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A subsidy for nuclear power and its unintended consequences

A subsidy for nuclear power and its unintended consequences

Poor people will pay for nuclear white elephants

Gerry Wolff, Energy Fair

January 2013

It makes no sense to build nuclear power stations that are not needed or to ask poorer people to foot the bill. But those are the likely effects of the Government’s proposal to include nuclear power amongst the technologies that will be eligible for subsidy in the form of a "contract for difference" (CfD). Likewise for any other subsidy for nuclear power.

Nuclear power is a mature technology that should not require any subsidy—that kind of support is needed for technologies that are still finding their feet commercially. The Government has said repeatedly that it will not subsidise nuclear power, there are cheaper and faster ways of cutting emissions and ensuring security of energy supplies, and nuclear power is already heavily subsidised. As applied to nuclear power, CfD or any other subsidy may be unlawful under EU laws designed to promote fair competition between businesses.

But the nub of the problem to be described is that electricity markets are changing and that nuclear power plants are notoriously slow to build. Given that no decision has yet been made to build any new nuclear plant in the UK, that there is a lead time before any construction can start, and that it can take 7 years or more to build a nuclear plant, it is unlikely that any new nuclear plant could be completed before 2020. A lot can happen between now and then.

Domestic consumers and businesses of all sizes will be empowered to generate much of their own electricity or to buy it from anywhere in Europe.

It is likely, first, that, by 2020, renewables will be much more affordable than they are now. For example, a report by the European Photovoltaics Industry Association shows that, because of rapidly falling prices, photovoltaics (PV) are likely to become a competitive source of electricity in the UK by 2019, without subsidies—not just for householders paying domestic retail prices but also for wholesale generators and large commercial and industrial consumers.

Greg Barker MP, Minister of State for Climate Change, has said "There is the potential for solar power to become competitive with fossil fuels without subsidy within the lifetime of this parliament [ie before May 2015]". Solar has gone from being one of the most expensive forms of renewable energy to one of the cheapest."

In sunnier countries like Spain, Italy, and Greece, PV will become competitive earlier, perhaps this year.

Secondly, it is likely that the long-awaited European internal market for electricity will be completed (a development that the Government supports), bottlenecks in transmission will be eased and, more generally, the European transmission grid will be stronger.

These and related developments will transform the electricity market in the UK. Domestic consumers and businesses of all sizes will be empowered to generate much of their own electricity or to buy it from anywhere in Europe. Paradoxically, the CfD subsidy for nuclear power will provide an added incentive for consumers to reduce their dependence on UK nuclear power from UK traditional suppliers, since the subsidy will be paid for via a surcharge to consumers’ bills.

PV has the attraction that it is quick and simple to install, it generates electricity in the daylight hours when demand is high, and there are no worries about rising prices of electricity, or poor service from electricity suppliers. When electricity from PV is as cheap or cheaper than electricity from the grid, there is likely to be an explosive growth in the market, both for domestic consumers and for large commercial and industrial consumers. IKEA, Apple, Google and Facebook are already investing in their own solar generating plants.

With other developments—such as consumers generating their own electricity using combined-heat-and-power (a technology that is already available to both householders and companies in the UK), ownership of wind farms by community groups and businesses (IKEA already has its own wind farm), the use of highly-efficient LED lighting (which is expected to be widespread by 2015), and the option to buy cheap solar electricity from sunny countries or wind power, geothermal power, or other renewable kinds of power from anywhere in Europe—most consumers can, with advantage, be largely independent of traditional suppliers in the UK. In short, much of the market for nuclear electricity in the UK is likely to disappear.

Much of the market for nuclear electricity in the UK is likely to disappear.

In a rational world, investors would assess these predictable features of the UK market for electricity in the coming years and decide that it would not be sensible to put money into the building of new nuclear plants. But the proposed CfD could lead us into a very expensive, wasteful and unjust alternative scenario.

Given the large up-front costs of nuclear power, any company or consortium that is considering building a new nuclear plant in the UK will need to know, before any investment decision is made, what the guaranteed price (the ‘strike’ price) of their electricity will be, and they will need something to ensure that that guaranteed price, with adjustments for inflation, will still be available when the plant is completed, and for many years thereafter.

It seems unlikely that investors will be satisfied with anything short of a legally-binding contract, since the government in 2020 will be different from what it is now. Here, the meaning of “legally-binding" is somewhat qualified since the subsidy may be withdrawn at any time via a ruling by the European Commission or the European Court of Justice, and in that case it is likely that any money that has been paid to nuclear operators via CfD will have to be repaid.

Let us assume that, about 2014, work starts on the building of a nuclear plant on the strength of a contract to deliver electricity from about 2021, at a guaranteed price that reflects market conditions in 2014, and for a period which could be as long as 40 years. Then it is likely that the subsidy will be paid at a relatively high rate for many years for large amounts of electricity that no one wants. It has been calculated that, for just two new nuclear power stations (at Hinkley Point and Sizewell), the cost of the subsidy would be at least £5 billion per year.

That is not only extremely expensive and wasteful but it is also very unfair because the subsidy will be paid via the bills of the relative handful of consumers that are still receiving most of their electricity from traditional suppliers—and these will be mainly poorer people that cannot afford the up-front cost of generating their own power.

It may be argued that similar things can be said about renewables. The first point here is that, in general, renewables can be built much faster than nuclear power stations. This means that there is much less opportunity for the market to change between when a subsidy is awarded and when the generating plant comes on stream. The second point is that each new contract will normally be for a much smaller generating capacity than a nuclear plant. A succession of relatively small contracts allows the level of subsidy to be progressively adjusted to reflect the market conditions at the time.

It may also be argued that if any new nuclear plant proved to be redundant, it could serve as a backup source of power. But nuclear plants are quite unsuitable for this purpose because they cannot easily be turned on and off. A much cheaper and better way of providing backup supplies of power is to keep some old but still serviceable gas-fired plants in reserve, together with a strategic reserve of biogas or biomethane.

There is now much evidence that renewables can provide abundant, economical, diverse, secure, responsive, and clean supplies of power, and with none of the problems with nuclear power.

There is no justification of any kind for subsidising nuclear power and there is every reason to ensure that nuclear power is not on the list of technologies that would be eligible for support via the CfD, or any other subsidy. We may thus avoid what would otherwise be the considerable risk of creating nuclear white elephants that would be paid for mainly by consumers that are least able to afford them.