IT WAS hailed as a signpost to a renewables-powered future by the Parliamentary Renewable and Sustainable Energy Group and enthusiastically welcomed by environmentalists. But the 2003 White Paper that aimed to define a long-term strategic vision for energy policy, combining the environment, security of supply, competitiveness and social goals, now appears hopelessly outdated. Chris Webb writes
Just three years ago, nuclear power was all but ruled out as a long-term way of boosting the UK's energy supplies. But in November, prime minister Tony Blair threw a lifeline to the now resurgent pro-nuclear lobby.
Moreover, the recent gas dispute between Russia and Ukraine has rekindled the on-off energy debate as security of supply assumes a more dominant profile than ever before (see p10), amid fears that similar blockades could befall European markets in the future.
The White Paper was the result of a study by the Cabinet Office's Performance and Innovation Unit, published in February 2002, and other reports into various areas of energy policy. The principal conclusion was that it would be unwise to invest in expensive new nuclear power stations; instead, the emphasis should be on energy conservation and tapping into renewable power sources.
Another Energy Review
However, implementation of the White Paper is on hold, as yet another Energy Review, announced by Blair in November, considers the UK's energy future, which is likely to include nuclear power. The energy minister, Malcolm Wicks, must make sense of the mess and report his findings in the autumn.
The review is not good news for the renewables industry, whose advocates reckoned they had won the environmental high ground and that renewables had been acknowledged as the best way to supply growing energy needs without increasing carbon dioxide (CO2) emissions. Climate change, the very issue that had positioned renewables at the hub of a low-carbon economy, was seized upon by the nuclear industry as its own raison d'être. The stigma attached to the industry is peeling away, amid growing public recognition that nuclear is a viable way of supplying large amounts of energy at a low environmental cost.
Meanwhile, the renewables industry has suffered setbacks of its own. At the end of 2005, the European Wind Energy Association (EWEA) said the industry faced a tough challenge if it was to overcome a deep culture of "distortions and institutional deficiencies in European electricity markets".
EWEA's analysis of the technical, economic and regulatory issues concerning the large-scale integration of wind power into European energy markets concluded that the existing climate for the technology was neither free nor fair. "Already today a penetration of 20% of power from wind is feasible without posing any serious technical or practical problems," said Corin Millais, EWEA's chief executive. But, he added: "Wind is not more fully deployed across Europe ... because of structural and market flaws, not technical issues."
The "technical issues" concern the intermittency of wind power, which is regularly cited by critics as a weakness. But, claimed Millais, the "entire electricity system is variable" – nuclear plants and fossil-fuel-fired plants are also subject to outages, even if they are generally planned. He added: "It makes little difference to add a variable technology such as wind."
The EWEA report followed a study by the IEA in September, which concluded that "ultimately, the question whether there is an upper limit for renewable penetration into the existing grid will be an economic and political issue rather than a technical issue."
The 2003 White Paper said that to meet the existing 2010 target of reducing CO2 emissions by 10% from 1990 levels, the UK would need to install 1.25 gigawatts of new renewable power capacity every year. And in its "qualified welcome" of the White Paper, the Renewable Power Association (RPA) forecast new investment of between £1.1bn ($1.9bn) and £1.5bn a year would be needed – a figure that raised sceptical eyebrows at the time.
Sceptical eyebrows raised
It also stressed that momentum would need to be maintained if the ambition of reducing emissions by 20% by 2020 were to be met. Some of this would come from electricity suppliers, the RPA said, but their pockets were "far from bottomless" and "much investment will need to come from the City".
The problem is that providers of equity and bank finance weigh the returns of their investments carefully against the technical, commercial and political risks. While technical risks are reducing, commercial risks have increased because of electricity-price fluctuations and deep-seated – if precariously founded – supply reliability issues.
Meanwhile, just as the UK is becoming a net gas importer, the recent dispute between Russia and the Ukraine over gas prices has intensified the debate in the UK over energy-supply security, adding weight to the argument for new investments in nuclear power.
However, new nuclear power plants in the UK could significantly affect the future structure of the country's liberalised generating industry, according to a report by Standard & Poor's (S&P), the credit-ratings service. For new plants to be built, difficulties in both the political process and in construction must be overcome, given the uncertainties of today's energy market in Europe, compared with the regulated model in place at the start of the last round of building, 25 years ago.
The S&P report also claims the case for nuclear will become compelling only if fossil-fuel prices, CO2 emissions-reduction requirements and market concentration continue to rise. Political stability is also vital. Until these conditions prevail, investment in nuclear will be directed at extending the life of existing plants.
New construction will have a profound effect on the ratings of companies that assemble a nuclear portfolio; given the high capital costs of building reactors, debt will be used to finance plants across Europe. Loan terms will be dictated by the rating assigned by S&P and other agencies.
"If construction of new nuclear plant is to become a reality in the UK, we have significant concerns over the future structure of the generating industry," says S&P analyst Paul Lund. These include the potential for increased regulation of the liberalised generating industry, a higher level of political interference in the market structure and whether nuclear power will be competitive, given the financial burden of decommissioning and waste storage. "Investment in nuclear power will rely on the long-term sustainability of high electricity prices in the UK."
The biggest hindrance to the long-term profitability of nuclear power stations is the uncertainty about the costs of decommissioning, storing radioactive waste and processing spent fuel. Most nuclear liabilities and asset retirement obligations in Europe are on balance sheet, but are unfunded. The obligations usually have no effect on day-to-day cash flows and are very long-dated. Nevertheless, the legal obligation to finance decommissioning costs creates significant future liabilities, the ultimate cost of which can be higher than that provided for, says S&P.
Ultimately, decisions about the construction of new nuclear capacity will depend on a range of commercial interactions. Investor-owned utilities will not invest in infrastructure unless risk-adjusted returns on capital meet internally set hurdles. This becomes even more of an issue where the investment is exposed to a fully competitive wholesale power market, particularly where predictability is an issue. Even so, the pariah that was nuclear power now seems curiously attractive.