Environmental Audit CommitteeWritten evidence submitted by Dr David Toke
Dr David Toke is Reader in Energy Politics at the Department of Politics and International Relations, University of Aberdeen.
Summary
1. The Government’s claims that similar support is being made available to all electricity generators under Electricity Market Reform is false since better terms are likely to be offered to nuclear developers compared to developers of renewable energy. In particular the Government is likely to award contracts giving nuclear power developers premium price support (subsidies) for much longer periods compared to contracts to be offered to renewable energy developers. Indeed if the demands posed by EDF are met not only will nuclear power developers be given premium price (subsidy) support for more than twice as long as renewable energy developers, but they will also be paid considerably more in “headline” strike prices than onshore wind and they will also be offered loan guarantees which will not be available to renewable energy developers. A Government offer of loan guarantees, whether initially agreed as “partial” or complete, as suggested by the DECC Select Committee, will lead to a blank cheque for nuclear which will crowd out funds for renewables which are much more cost-competitive in practice.
2. The Government appears to be gearing up to justify giving preferential treatment to nuclear power compared to renewable by pointing to a distinction between “baseload” and “intermittent” low carbon generators. This distinction is irrelevant and arbitrary for the purposes of giving subsidies, and moreover represents an about turn in the policy compared to that given when EMR was introduced at the end of 2010. Then it was argued that novel technologies like offshore wind could receive higher support, not nuclear power which is not a novel technology. This policy change seems to have no other plausible explanation other than nuclear power turning out to be more expensive in reality than was expected according to hopeful projects by nuclear advocates.
3. Any policy of giving preferential support to nuclear power compared to renewable sources such as wind power is contrary not only to the principles underlying competitive energy markets but is in flagrant breach of EU state aid rules. The EAC should warn against this and urge that the best disposition of low carbon support to achieve good value for the consumer is towards renewable energy rather than nuclear power.
Introduction
4. The aim of this submission is to discuss the balance of support (or subsidies) between renewable and nuclear power proposed by the Government’s in its “Electricity Market Reform” (EMR). Will this policy fulfil its stated central purpose of offering a pathway for “decarbonisation” that is competitive and cost-effective?
5. The issue of whether support (whether called subsidies or not) which the government is offering to generators from these technologies are indeed being made available on equally competitive terms to these technologies is of central importance to the debate being held by the EAC. Indeed the Government has repeated claimed that the support for low carbon energy sources, that is the proposed contracts for difference (CfD) mechanisms, are equally available to all generators. For example Ed Davey told the House of Commons on 7th February this year that:
6. “Under EMR, as set out to Parliament in October 2010, new nuclear will receive no levy, direct payment or market support for electricity supplied or capacity provided, unless similar support is also made available more widely to other types of generation.” (Gov UK 2013)
7. There are two key aspects of the question considered here. First, does the Government’s approach actually meet up to this specification, and second, can this specification be achieved if EDF’s demands for support for the Hinkley C development are approved by the Government? The answers to these questions will help us understand the extent to which Government policies are genuinely competitive, the extent to which they favour particular interests over others, the extent to which the policies are consistent and, in a practical sense, the extent to which they may pass the “state aid” test that will be set by the European Commission. The discussion is put into five sections: first the intentions set out in the EMR proposals set out in 2010 and the extent to which the current government discussions are consistent with that. Second the issue of the lengths of the contracts for difference (CfD) that are likely to be offered. Third is the issue of the “strike prices” that are to be offered. Fourth is the issue of “construction risk”. Finally there is the issue of EU “state aid” rules.
Change since 2010?
8. There can be no doubt that there have been some highly significant changes in the framing of the debate about Government support for low carbon sources since the Government published their proposals at the end of 2010. Some key paragraphs are reproduced in the annex to this submission to illustrate this. Summarised here, it can be said that the original proposals give an impression that there would be a competitive auction of contracts to supply low carbon electricity, with the cheapest sources winning the contracts. The only major caveat to this seemed to be that some allowance could be made for “early stage, high cost technologies such as renewables” (DECC 2010, 117). In other words the clear impression that was left was that it was anticipated that nuclear power would be the cheapest.
9. Many of us were sceptical of this. Speaking for myself I found it very challengeable to expect that, for example, onshore wind, would be more expensive than nuclear power. I was unconvinced by the widely agreed assumption that the latest models of nuclear power plant (eg the EPR) was going to be cheaper than previous incarnations of nuclear sets, such as Sizewell B. It could not even be assumed that, in practice, the new nuclear plant could be financed to be at a lower cost than offshore wind plant.
10. My assumption was a somewhat cynical one in that the Government policy would not be implemented as it appeared, and that some policy “fix” would be applied to ensure that nuclear power was given much superior terms compared to renewable energy. In the past, hopeful over-optimistic projections about the cheapness of nuclear power have always been proved wrong by reality. The recent period has followed this trend, with studies of nuclear power costs prepared by the pro-nuclear engineering establishment proving to be gross underestimates compared to the realities of building EPRs as evidenced by the reactors being built in Finland and France. However, in the past nuclear power was given an effective blank cheque by the state. Perhaps nuclear advocates had been hoping that the Government’s claims to support competition in provision of low carbon energy would be abandoned in fact and that there would be a return to the nuclear “blank cheque” practices of the past.
11. Indeed, proposals now appear to be emerging that will offer nuclear power a superior set of terms compared to renewable energy. The only point of debate is whether the terms offered by the Government will be sufficiently weighted in favour of nuclear power to give them the very wide advantage that they need over renewables in order to be deployed.
12. What is clear is that the reality of relative support given under EMR to nuclear compared to renewable is somewhat different to that which was presented in the original EMR proposals. It is nuclear power, not renewables, that will be given special treatment of much more generous and amounts of support (subsidy).
Contract Length
13. The Government’s own proposals, and my own informal feedback on the contract negotiations, indicate that renewable energy generators such as onshore and offshore wind developers will be offered contracts of 15 year length, and no longer. On the other hand it appears that the Government is prepared to offer nuclear power developers contract lengths of at least 25 years. Certainly the implication from Ed Davey’s statements is that nuclear developers will be offered longer contracts than those offered to renewable energy developers (Davey 2013). This gives a clear competitive advantage to nuclear developers. If, for example, nuclear developers are given 25 years and are given the same “strike price” as renewable operators then the nuclear developers will receive premium price support that is two thirds more in total compared to renewable energy developers.
14. This appears to be justified by assertions that renewable energy plant lasts for a shorter period compared to nuclear plant (Davey 2013). This will indeed usually be the case, but such an assertion ignores the fact that, in the case of wind plant, the existing infrastructure can be re-used following refurbishments, perhaps with new blades. This is especially significant in the case of offshore wind where a successor scheme could financed much more cheaply than the initial project given that the foundations and electricity distribution infrastructure has already been installed. Perhaps this second project, consisting perhaps of no more than new blades, may require a guaranteed contract price of no more than the wholesale electricity price. A further factor is that wind power plant costs could well have declined after the first fifteen years. By comparison consumers become “locked in” to paying much higher premium price levels of support to nuclear power plant. Locking in consumers to paying premium prices for longer than is necessary does not represent good value to consumers, but it does represent a policy bias in favour of nuclear power and against their main low carbon competitors such as wind power and solar power whose prices have tended to fall in the past.
15. In fact EDF has been lobbying for a contract length of 40 years (Utility Week 2013), sometimes described in the press as a demand for a 35 year contract. This contract length would therefore commit the energy consumer, for a given strike price and given amount of energy production, to paying more than twice the amount of total support to nuclear power compared to wind power. If, as discussed below, nuclear power were given higher than onshore wind’s expected strike price of £80 per MWh, this disparity would increase to even higher multiples.
Strike Price
16. Under EMR the strike price is the payment, per MWh, for low carbon electricity production, that developers will be assured of being paid over periods specified in a long term contract. Such long term contracts are referred to as “feed-in tariffs”. However, not all low carbon technologies will be paid the same. For example, it seems likely that onshore wind power developers will be offered around £80 per MWh (2013 prices) as a strike price. This is less than the income theoretically available under the Renewables Obligation (RO). However under a feed-in tariff system there should be more certainty about future income levels compared to the RO, and making the cost of investment capital cheaper and thus requiring the required power purchase price per unity generated lower.
17. It seems that nuclear power developers will be offered at least £80 per MWh, and certainly it is the case that EDF have lobbied for a lot more—just under £100 per MWh according to the press. Indeed DECC itself appeared to suggest that nuclear “First of a Kind” would cost £98 per MWh (DECC 2010, 28), although the ascription “First of a Kind” is a curious formulation since nuclear power plant have been operating for 60 years.
18. Coincidentally or not, the “strike price” suggested by EDF is also around this level,—£98 per MWh—although as mentioned earlier, involving a much longer contract compared to wind power. As commented previously this level of support would mean that the consumer would be committed to giving several multiples of higher support for a unit of nuclear energy compared to onshore wind power, and much higher quantities of subsidy compared to offshore wind power schemes.
19. The Government have outlined a vision to bring down the cost of offshore wind to £100 per MWh (Renewable Energy Roadmap 2011). Yet it seems that this is in a policy context of offering 15 year contracts to offshore wind and offering at least 25 year contracts to nuclear power (with EDF wanting 35–40 years). This means, in effect, that if the Government did acceded to EDF’s demands for a £98 per MWh strike price it would be giving much more support to nuclear power than it would prefer to give to offshore wind. This contrasts with an originally dominant discourse has often been that offshore wind is a less mature technology. Is the logic about to be turned around and nuclear power now to be regarded as an immature technology and offshore wind to be regarded as a being an “old” technology relatively less deserving of support compared to nuclear power?
20. However, the contrast between the initial impression given by Government policy and the possible out-turn of policy is made even sharper by the fact that EDF’s demands for a high strike price and very long contract do not end there. They also want (at least some) underwriting of construction risk.
Construction Risk
21. Underwriting of construction risk means that whatever happens, then some agent (in this case HM Government) will agree to pay the cost of construction of the plant, or an agreed portion of that grant. Currently EDF is requesting only (to my knowledge) an unspecified part of the construction risk, although some nuclear advocates, including the Select Committee on Energy and Climate Change itself (DECC Select Committee 2013a), appear to be recommending that the entire nuclear construction risk be underwritten by government. This would help nuclear projects because banks may be more likely to lend that amount of money at relatively low interest rates compared to the much higher rate of return required by equity investors. However, three issues are raised by this.
22. The first issue is that analysis of the history of nuclear power construction might question the assumption that this was a “risk-free” action by the Government. Nuclear power plant have been subject to cost overruns and often take longer to complete than planned meaning that the loan guarantees would have to be called in if this experience repeated itself. A nuclear constructor could spend some or all of the money that was underwritten and, having suffered unplanned reverses, announce that they would ask the government to repay the loans the pay for “part” of the project. However they would quite probably also say that they would be unable to complete construction unless the state guaranteed the rest of the power station costs. “Partial” underwriting would thus collapse into full underwriting. The nuclear constructor would suffer no financial penalty, but the state would be faced with the dilemma of having a part completed nuclear power station.
23. This scenario effectively happened in the case of Sizewell B when the electricity industry was privatised part way through its construction. The Government agreed to guarantee the costs of completing the project. The electricity consumer ended up picking up all of the costs guaranteed under a mechanism called the “fossil fuel levy”. History could quite easily repeat itself if the state agreed to any form “underwriting” of construction costs. Despite this the DECC Select Committee has actually recommended such a strategy (DECC Select Committee 2013a). By offering what may be initially sold as “partial” underwriting of construction risk, the Government will be signing a blank cheque for nuclear power in all but name. For nuclear power there is no such thing as “partial underwriting”, any more than there is such a thing as being “partially pregnant”.
24. The Government’s reply to the DECC Select Committee has been interpreted as a response which did not completely rule out this possibility of nuclear underwriting. Indeed the letter from DECC actually suggested that “baseload” and “intermittent” plant could be treated differently. This may be referring to offering longer contracts to nuclear constructors compared to renewable developers, but this is unclear.
25. A second issue is how the claims for “competitiveness” can survive if one party (nuclear power) is given preferential terms through “underwriting” risk. I have already discussed how it seems that nuclear is going to be given preferential terms through a longer contracts, and also, perhaps (if EDF’s demands are met), through a higher strike price compared to onshore wind. Now there is also a possibility of nuclear power being afforded a third type of preferential term through having their construction costs underwritten.
26. A third issue is whether such “underwriting construction risk” support could possibly be reconciled with the EU’s state aid rules (see below). The Government would have, at the very least, to offer comparable support for construction risk to offshore wind, as well as offer equivalent terms to renewable on other matters. Given that a MW of nuclear power generates a much larger amount of electricity than a MW of offshore wind this means that if the Government underwrites Hinkley C at 3.6 GW worth of capacity it would have to offer similar underwriting to something around 10 GW of offshore wind. Underwriting would be of significant benefit to offshore wind and would lead to major cost reductions because of the reductions in interest charges on debt portions of the investment. Certainly, if any technologies should be offered underwriting, the newest, most innovative technologies, such as tidal lagoons, tidal stream and wave power technologies should be given priority. It is difficult to see how, some 60 years after their genesis, nuclear power might claim to require a market preference policy.
27. Nevertheless, as mentioned earlier, the Government through its distinction between baseload and intermittent plant seems to be preparing the ground for giving preferential terms to nuclear power compared to renewable. Yet it is difficult to see the basis for this. Contrary to frequently made assumptions, wind power and other renewable developers have to pay for the balancing of their output through their own income stream from sales of electricity. When their electricity is traded on the wholesale markets the value of this electricity is discounted to pay for the balancing services consequential upon the “intermittent” (or variable) source of electricity. Indeed the very choice of language (intermittent as opposed to variable) implies a bias in the Government approach towards seeing variable renewable output as being less valuable than “baseload” nuclear production. It is the case that if large proportions of electricity are sourced from renewable then more transmission interconnector capacity will have to be built. But not only is this facility open to other electricity trading uses but also such costs will be offset (in the comparison with nuclear subsidies) by in-kind or actual subsidies to nuclear power. These include the sharing of costs for extra back-up capacity required to guard against sudden breakdowns by nuclear power stations (Carrington 2013), and other subsidies discussed by other submissions to the EAC.
EU State Aid Rules
28. EU state aid rules exist for a very good purpose—to ensure that the Government does not give state aid that would distort the efficient allocation of resources through market mechanisms (Europa 2013a). The Government insists that its low carbon support policies do not discriminate between different technologies. However, as covered in the arguments above, the proposals to support nuclear power clearly do discriminate in favour of nuclear power. This will be at the very least through offering nuclear developers longer contracts than will be awarded to wind power developers, and, if EDF’s terms are accepted, a lot more than this.
29. In fact, as can be seen by reference to the state aid rules renewable energy has an exemption on the grounds that it is an environmental measure. In contrast, nuclear power has no such exemption (Europa 2013b). Yet the Government proposes to do the exact opposite of the these rules, that is offer better terms to nuclear investments compared to renewable energy. It is extremely difficult to see how this can be reconciled with the state aid rules.
Conclusion and Recommendations
30. It can be seen through this argument that the Government has shifted from an ostensible policy of saying (initially) that it would allow some concessions to be made for some newer renewable generation in its low carbon support towards now building a case to justify why better terms should be given to nuclear power. It has been the contention of many that the process of presenting nuclear power as somehow cheaper than renewable has been flawed from the start. It does seem that public policy has been dragged along on the basis of a process of what Tom Burke has called “salami slicing”—that is presenting nuclear costs as being smaller than they are, but bit by bit gaining policy acceptance of an ever increasing set of subsidies. The strategy has been of gaining policy commitment for a steady incremental rise in the level of subsidies offered to nuclear power. It would have been politically unacceptable for the policy process to have become by an open declaration that nuclear power would receive better terms than renewable energy sources. However now we see these better terms emerging through this process of “salami slicing”. The Government have already it seems, committed to offering nuclear developers longer contracts to received low carbon premium support compared to renewable energy developers. The exact scale of the preferential treatment is yet to be seen. However if the Government does accede to the demands set by EDF the difference between the terms will be very large indeed. Given that renewable and nuclear are competing for a limited set of resources under the “levy controlled framework” it is difficult to avoid the conclusion that Government’s policy will achieve poor value for consumers in that the cheaper resources of renewable energy will be sidelined by Government policies to give better terms to more expensive resources associated with new nuclear power stations.
Recommendations
31. It is therefore recommended that:
(a)
(b)
Annex
EXCERPTS FROM GOVERNMENT’S INTRODUCTORY PAPER ON ELECTRICITY MARKET REFORM ISSUED IN DECEMBER 2010 (DECC 2010), PAGES 116–117
9. The Government is attracted to a greater use of auctioning as a mechanism to set the level of feed-in tariff support, regardless of the specific model for FIT chosen in the White Paper next year. The price discovery characteristics of an auction should enable financial support to be set at a level just high enough to lead to deployment but not high enough to lead to excessive profits, with bids driven down by competition.
10. However, adopting an auction-based approach would require Government to determine what share of the electricity mix should be low-carbon and may require Government to have a view on the breakdown of technologies within the low-carbon mix. Leaving decisions on technology choice to individual investors—who are directly exposed to the risk of making poor decisions, could lead to a lower-cost and lower-risk technology mix. (page 115 DECC 2010)
14. Having one auction for all low-carbon technologies would maximise competition between technologies, allowing investors (who are driven by maximising the return on their investments) to determine the most costeffective low-carbon technologies. However, this could on the other hand lead to a “winner takes all” outcome where the current lowest cost technology would win all the bids and dominate the technology mix. This would not be good for encouraging early stage, high cost technologies such as renewables.
15. Having technology-specific auctions would enable different tariffs to be set for different technologies but could lead to insufficient competition (not enough bidders) and would probably entail the Government having to specify how much capacity from each technology was wanted (ie how many GW of onshore wind, offshore wind, nuclear etc).
16. One way to provide differentiation in support for individual low-carbon technologies within an auction approach, and replicate the benefits of allowing investors to choose the technology mix, could be to have a technology neutral auction for a single tariff level for all low-carbon generation and then to offer technology specific premiums on top to early stage technologies with higher costs such as offshore wind. This would give additional revenue certainty to the lower cost and more mature low-carbon technologies but would allow Government to recognise that innovation in earlier stage, higher-cost technologies is a legitimate objective in its own right. (p116–117)
References
Carrington, D (2013), Renewable energy providers to help bear cost of new UK nuclear reactors, Guardian 27 March, http://www.guardian.co.uk/environment/2013/mar/27/renewable-energy-cost-nuclear-reactors
Davey, E (2013), “Edward Davey speech to the Commons on new nuclear power on February 7th”, Gov UK, https://www.gov.uk/government/speeches/edward-davey-speech-to-the-commons-on-new-nuclear-power
DECC (2010), Electricity Market Reform Consultation Document, http://www.decc.gov.uk/assets/decc/Consultations/emr/1041-electricity-market-reform-condoc.pdf
DECC (2011) Renewable Energy Roadmap, https://www.gov.uk/...data/.../2167-uk-renewable-energy-roadmap.pdf
DECC Select Committee (2013a) Building New Nuclear: The challenges ahead, www.publications.parliament.uk/pa/cm201213/cmselect/.../117/117.pdf
DECC Select Committee (2013b) Government Response to Committee’s Report on Building New Nuclear http://www.publications.parliament.uk/pa/cm201314/cmselect/cmenergy/106/10604.htm
Europa 2013 (2013a) http://europa.eu/legislation_summaries/competition/state_aid/index_en.htm
Europa (2013b) http://europa.eu/legislation_summaries/competition/state_aid/ev0003_en.htm
Utility Week (2013), unsigned, EDF aims to strike CfD deal in next three months http://www.utilityweek.co.uk/news/news_story.asp?id=198148&title=EDF+aims+to+strike+CfD+deal+in+next+three+months
11 June 2013