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My understanding is that the economics of decommissioning is still fairly vague, because we do not know what the terms of the contracts will be—indeed, we might never know every dot and comma. Decommissioning and the work that the NDA will be allocating in the next three weeks might well enable the successful company to expand its role, rather than just take the money out, which would be regrettable. We would want the company to be encouraged to do more, rather than just do as much as it is saying. That would be a win-win situation for UK plc, for the companies involved and for the important task of getting rid of the waste.

5 pm

Lord Jenkin of Roding: I have a feeling that the Minister will be like the third judge in the Court of Appeal who says, “I agree with my learned friend and have nothing to add”. I hope that the Minister can respond positively to the amendment. The noble Lord, Lord O’Neill, has two advantages over me. First, he has obviously gone into this a good deal more thoroughly than I have and, secondly, he is being paid for it. It is much welcome that he has put his interests firmly on the record in Hansard. It has been recent and growing practice in the House to say, “My interests are all declared in the register”. I do not regard that as a sufficient declaration of interest, because you do not have the register in front of you. A Member may make a speech and you do not know what his interest is. I applaud the noble Lord, Lord O’Neill, for his declaration.

I appreciate that this matter may be a good deal more complex than I had thought. I yield to the noble Lord’s considerable expertise in this, but questions for the Government to answer still remain, although the Minister may find that the contribution of the noble Lord, Lord O’Neill, is extremely helpful. He attended that investors’ conference, which I was unable to go to. Nevertheless, the Minister may feel that he can add something. The noble Lord, Lord O’Neill, did not dispute that there are still uncertainties out there in the industry regarding what will actually be required of those companies under the provisions in the Bill and under the supervision of BERR. If the Minister can do anything to clear that up this afternoon, we would all be extremely grateful to him.

Lord Davies of Oldham: We are in deep financial and business waters in which I was floundering until the noble Lord, Lord Jenkin, threw me a lifeline by saying that my noble friend Lord O’Neill had so accurately identified the issues and clarified the noble Lord’s mind that there was nothing for me to add, except that I agreed with him. I do agree with him, but then the noble Lord, Lord Jenkin, said, “Yes, but I think that the Minister should add a little more” on a significant point that I should attempt to respond to, although I will base a great deal of my response on what my noble friend Lord O’Neill said. I am able to

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reduce my response because he has done a signal service to the Committee by outlining what he sees as the potential benefits from innovation and learning over time. It would be a strange industry—certainly it would be strange for the nuclear industry which is at the cutting edge of technology—that did not reap advantages over time in terms of technical innovation and improvement. I am grateful to my noble friend for identifying his optimism on that and the expectations of all of us. Our problem with the nuclear industry is that the timescale is always so surpassingly long that, in terms of decisions taken by business, it raises some very fundamental questions indeed. I will attempt to address those fundamental questions. The noble Lord, Lord Jenkin, will see whether I respond adequately to his points.

Clause 45 sets out who can propose a modification and what the proposal can consist of. Modifications to an approved funded decommissioning programme under this clause could include both financial and technical modifications. The persons who can propose modifications are clearly listed: the Secretary of State, the site operator and any other person who has obligations under the programme, provided that the site operator consents to the proposed modification.

The aim of the power is to allow for the principle about which the noble Lord spoke; that is, the modification of a programme after it has been approved. It is obvious that that is necessary; otherwise, we would be in a state of stasis which would ill befit an industry with capacity for significant development. The operator would be expected to propose modifications where a technical or operational change in the station had a significant impact on decommissioning or waste cost estimates. Modifications might need to be made also where there had been a breach in the programme.

It is important to stress that the Secretary of State can exercise his power to make a modification only in order to ensure that the programme continues to make prudent provision for technical matters and the financing of designated technical matters. The clause allows the Secretary of State also to impose new or additional obligations on any body corporate associated with the operator. This might be necessary where the level of security that a body corporate could provide had diminished in some way and there was a requirement for another body corporate associated with the operator to provide that additional security.

The Secretary of State’s power to make modifications or impose obligations is of key importance if a programme is to remain up to date and to ensure that the cost estimates, technical plan and financing arrangements remain prudent. It is also integral to the enforcement and sanction regime. In the event of a breach in the programme, the Secretary of State might choose to modify the programme prior to, or instead of, taking formal enforcement action.

Similar powers in relation to the modification of a decommissioning programme exist elsewhere. We have the experience of the oil and gas industry. The Petroleum Act 1998 gives the Secretary of State a power to revise a programme to decommission offshore oil and gas installations. The provisions of the Energy Act 2004

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give the Secretary of State a similar power in relation to decommissioning of offshore renewables installations.

I speak by way of broad introduction to the important issues that the noble Lord, Lord Jenkin, raised with his amendment. The clause already enables the Secretary of State to increase or decrease the target sum or propose other technical modifications which do not alter the target sum that a fund will be required to meet, provided that it is prudent to do so. Therefore, I do not think that the amendment is necessary. However, the noble Lord is probably less concerned about whether the amendment is necessary than about the issues that he raised with regard to costs, to which I shall come.

I have described the Government’s powers, but it is fair to say that discussion to date has focused on the worst-case scenario, with an underlying assumption that costs will increase. It is arguable that as a Government we are obliged prudently to focus on that scenario. However, the amendment raises the valid question of what would happen if a solution to minimise the amount of waste or reduce the amount of moneys needed to meet the liability came forward.

As I have already said, the clause as drafted allows for modifications that decrease the target sum where it is prudent to approve them. The framework provided by the provisions allows for operators to propose effective ways of dealing with decommissioning and waste management other than those set out in guidance issued by the Government. But that answers only—I hope that the noble Lord will bear with me—the question on approvals for modifying the programme. Any proposal to decommission a nuclear power station and dispose of its waste will also need regulatory approval from, among others, the Nuclear Installations Inspectorate and the Environment Agency. Furthermore, any proposal from an operator to reduce their estimates of the costs of decommissioning, waste management and disposal liabilities would need the agreement of those managing the operator’s independent fund. Additionally, any proposal that involves the shipment of waste would need to conform to existing UK policy. Any proposal to decommission a new nuclear power station and to dispose of its wastes will have to conform to existing policy, as will any proposal to accelerate decommissioning. However, I want to emphasise that this approach does not rule out the consideration of alternative or new methods of decommissioning or waste management techniques, the point addressed by my noble friend Lord O’Neill in his contribution. It is for this reason that the Government have not taken a prescriptive approach to the technicalities involved in waste and decommissioning in the Bill. The guidance issued under the Bill allows operators to develop and propose innovative decommissioning methods.

The noble Lord, Lord Jenkin, asks: where is the gain and therefore the incentive for operators to do this? First, let us deal with the crucial point about the concept of the fixed unit price. The fixed unit price will reflect the most up-to-date estimates of costs available at the time when the price is set, and the level of certainty the Government have on those costs. Consequently, dependent on the date of construction of a new nuclear power station, operators of different stations may be set different fixed unit prices for waste

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disposal. For example, the fixed unit price for a power station to be constructed in five years’ time could be different from the fixed unit price agreed for a power station to be constructed 10 years hence. The difference may arise because over time it is likely that understanding of the expected costs of the geological disposal facility and associated activities will increase, and therefore at the time the agreement is entered into, the Government could be more comfortable attaching a different risk premium on the fixed unit price.

Of course the Government have a primary duty to safeguard the taxpayer’s position when they are bearing a very substantial risk. The fixed unit price will be set based on estimates of the costs of the geological disposal facility and the level of confidence we have in the cost estimates at the time a company comes forward. Business wants clarity and certainty, and has indicated that it would be prepared to pay a significant risk premium in return for having the certainty of a fixed unit price. It is that which the Government are seeking to respond to. If operators can carry out decommissioning more cheaply than originally envisaged, provided that all the regulatory steps have been taken, any surplus in the fund set aside for decommissioning will be returned to the operators—and there is the gain. A fixed unit price gives a guarantee to the operators of what their maximum costs could be against a background where the price needs to be set to safeguard the interests of the taxpayer, but if techniques and technologies are developed that reduce the costs, the fund set aside for decommissioning can be returned to the operators, who then gain from the position.

5.15 pm

Lord Palmer: Perhaps I may add a supplementary to the question of the noble Lord, Lord Teverson. I hate interrupting the Minister when he is in such elegant flow, but what verification will we have of the costs of decommissioning and how will that verification be abundant to everyone concerned?

Lord Davies of Oldham: It would not. But, as I indicated, over time, a power station that is constructed in five years’ time might face a different risk cost unit price from one built later. The price is the one against which the station is built and which it recognises is the fixed unit price that it bears throughout its operation. I am merely indicating that the clause does not need the amendment of the noble Lord, Lord Jenkin, but it did need the stimulus of his amendment to provoke this debate, which I hope is clarifying the issues. If those costs can be reduced through improved technology with regard to decommissioning, the power station might find that it gets some return against the improved technology. What it does know is that that is the maximum fixed unit price which it will have to meet. That is the certainty and that is the guarantee.

Of course, it may be that over time the power station can see that it will get additional profits through the advantages of new technology, which reduces the decommissioning cost. But it cannot bank on that. The certainty is the price that it is given when it is constructed. Those costs will differ over time: it is not a fixed price for everybody, but depends on when one

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is engaging in that operation. The noble Lord, Lord Palmer, asked whether I was in a position to give anyone a fixed cost. The answer is no, not at all. I do not think that anyone would expect, within the framework of this Committee, that I could. But the intention is clear that when the first nuclear new build occurs, it will be building against a clear fixed cost, which will give certainty.

Lord Woolmer of Leeds: The Minister said that if it turned out that there was a surplus in the fund and that the fixed-price, as he called it, was higher than it needed to be, any surplus would be returned to the companies. I am sure that he said that. That is what I understood. But if that is the case, in layman’s terms that is not a fixed-rate mortgage; it is a capped mortgage. They are very different things. Surely, going forward, the funding agency will take a risk. It could turn out that there is not enough. At one time it might think that there is more than enough and at another, five years later, it may turn out that there is not enough. The fund would have to keep a healthy surplus against the possibility in the future that there may not be enough. It may have been underestimated. I would be extremely surprised—I may have heard incorrectly—that a surplus or what I would call a sunk cost in the past would be refunded if a company found that the cost was less than expected. I would be grateful if the Minister could clarify that.

Lord Oxburgh: Before the Minister’s flow is interrupted, can I ask for another clarification? We are talking about very long periods. Are these fixed sums in the money of the day and do they stay fixed in the money of the day?

Lord Teverson: What the Minister has described is a one-way bet against the taxpayer. I am trying to describe things objectively. History shows that things have cost more in that sector. We hope that technology will reduce costs in the future, but if the costs increase, which has been the whole history of this industry, the taxpayer will make up the difference, but if costs decrease, the companies get their money back. That cannot be good. It is certainly not good for the taxpayer. I also emphasise the point made by the noble Lord, Lord Oxburgh, about whether this is in fixed monetary terms or related to something. Presumably it is not related to the retail prices index, which would be quite inappropriate in this instance.

Lord Davies of Oldham: I said that our debates would be enormously helpful and, indeed, they have been. Perhaps I may make the position clear. As the noble Lord, Lord Teverson, said, the initial risk relating to waste disposal is borne by the taxpayer. There is a substantial element of the Government taking the risk for the construction of the facility and guaranteeing the security of the waste disposal. The industry will benefit from knowing what that cost is and for each new nuclear build it will know what the fixed costs are for waste disposal. I have no doubt that the industry will say that the Government are putting that cost at a high level, whereas the industry would obviously like it to be as low as possible.



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The Government’s view is clear. The risk is being borne by the taxpayer for this crucial construction and the Government intend that the price will be fixed to guarantee that the taxpayer is not faced with increased costs that the Government have not bargained for. Therefore, the fixed-price cost for the nuclear power station, when constructed, will certainly be guaranteed but it will assuredly be high. However, that cost may come down for successive builds as technical developments in waste management accrue to the industry. Therefore, the fixed cost for subsequent power stations may go down due to technical developments but there is no guarantee of that; the cost may go up. It will not go up for those who have already contracted at the fixed price, because that is the concept of the fixed price, but the level of the fixed price may go up if the burdens on government and the taxpayer substantially increase due to an increase in the costs of waste disposal.

We cannot foresee which way the costs will move, although of course we share the optimism of my noble friend Lord O’Neill. The noble Lord, Lord Jenkin, indicated that enterprising companies may well reduce the development costs of power stations. If they do, the fixed cost will come down for future build. I do not have a detailed answer on the fixed cost—I do not think that that would be expected of me—but at the end of this year we will publish the methodology of establishing a fixed unit price for the disposal of intermediate-level waste and spent fuel. Whether the retail prices index will be regarded as the best measure for indexing, I do not know; nor do I know how many years will be involved. The noble Lord, Lord Teverson, is absolutely right: we are talking about an industry with a waste problem, the lifespan of which is beyond the range of analysis in those terms; that will have to be built into the methodology. However, that is the kind of problem with which Governments have to wrestle.

This industry knows that the one feature that it has which is unique—I hesitate to use that word because someone can always think of another example—or close to being unique, is that its waste product has a timeless concept which requires a particular form of disposal. That involves substantial costs and is critical to the community’s security, and that is why inevitably the Government become crucially involved.

I was also going to help the noble Lord, Lord Jenkin, on one of his discrete points. If the Committee will allow me, I shall deal with that before withstanding the rain storm of further questions that will no doubt follow my inadequate replies.

The noble Lord, Lord Jenkin, asked how the share of the funding for decommissioning and waste disposal is calculated. Operators must pay their full share of waste management and disposal costs, and are obliged to set aside sufficient funds over the life of the station to enable them to meet these costs as they fall due, as for decommissioning. “Full share” reflects the fact that the Government’s view is that waste from new build can and should be disposed of in the same geological disposal facility as legacy waste, to which we are approaching a solution. This means that some of the costs of building the geological disposal facility will rightly be for the Government, because they are

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the legacy costs of an industry that we have sustained during the past four or five decades. The cost of disposal of legacy waste is inevitably for the Government and the public to bear. However, we wish to ensure that operators of new nuclear power stations make the right contributions to the cost of the disposal facility for their waste. That is the concept of their full share. It will be governed by the fixed price. I accept that there is interest in how the calculation of that fixed price will be arrived at. I cannot define the methodology. The department recognises fully that the questions of the noble Lord, Lord Jenkin, will not be answered until that methodology has been identified and everyone can see how the calculations will be made. But that will have to wait for another day and rather more expert exposition than I can offer.

Lord Jenkin of Roding: One of my colleagues sent me a note, which is perhaps unkind to the Minister, stating: “What he said was as clear as mud”. The Minister has done his best, but I shall two make points before I withdraw the amendment. First, he said that we will not know what is meant by the “full share” until it is finally clarified by the department. I will study his speech with great care between now and Report, but one would have to be a bit of an optimist to believe that he has answered that question effectively. We will wait till a later stage, perhaps well after the Bill has become law, to know precisely what is meant by that.

My second point has been followed up by a number of noble Lords. It is the question whether any of the excess or surplus—I quote the Minister’s words—“would be returned to the operators”. Paragraph 2.10 of the document that I quoted in my opening speech, Consultation on Funded Decommissioning Programme Guidance for New Nuclear Power Stations, made it quite clear that,

We got confused at one point because, as the noble Lord, Lord O'Neill, rightly said, this is a dynamic process, there will be successive nuclear power stations and the unit costs will not be the same for all. I am asking about the initial tranche—I do not know how many there will be—one, two, three or whatever. They will have a unit cost set and, over the life of the station, that may well turn out to be more than is necessary to deal with decommissioning and waste. Will they get any of that back, or will only future nuclear power stations benefit from a lower unit cost? There must be an answer to that question. I will carry on for as long as is necessary for the Minister to consult his oracles.

5.30 pm

Lord Davies of Oldham: I am grateful to the noble Lord, who has shown the greatest understanding and maximised my chances—although they are still not high enough. The industry will know the unit price that it is facing, fixed cost, for the disposal of its waste. A component of that is the Government’s, because of legacy, but for all additional waste, it will know its fixed price. It will be different for power stations according to when they are constructed. It may go up;

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it may go down; nevertheless, that is the fixed cost on which they operate. Where they may benefit from technological advance is in decommissioning costs. Through advance in technology, we may reduce the decommissioning costs of a power station, and each of them may benefit from that. That is really the best that I can do.

Lord Palmer: Before the noble Lord, Lord Jenkin, withdraws the amendment, I must point out that I feel terribly strongly about this, especially living so close to a nuclear power station in southern Scotland. We are looking so terribly long term—there is so much uncertainty involved when one is looking 30 or 40 years in advance. There may be a very strong case to bring the amendment back at the next stage.

Lord Davies of Oldham: I understand the point that the noble Lord is making, but there are only two major problems to be resolved—I say that to be simplistic—to which the amendment is addressed. One is the disposal of waste, which is not a localised problem for anyone who lives in the area until we know how that localised waste is to be dealt with. We cannot say whether anyone would have anxieties about where they live, except when they will need assurances about the site to be developed for the disposal of nuclear waste—the guarantee that the process will be entirely safe.


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