Nick Butler: Nuclear power yesterdays technology?

Thursday, April 4, 2013

Why is it proving so difficult to close the deal on new nuclear in Britain? In part, of course, there is the normal arm wrestling negotiation. This is focused on the so called "strike price" - an energy price below which the suppliers will get compensation from the state - and on the allocation of risk around a £14bn construction contract.

The UK government wants a strike price of around £65 to £70 per MWh which is high but probably politically defensible. They well remember that in 2008 EDF talked about a price of £45 per MWh. EDF now wants something between £95 and £100, but they can probably afford to accept the Government's figure and still make a reasonable profit.

The allocation of the risks is even more important than the strike price. Unless the Government is careful it could end up pay enormous sums for capacity which is underused because cheaper supplies will be available to consumers. If the company gets it wrong, a bad deal would overhang its finances for decades.

The negotiating process is not being helped by an amateurish public relations campaign on behalf of the company. One day the message is that the deal is almost done; the next that the company is about to down tools and walk away. This causes a mixture of amusement and irritation in Whitehall. Threats and attempts to bounce through decisions do not go down well. EDF would not dare to deal with the French Government in this way. But the real problem is deeper and not specific to the UK.

Nuclear has come to look like yesterday's technology. The development of new nuclear stations is a desperately slow process. If built, Hinkley Point will take at least twice as long from conception to commission as the whole of the London Olympic Games. Partly this is about the safety requirements which are now platinum plated and include an approval process which is painfully slow especially in approving what is a well-established reactor design.

Necessary or not, such processes put a blight on all nuclear projects in the developed world. In turn, the extended timescale complicates the initial decision. Even on the most optimistic scenario Hinkley cannot start production before 2020. The real start-up date is probably at least a year or two later. New nuclear can do nothing to help with the energy crunch, which is coming in three or four years time.

Furthermore, energy technology is moving very quickly. Shale gas will not be the last major breakthrough. So who knows where the sector will be by 2020? The extended timescale locks consumers into a decision which could soon be overtaken by events.

So nuclear is beginning to look unfundable as a private sector investment. Which private investors want to tie up $14bn of capital for more than 10 years? As Centrica demonstrated by its decision to walk away from new nuclear in the UK, there are quite simply other, easier investments for energy companies.

The only serious prospective investors then are governments. In the UK case, it is the French, who own the bulk of EDF, the British and the Chinese. The Chinese are said to want a stake in a strategic sector in Europe and might pay to get it. "Might" is the key word. I will come back to the Chinese in a separate post.

Countries going ahead with nuclear tend to be those whose strategic need for indigenous sources of supply outweighs all considerations of the economics. China is the obvious example, along with the oil states of the Middle East who need domestic power supplies to release oil for export. In such cases funding, one way or another, comes from the state.

If this is to be overcome, the answer for the nuclear industry must lie in new technology - in particular, small reactors with lower risks, lower safety requirements and a shorter construction timetable which is more attractive to private finance. A new generation of such technology has been long promised but never seems to arrive.

As someone said to me the other day, nuclear power feels like a business where the process of evolution has come to a halt. Until there are technical breakthroughs in the sector, nuclear will struggle with its development largely limited to areas in which governments can over override the constraints of the market.

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