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Reversal of fortune

THE UK's nuclear industry seems to be growing in strange ways. The best prospects, for now, are to be had in cleaning up the industry's mess. The £1.3bn ($2.4bn) decommissioning contract for the Drigg low-level radioactive-waste repository in Cumbria is just the first chunk of an estimated £56bn of new business and specialist contractors are rubbing their hands at the prospect of a brand new, stable stream of revenue.

The creation of this mini-industry may be good news for some firms, but it is not much of an advertisement for the nuclear industry. In its draft strategy for nuclear decommissioning and waste management, published this summer, the Nuclear Decommissioning Authority (NDA) raised its estimate of the clean-up bill, which will be funded with public money, by £8bn. And nobody is even sure what should be done with the radioactive waste. The NDA thinks it should probably be buried deep below the ground, but there are other options. Costs, uncertainties and dangers on this scale are certainly damaging to the image of nuclear and, argue anti-nuclear campaigners, kill off the prospect of new investments in the business.

Yet the fortunes of British Energy – which owns and operates eight nuclear power plants and supplies about a fifth of the UK's electricity – have been picking up. Despite repeated brushes with bankruptcy in the last three years, it is jostling for a place in the FTSE 100.

An unlikely comeback

However, little can be concluded about the future of nuclear either from the grisly and expensive task of waste-management or from British Energy's unlikely comeback.

British Energy has had little influence on its resurrection. It owes that to government bail-outs and, late last year, a £1bn debt-for-equity swap that handed most of the company's shares to its creditors. The rally in its shares this year (they have nearly doubled in value since January) is mainly the result of rises in electricity prices – a reversal of the situation that landed it in trouble in the first place.

There are various other theories that might explain British Energy's recovery. It would not benefit from any government decision to encourage the development of new nuclear plants because it is barred from building new nuclear power stations under the terms of its rescue agreement. But speculation in recent months that the lifespan of some of its plants may be extended may be behind the share-price rise. Indeed, Dungeness B is the first test case. Last month, the firm said it had decided to keep the plant open until 2018 – an extra 10 years.

Neither, despite the claims of the anti-nuclear lobby, do the NDA's alarming-sounding figures necessarily rule out the construction of new nuclear plant. Nobody expected decommissioning to be cheap or easy. The NDA's latest calculations, says Robin Smale, a senior economist at Oxera, a consultancy, are not grossly out of whack with previous forecasts. He also says experience from the more mature US nuclear decommissioning industry suggests waste-management can usually be executed more quickly and cheaply than initially assumed.

Also, today's clean-up bill has little bearing on likely future costs. The UK's nuclear-power industry, built as part of the post-war atomic-weapons programme, was a rush job. In future, decommissioning would form a central part of the planning process and costs would be lower.

Nuclear's notoriously high up-front costs should also come down, the nuclear industry says. The UK's nuclear stations are a hotchpotch of designs. But new power stations would follow a standard – and, therefore, cheaper – model. In addition, points out Robin Cohen, a nuclear power analyst at the Deloitte & Touche consultancy, the UK could avoid the high cost of building prototype plants by learning from other countries, such as Finland, France and China, where new-build nuclear programmes are under way.

And although new-build nuclear has a reputation for exorbitant capital costs, some research – including recent studies by the International Energy Agency and the Royal Academy of Engineering – suggests nuclear, including building and decommissioning, may be able to compete with other forms of generation. It will depend – broadly speaking – on the price of oil and gas, and the costs associated with emitting carbon dioxide.

Although the UK has met its Kyoto obligations, it looks hard pushed to meet its ambitious self-imposed aspiration of reducing carbon dioxide emissions by 20% from the 1990 level by 2010. Despite progress at encouraging renewables, the British Wind Energy Association's claim that wind could be supplying 7-8% of national electricity supply by 2010-12 and 20% by 2025 is more hopeful than reliable.

Also wind, unlike nuclear, is an intermittent power source and cannot be relied upon to supply baseload capacity. The Nuclear Industry Association, the UK's civil nuclear trade association, argues that renewable energy sources "should be seen as complementary to nuclear energy". Cohen shares that view. With all but one of the UK's nuclear plants scheduled to close by 2023, a large chunk of carbon-free generating capacity is set steadily to disappear. The government "would be brave not to rely on nuclear as part of the generation mix. The main issue is how much support – if any – is required from government, relative to renewables and other options."

Inspiring investor confidence

Certainly some. Private capital is not interested in nuclear at the moment – no nuclear power station has been ordered since Sizewell B, which was completed over 10 years ago and was, in any case, funded with public money. But the combined attractions of widening the UK's range of energy-supply options, reducing reliance on foreign suppliers, cutting the energy-import bill and assuring itself that future electricity demand can be met reliably make it likely that the government will, through policy intervention, encourage the private sector to invest in new nuclear plants. That will involve removing regulatory uncertainties – establishing, for instance, a formal policy on radioactive-waste management, so companies can be sure they will not be ambushed with extra charges in the future – to give investors sufficient confidence in the stability of future revenues to stump up the large up-front sums required.

The only other green options – apart from for demand-side efficiency improvements, which are limited in scope – would be to invest in technology either to scrub out and store the carbon from emissions from fossil-fuel plants or clean-coal technology, both of which look expensive.

A return to nuclear will not be easy to manage. Nuclear plants remain unpopular and environmentalists are on hand to whip up public and political opposition. Even in Germany, where green issues are much more important to voters, there are signs of a reluctant acceptance that nuclear may have an indispensable role to play in producing energy without exacerbating global warming. Growing public concern over climate change and energy security may give the UK government sufficient leverage to revive nuclear.

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