Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by the Nuclear Industry Association (NIA)

1. The Nuclear Industry Association (NIA) welcomes this opportunity to provide written evidence to the Committee on this issue.

2. The NIA is the trade association and information and representative body for the civil nuclear industry in the UK. It represents over 270 companies operating in all aspects of the nuclear fuel cycle, including the current and prospective operators of the nuclear power stations, the international designers and vendors of nuclear power stations, and those engaged in decommissioning, waste management and nuclear liabilities management. Members also include nuclear equipment suppliers, engineering and construction firms, nuclear research organisations, and legal, financial and consultancy companies.

3. Some of these companies, particularly the prospective new build operators, may be making their own submissions to the Committee. We recognise that different developers may have specific points of interest, and will restrict our submission to broad industry-wide comment.

Overview

4. The NIA very much welcomes the Bill’s publication as a demonstration of the Government’s commitment to making progress on electricity market reform. As stated in earlier evidence the NIA strongly agrees with Government that the UK needs credible plans to decarbonise the power sector if it is to meet its energy security and climate change targets. With all but one of our existing nuclear stations likely to close in the next decade and a half delays in taking decisions now could result in the UK becoming locked into a high carbon scenario.

5. The Climate Change Committee (CCC) has recommended that if the UK is to meet its emissions targets the power sector be almost completely decarbonised by 2030—with 30–40 GW of new low carbon plant added to the grid. Significantly it also concluded that current electricity market arrangements were unlikely to deliver this cost effectively. Whilst low carbon generation has lower operating costs than fossil generation its higher up front capital costs make it difficult to finance in the current market.

6. Although important details remain to be ironed out we believe that, in principle, the Governments reforms will create a package that could provide investors with the certainty they need to proceed with the construction of new low carbon plant. Importantly it will also provide long term price stability for consumers, protecting them from high or volatile fossil fuel prices. The Government’s view is that electricity bills after the implementation of EMR are expected to be, on average, lower than they would have been in the period up to 2030.

7. In addition to its carbon reduction and security of supply benefits a substantial nuclear new build programme will also of course lead to significant industrial and employment benefits, including major opportunities for the UK nuclear supply chain, a boost for UK manufacturing, regional regeneration, and training and career opportunities. As the CBI recently stated the “multiplier effect” of investment in infrastructure is much greater than that in other sectors. It could therefore be a major engine for growth at a critical point in the economic cycle.

8. That said it is vital that the reforms should be implemented as quickly as possible. As the Committee will be aware the lead nuclear consortium (EDF Energy/Centrica) submitted an application last year to the Infrastructure Planning Commission for a Development Consent Order for Hinkley Point C, and are expecting to take a final investment decision by the end of this year. If this is to happen there will need to be clarity on market arrangements at that point, and therefore real progress in taking forward the legislation. We hope that the pre-legislative scrutiny by the Committee will make a major contribution to this process.

Contracts for Difference (CfD)

9. Turning to specifics we agree with Government that the combination of CfDs and the carbon price floor will provide the stable, predictable returns required to finance long term capital intensive low carbon projects. However as the Government concedes, considerable detail remains to be worked out.

10. As Government recognises industry has “strong concerns” about the current legal framework and payment model. They believe this is insufficiently robust for potential investors. Industry strongly suggest that a “single counterparty” payment model would be far better suited to meeting the objectives of Government by incentivising the market to invest in low carbon projects.

11. However with regard to the process in general, whilst we applaud government for delivering progress to date; there are a number of issues which are critical to successful progress on a new build programme, such as clarifying the nature of the CFD counterparty, negotiation of strike prices for individual projects, and identifying realistic inflation indices and a transparent and fair reference price. Whilst these are clearly more matters for the new build developers than for the NIA, it is important that negotiations proceed quickly to reach a solution satisfactory to all parties.

Transitional Arrangements

12. The Government states that is its intention for CfDs to be available from 2014, but that to avoid the risk of an investment hiatus they would work with developers on transitional arrangements. We are aware discussions have begun with EDF Energy and Centrica on this, but given the very tight timescales—EDF’s final investment decision on Hinkley Point C is expected at the end of this year—it is important these are progressed as a matter of urgency. Similarly it is important that any associated necessary state aid approvals are progressed to the same time-scale.

Capacity Market

13. We agree with Government that, given the growing proportion of electricity generating capacity provided from intermittent sources, a capacity mechanism is an important element in the EMR package. Left to its own there is no guarantee that, over the next few years, the market would deliver an acceptable standard of security of supply.

14. That said the detailed mechanisms for achieving such a capacity mechanism are more a matter for the prospective new build operators than for the NIA. What is important is that the final arrangements are practical, and provide the stable policy framework needed to underpin very large scale investments in new nuclear generating capacity.

Energy Strategy and Policy Statement

15. The NIA supports the Government’s proposals for a new Strategy and Policy Statement setting out Government’s strategic priorities, and describing the respective roles of Government and Ofgem. As the Government states, the role of the regulator is becoming much more complex. It therefore makes sense for Ofgem to have regard to the Government’s policy goals, particularly on energy security and climate change, in taking its independent regulatory decisions.

Office for Nuclear Regulation

16. Finally, whilst we note that the Committee is limiting its scrutiny to Part I of the Bill, we very much support the inclusion in Part 2 of provisions consolidating the ONR onto a statutory footing. As the Committee will be aware the nuclear industry, and the NIA, has long supported this reform, which we believe is vital if the UK is to deal effectively with the new challenges resulting from the new nuclear build programme and our growing decommissioning and nuclear legacy activities.

June 2012