Energy and Climate Change CommitteeWritten evidence submitted by The TaxPayers’ Alliance (SEV 12)

1. The proposed Severn Barrage does not appear to be a cost-effective means of generating energy to supply the needs of Britain’s families and industry, or of increasing the amount of low carbon energy used in order to meet international commitments. While private finance may be available, that will only be on the basis of significant subsidy at the expense of taxpayers or consumers.

2. A feasibility study in 2010 by the Department of Energy and Climate Change found that a proposed Severn Barrage would only generate power at a levelised cost of over £300/MWh—”other renewables (e.g. wind) and nuclear power represent better value”—and would have a negative Net Present Value (NPV). The study found that the project most similar to the Hafren proposals—a Cardiff-Weston barrage—would have had a levelised cost of £312/MWh and an NPV of -4.6 billion.

3. The projected cost per MWh is greater than for any other source of energy which is currently expected to be deployed on a significant scale. The price and construction risk is also greater with a single project. And building a single barrage removes the possibility of technological improvements and learning reducing the costs and risk over time as the project moves to scale.

4. As a result, Contracts for Difference (CfD) are needed for energy generated by the Severn Barrage to be competitive, and would presumably need to cover the difference between the levelised cost and the energy price. That implies a very high level of subsidy. Given the scale of the project, and the amount of energy that could therefore be generated, the high cost per MWh would mean that paying for the subsidies would impose a substantial burden on consumers.

5. The difference in the DECC feasibility study between the levelised cost for the Cardiff-Weston barrage £312/MWh and the levelised cost of even extremely expensive offshore wind energy (at £160/MWh) is £152/MWh. As a result, even if the barrage entirely displaced offshore wind energy, it would cost an additional £2.4 billion a year to generate the projected 15.6 TWh a year—equivalent to nearly £90 a household.

6. It would be more likely that it would displace a much more affordable mix of energy sources and the cost would be even greater than that. If the barrage displaced nuclear power (estimated in the feasibility study as costing £79/MWh) then it would increase costs by £3.6 billion a year—equivalent to nearly £135 a household.

	Cardiff-Weston barrage	Offshore wind	Nuclear	Difference between Cardiff-Weston and offshore wind	Difference between Cardiff-Weston and nuclear
Energy generated TWh per year	15.6	15.6	15.6	-	-
Levelised cost £ per MWh	312	160	79	152	233
Total cost £ billion per year	4.87	2.50	1.23	2.37	3.63
Cost per household £ per year	180	92	46	88	135

For all projects, 10% investor discount rate assumed and optimism bias included. Number of households assumed at 27 million.

7. The contracts for difference would also transfer electricity price risk from investors to consumers. Given the lifespan of the project, those risks could lead to a substantial further subsidy bill if the energy price turns out to be lower than expected.

8. While most of the construction risk will lie with the investors, should the project go too far over budget it seems possible that the taxpayer will ultimately end up with the liability to complete the project.

9. Much more detailed technical information is needed in order for independent groups to properly assess the scale of the costs of this new project and risks which will be borne by consumers. There is no reason to think that the NPV has changed sufficiently from the DECC study to justify going ahead though.

10. Claims about significant increases in employment resulting from projects which depend upon substantial subsidies should always be viewed with scepticism. The effect on net employment after the disruption of local industries (such as Bristol Port, with reports a new deep-sea port may be jeopardised) and the cost to domestic and industrial energy consumers is likely to be negative.

11. The DECC feasibility study was highly uncertain but it suggested Regional Net Operational employment of only 120 within a range between -2000 and +800. Given that the subsidies will mostly be paid outside the region, it seems likely that the overall impact on employment across the UK would be negative. The wider benefits envisaged by Hafren are highly speculative and their estimate of 50,000 new jobs is not credible.

12. Given all of these concerns, the TaxPayers’ Alliance believes that it would be reckless to go ahead with this high risk project. There is also no sense in repeating a major study on the feasibility of a Severn Barrage when the last one was completed just two years ago. Britain should focus on other sources of energy for the foreseeable future.

November 2012