Energy and Climate Change CommitteeWritten evidence submitted by SSE (NUC 28)

1. SSE is a UK owned and based company. Its core purpose is to provide the energy that people need in a reliable and sustainable way. Operating across the UK and Ireland, SSE is involved in the generation, transmission, distribution and supply of energy. It is currently the UK’s second largest generator, and the largest generator of energy from renewable sources.

2. In 2011 SSE exited the NuGen consortium which is developing new nuclear at Sellafield, this was principally due to economic considerations.

3. SSE is concerned that mechanisms are being designed in the Energy Bill specifically to support new nuclear but that this will be at the expense of other low carbon technologies and consumers. The proposed CfD is well suited to nuclear generation, but less so for renewables, which have very different characteristics, or CCS which is still in its demonstration phase.

4. SSE therefore believes that different low carbon technologies should be supported by mechanisms which take into account their different characteristics and stages of development. This would mean separate mechanisms for renewables, CCS, and, if necessary, new nuclear.

5. If the Government believes that new nuclear requires support over and above the Carbon Floor Price then it should be explicit about the need for this support, and design a specific mechanism accordingly. One way of doing this would be to explicitly address the construction risk of building new nuclear through targeted support.

Energy Bill Proposals

6. The draft Energy Bill contains details of how the Government is intending to support new nuclear in the UK in the short term. In summary the Bill proposes a “behind-closed-doors” negotiation process to agree Investment Instruments between nuclear developers and the Government before the Energy Bill receives Royal Assent.

7. This negotiation will decide on key terms including the contract strike price; the contract length; penalties; and “get-out” clauses.

8. Given the opaque nature of this process there are concerns that the end result will be long-term contracts for nuclear being agreed by the Secretary of State with only limited detail of how much is being paid, why it is being paid at a particular level, or the contract terms.

9. There is also concern that Government will be at a disadvantage when negotiating contract terms for nuclear, both in the short term through Investment Instruments, and the long term through CfD contracts, because of the limited number of competition in the new nuclear market. This could mean that strike prices will be set higher than is needed to achieve an acceptable rate of return, and consumers will be locked into paying higher than necessary prices for considerable periods.

10. Another issue to be considered is that new nuclear developers will have to build the risk of: a) not getting State Aid approval, b) not getting a final contract for a number of other reasons, into their Investment Instrument strike prices. Clearly such risks have a cost and will only add to the “strike” price levels required.

11. Once CfDs are introduced the key challenge for Government is to avoid “under or over rewarding” nuclear through the subsidy regime that is constructed. In order to do this then SSE believes that the strike prices for new nuclear should be in line with independently conducted research, such as that carried out by the Climate Change Committee whose graph in figure 1 demonstrates their proposed cost range for all low carbon technologies.1

12. In SSE’s view all technologies should receive a standard contract (which is publically available) and each technology should have a “strike” price. Only if a developer can accept those terms will it build a project. This would create an open and transparent framework.

13. Others in the industry have expressed similar concerns. In the Draft Energy Bill Select Committee evidence sessions, Keith Anderson, ScottishPower, told the committee: “the detail of these conversations [over the strike price] need to be made public”. Furthermore, John McElroy, RWE npower, said: “it is important that there is sufficient transparency around what happens. We’d like to see the terms and conditions that are offered.”

July 2012