the world’s known reserves increased by 15%, as a result of increased exploration. Ref: WNA (http:/www.world-nuclear.org/info/inf75.html).

(v)In Para 3 of the White Paper “Planning our Electric Future” July 2011 it is stated that that nuclear plant is inflexible. This is wrong. Modern designs can change load at 5%/minute. The French and Germans regularly flex their nuclear units. On 15 August 2009 the output from one of EdF’s reactors flexed between 100 and 15% of full load. This has implications for minimising overall generation costs—to be discussed in section 4. See OECD, NEA updates, NEA News 2011, No. 29.2. (http://www.oecd-nea.org/nea-news/2011/29–2/nea-news-29–2-load-following-e.pdf)

3. Competition Between Nuclear Generators

(i)There are nine operating nuclear sites in the UK, of which EdF owns eight and RWE owns one at Wylfa. EON owns one retired site at Oldbury. If EdF succeeds in its attempt to purchase Wylfa, it will own eight of the UK’s 10, further reinforcing its monopoly of UK nuclear power. The situation is even more worrying because EdF will purchase only Areva’s EPR. This is not surprising since EdF is owned 85% and Areva 90% by the French Government. We are in imminent danger of indefinitely perpetuating a market in which we have to buy the bulk of our nuclear electricity at a guaranteed price from a de facto nationalised French monopoly buying its equipment from a de facto nationalised French nuclear plant manufacturer. As an illustration of the opacity of EdF’s business, there is the unexplained hike from £4 billion to £7 billion in the cost of Areva’s plant for EdF’s Sizewell site. If we let this go on, we are putting ourselves in the hands of monopolies that are accountable ultimately only to a foreign government—despite all the window dressing to make EdF and Areva look like independent private companies. When HMG negotiates with EdF it is in fact negotiating with the Elysee Palace.

(ii)To avoid this unacceptable constraint on HMG’s energy planning two conditions need to be met:

It should be a criterion that, for an investor to receive income guarantees of any kind, it must have sought competitive tenders for the construction of its power stations.

EdF’s monopoly of sites must be ended. There are several ways of doing this. For example, using monopoly laws, EdF could be obliged to sell some of its sites or allow others to build new nuclear plant on them. The actual operators of these plants could be any competent international nuclear utility contracted by the investors. There would need to be grandfathering of agreements for existing plant and for decommissioning, of course. These are just examples. There are many approaches to this.

The importance of going out for competitive tender is further illustrated by the experience of Areva and Westinghouse, see footnote.

(iii)Fortunately, HMG is in a strong position to move forward along these lines. On the one hand, EdF needs to extend the life of existing UK nuclear plant to keep revenues flowing. This has become particularly important in view of the negative views of M.Hollande towards nuclear power in France. On the other, we have the prospect of shale gas to fill in any medium term gap in electrical capacity. So, although HMG rightly wants to press ahead with its nuclear programme, its timescales for decision making are less pressing than EdF’s. HMG need not blink first. Failure to take these actions will severely compromise the introduction of economically priced nuclear power at the desired rate and with competitive build times.

(iv)Completing the EMR is essential to attracting investment in UK’s nuclear power. Once it is in place UK nuclear power will be as secure a long term investment as can be found and its financing cost will reflect this. It makes one wonder why HMG does not set the nuclear investment ball rolling by creating a PPI to develop Wylfa and follow up with further PPI investments in nuclear infrastructure. It would give a tremendous boost to investor confidence and HMG would acquire part of a reliable income stream, all of which could otherwise go abroad. Mr Osborne’s suggested special bonds for infrastructure projects could not find a more rewarding opportunity. The Wylfa site is an obvious target for this money, for two reasons. The first has just been described. Another important factor is that Horizon has gone a long way with tender assessment, all of which would be opened to the PPI partners. This information alone would be invaluable in negotiating a strike price for nuclear. One imagines that EON and RWE, through Horizon, would be quite willing to act as operators of any such new nuclear plant.

Footnote

Areva’s first EPR is in Finland, Olkiluoto 3. It began construction in August 2005. Initially it was scheduled to go online in 2009. But after many delays, operation is not expected to start before 2014 with a cost escalation from 3.3 billion to 6.4 billion euros. Costs of its Flamanville plant in France rose from 3.7 billion 6.4 billion euros by June 2010 and completion has been pushed back from 2012 to 2016. However, Areva seems to have learned from these debacles. Its plants in China are faring far better and are currently ahead of schedule due to the Chinese working 10 hour shifts seven days a week. Since cost overruns are usually associated with delays in construction one assumes the costs are on or near to budget in China.

Westinghouse is building four PWRs in China. The first plant, which started construction in April 2009, is on time for 2013—ie, four year construction time. The remaining three plants are also on time for 2014 and 2015. Without delays in construction one assumes that these too are running to budget.

4. Economic Optimisation and Marginal Costs of CO2 Abatement

(i)The problem with costing variable sources of power such as wind is that their presence on the power system requires capital expenditure on underused reliable back up generation. Without this safety net wind power could not make a significant contribution to total electricity demand. In fact, back up generation could equally well be called back-off generation because it has to cut back production, with the attended loss of revenue, whenever the wind generators come into operation. From an economic point of view this loss of income should fall as a charge on the wind turbines for the service provided to them by the backup plant. This means that the usual practice of expressing the cost of wind power in terms of £/MWh without including these charges is economically misleading and should not be used in cost comparisons with other forms of generation.

(ii)The costs that matter to consumers and, therefore, to the economy are those associated with the whole power system. Numbers such as costs in terms of £/MWh for individual plant are not absolutes. They depend upon the plant’s utilisation factor. So they are of no use in arriving at the mix of generation plant that provides the required power that meets environmental requirements at minimum total investment and operational costs. To do this it is necessary model the power system as an integrated whole, exploring the effect on total costs of the system of different mixes of generation plant that meet environmental requirements, security and risk of loss of load targets. In this analysis nuclear reactors need to be treated as flexible plant, contrary to what is stated in DECC documentation. With the aid of National Grid, a competent power engineering consultant could undertake this exercise using various scenarios with ranges of such factors as demand curve, plant mix, plant investment and running costs, etc. This is the only way to understand the costs of the various options for investment that will provide power generation and transmission to meet CO2 targets. For strategic reasons the minimum cost option may not be chosen. But such a decision would have to be justified. This analysis will also provide the marginal cost of each decrement of CO2 emissions. These are numbers that should be in the public domain. We, who will have to foot the bill, need to know what we are being asked to pay for and that the government is getting us the best value for our money.

5. The Wider Picture

It is clear that the pattern of climate change will be set by the actions of the USA and the big emerging economies, none of which have signed up to any binding targets for CO2 emission. However, the USA will move in the direction of CO2 reduction through the increasing use of shale gas. On the other hand, countries like China and India have no option but to increase their use cheap coal fired power stations.

(ii)These powerful players will also set the global competitive economic conditions within which we must earn our living. All major players are expanding their dependence on electricity, in part because of diminishing oil reserves. So the cost of electricity will play an increasing important role in a country’s economic viability. Another new feature is the rapid erosion of Europe’s and the USA’s monopoly of technological expertise. Competition will be fierce on all fronts, not least on the cost of energy to the end user which will increasingly be in the form of electricity.

(iii)We need to be sure that our investment in CO2 reduction is proportionate to this situation. Whether we have serious disruption from climate change or not it is only the economically viable countries that will be best able to adapt. The procedures outlined in 4(ii) are crucial for developing policies that ensure that the UK stays a viable economic entity.

June 2012

Prepared 1st March 2013