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UK nuclear needs market reform

WITH a commitment to cut carbon emissions by 34% by 2020, and with little of its own money to spend, the UK government must encourage private-sector investment in low-carbon electricity generation

Nuclear power must play a key role in this, but there are regulatory obstacles to the kind of long-term investment needed. A carbon floor price and an obligation for traders to buy low-carbon power under long-term contracts are the two sticking points.

At the moment, non-nuclear low-carbon forms of generation benefit from Renewables Obligation Certificates (ROC), which guarantee the power they produce can be sold under assured long-term contracts, providing the cash flows that give long-term investors comfort. Nuclear projects do not qualify for ROCs and must sell electricity on the spot market, because ROCs were created as an incentive for new generating technology, and nuclear is considered to be an established route.

The difficulty for the new coalition government is that while the right-of-centre Conservative party is in command, it is being propped up by the moderate Liberal Democrat party. The Conservatives are broadly pro-nuclear, but the Liberals tend to oppose it on environmental grounds. How to encourage investment is a politically sensitive issue that runs through the heart of decisions on energy policy.

The government says that it will deliver a new nuclear plant by 2018. This is a more modest target compared with the previous government's plans, which involved delivering 10 plants with a combined capacity of 16 gigawatts (GW) by 2025.

The ministry of energy and climate change is in the hands of Chris Huhne, a Liberal Democrat. If he maintains his position that there can be no public subsidy for new nuclear capacity – yet still wants nuclear to help reduce emissions – the renewable obligation must be broadened to become a low-carbon obligation. Otherwise, investment for these projects, which cost around £4bn ($6bn) per 1 GW of capacity, will be difficult to secure. But although building nuclear plants is pricey, once on line they are cheap to run.

The government has committed to setting a carbon floor price, under which the per-tonne price of emissions will not drop. But it has not said what price that will be. At present, the carbon price depends on the EU Emissions Trading Scheme, and varies.

The price now sits at around €16 a tonne ($21/t). This is far too low to support investment into nuclear, suggests Chris Rowland, an analyst at Ecofin, a specialist investor in the utility and energy sector. He says that, depending on gas prices, nuclear generation would be viable at around €30/t. By comparison, offshore wind generation would need a carbon floor price of around €150/t – once subsidies are included. Take out the subsidies, and wind power needs a price of €275/t.

The combination of a carbon floor price and the creation of a Low-Carbon Obligation Certificate would encourage investment and push nuclear to the forefront of the UK's carbon-reduction initiative. Nuclear generation gives scale, but negligible greenhouse gases, so this would help the government hit its emissions-reduction target. But it could cause problems with the environmental lobby, which would view the inclusion of nuclear in a market-obligation mechanism as a subsidy. For many greens, subsidies are fine for other low-carbon forms of generation, such as wind farms, wave and tidal power. But few environmentalists are happy to put nuclear in the same category.

To some disbelief, Huhne said recently that he has never opposed the development of new nuclear capacity. But confusion about his stance and, therefore, about the stance of the Liberal Democrats abounds. Only an explicit statement of policy will settle the matter. This seems unlikely before the end of the year. But if new nuclear capacity is to be on line by 2018, potential investors need some clarity soon.

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