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UK's nuclear future at risk says parliamentary report

A parliamentary report says a lack of a clear pricing system is spooking investors

The development of nuclear power in the UK faces an uncertain future because the lack of a clear pricing system is spooking investors, a UK parliamentary report claims.

The report by the UK's Energy and Climate Change Select Committee (ECCSC), Building New Nuclear: The Challenges Ahead, says it is extremely worrying that the UK government "does not appear to have any contingency plans in place" if new nuclear capacity is not built as planned. 

The UK government wants to bring 16 gigawatts (GW) of new nuclear power capacity online by 2025 to help reduce the country's carbon emissions and offset its looming electricity supply crunch.

Around 20% of the UK's existing electricity generation capacity will be shut down over the next 10 years as ageing coal and nuclear power plants close. The UK also needs around €100 billion ($160bn) of investment in new electricity generation and transmission by 2020, double the rate now.

The government says between 40GW and 70GW of new, low-carbon power will need to be deployed by the end of the decade and that between 21% and 45% of heat supplied to UK buildings will need to be sourced from low-carbon energy by 2030.

New nuclear power could contribute 10 to 15GW of capacity by 2030, while fossil fuels combined with carbon capture and storage would account for up to 10 GW. Renewable energy could deliver anywhere between 35 and 50 GW, the government says, depending on development costs and new build rates.

Utilities EDF and Centrica have proposed building four new nuclear reactors at Hinkley Point, southwest England, with a total capacity of 6.4GW. NuGen, a consortium of GDF Suez and Iberdrola, is also planning to build up to 3.6GW of new capacity at Moorside, near the Sellafield nuclear power plant in northern England.

Hitachi is also planning to develop around 6GW of capacity at the Horizon Nuclear Power site at Wylfa and Oldbury after E.ON and RWE pulled out of the project in October 2012. The first new power station is planned to begin operating in 2019.

So far, however, EDF is the only company to have applied for planning permission for a new nuclear plant in the UK. There are several investment risks for nuclear projects, including possible construction delays, the threat of cost overruns and government policy changes. These are risks companies such as EDF will not take without a guaranteed price for the power they produce.

EDF is preparing the Hinkley Point site in southwest England and is waiting for the government to grant final planning permission. A decision is due on 19 March. But even if EDF gets permission, it won't move forward with development plans until a clear pricing mechanism has been developed.

"The important thing for us is that Tim Yeo (ECCSC chairman) is putting a message out to the government to get on with it," an EDF spokesperson told Petroleum Economist. "The planning application is one thing, but what will make this decision is the CFD (Contracts For Difference). The work has been done putting the case for new nuclear. Now it's a commercial decision to get the right clarity in place."

Each of EDF's nuclear generators at Hinkley Point will have a strike price, a guaranteed minimum price for power generation under long-term contracts. If the wholesale price for nuclear power dropped below that agreed level under this CFD scheme, the government would compensate EDF.

The EDF spokesperson also told Petroleum Economist that if the wholesale prices rise above the agreed level, then some of that money could also go back to the government. An independent organisation would be set up to administer the scheme.

Neither EDF nor the Department of Energy and Climate Change (DECC) would comment on the strike price levels while negotiations are under way.

The ECCSC report said that the price must be fair to consumers and recommended that it should be no higher than the level for wind power, which is expected to be €100/MW hour.  

More subsidies

EDF could also be in line for a government payout to help with other costs, too. Under the UK Guarantees Scheme, announced in July 2012, the government could subsidise construction costs to encourage private sector investment in new infrastructure projects.  The scheme could provide public guarantees of up to £50bn in private infrastructure projects.

A DECC spokesperson declined to comment on the negotiations with EDF, but in a statement the department said there would be transparency over the terms of any investment contracts offered to developers of low-carbon electricity. It also said details of contracts will be laid out in the UK Parliament.

However, a number of residents who live near the Hinkley Point site are not convinced that that new projects should be subsidised by the government or that their safety concerns have been addressed. 

"When you talk to individuals there is a lot of unhappiness and resentment. They feel like there's a steamroller which they can't stop," Theo Simon, spokesman for Stop Hinkley, which opposes the plant's development, told Petroleum Economist. "Realistically, there are no plans to deal with nuclear waste. Whatever deal they (EDF and the government) manage there is the possibility of a big public backlash when we know what the subsidy is."

At a time when the UK's oil and gas production continues to fall, the government is not in a strong bargaining position. Government data show that the UK's energy production fell by almost 11% over 2012 to 122.4m tonnes of oil equivalent because of declining oil- and gas production and maintenance at producing fields. This followed a 13% year-on-year fall in 2011. Failing to bring new nuclear projects online would not only put the UK's energy security at risk, but also undermine any hopes of raising funding for future projects, the ECCSC report said. It would also mean that the UK would miss its carbon-reduction targets.

Alistair Smith, chairman of the Institution of Mechanical Engineers, said the government's electricity market reforms to encourage investment have been part of a painfully slow process that has left the UK at risk of increasing energy bills.

"In the near term, the UK looks set to be at the mercy of gas-price volatility as developers look to build gas plants to meet the looming gap," Smith said. "But if market mechanisms are applied correctly by government, there is an opportunity for... (utilities) to develop their plans for renewable energy and nuclear power, which will fill the much larger gap which will appear post 2020."

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