Nuclear Requiem – Is the penny finally dropping on costs?

This week we say a bit of a hammer blow struck to efforts to build (or more specifically replace outdated) nuclear reactors in the UK. Two companies, RWE (otherwise known as Npower in the UK) and E.On announced that they were pulling out and dropping plans to build nuclear power plants in the UK. This would, at face value, probably eliminate the planned new reactors at Anglesey and Oldbury. That pegs back any proposed nuclear reactors in Britain to just 5. And even that will require strong support from the French to build any of even this number (more on that later).

This announcement took many energy industry watchers completely by surprise . Even I was somewhat taken aback! Although that might be because I’ve been too busy to keep my finger on the pulse (I missed this article here for one, which suggests that’s its actually been on the cards for awhile).

Many corporations, including RWE and E.On have been quietly planning the construction of new UK reactors for the better part of a decade now. Since at least 2003 there has been a quiet steady drumbeat across the UK energy industry, all focused towards gearing things up for the first sod turning ceremonies on a British nuclear plant in almost 3 decades. Indeed the collapse of the “Horizon Project” (the joint E.On and RWE project) is particularly significant, as they were the closest of all proposed nuclear projects in the UK to actually commencing construction. They’d even announced a provisional commissioning date of 2020.

Consequently this would not have been a cost free decision to pull the plug. Many thousands of man hours will have been devoted by both companies employees, as well as time spent by government advisers and pro-nuclear scientists (working for universities or organisations such as BNFL, AWE or NNL), preparing the background for the project (site survey’s, hammering out contract details with suppliers, designing foundations and bits of kit, safety evaluations, working out the logistics of construction…indeed I know several colleagues who were all but assured of a job doing this!). Now all of that work has just been flushed down the toilet. Naturally, this is not the sort of decision that is made by any corporation on whim.

So why did they jump? Where they pushed? I suspect the answer maybe a bit of both, but don’t blame me, Greenpeace or FoE. No, I suspect the reasons for this pull out are largely financial.

It’s about the economy stupid!

If there’s one point I have repeatedly tried to hammer into the heads of pro-nuclear advocates, it’s the issue of costs and the economics (or lack there-of) of their industry. In short I say to them:

 Ya nice idea! But how are planning to pay for all of that?

 The simple fact is, nuclear power is expensive energy. I discuss the economics of nuclear power in more detail here, if anyone doubts this fact. However, as one commenter to my page pointed out sometime ago (here) there’s also the issue here of uncertainty and business risk to consider.

The spiraling costs of new nuclear build [Credit: Mail & Guardian]

Business risks and nuclear power

Many recent nuclear projects have run over budget and have been delivered late…and we’re talking here about being up to 4 years late and Billions over budget! A quick glance at the slow motion train wreck that is Olkiluoto or Flamenville should illustrate what I’m talking about. Being late also has financial costs. It means not only going back to the bank for yet more loans to cover these cost overruns, but paying interest on those loans for longer while loosing out on several years worth of electricity sales (which for a nuclear plant can cost you the best part of hundreds of millions to billions per year of delay depending on local electricity prices).

Also in a free market economy there is no guarantee that utility company’s will buy you’re electricity, just because you’ve built a power station. If something else, say a Gas Fired power station, is able to sell electricity cheaper than you, utilities will buy they’re power and not yours. And if governments don’t wake up to the business of tackling climate change and introduce a steep carbon tax, or they start favouring things such as Shale gas (both of which seems likely in the UK, as they’ve recently announced CO2 limits for new gas fired plants that are woefully inadequate and have previously confirmed they’re support for shale gas), there is a risk that future gas-fired electricity prices could be on the low side. Sufficiently low to force nuclear plants to either remain idle for lengthy periods, or force them to sell electricity at a price below their operating costs…plus the money it costs to pay off all those loans we talked about earlier. Again, the point I’m making here is “business risk” the risk of this happening and the costs to a business of hedging against these risks.

Oh, and of course nuclear will have to compete with renewables too and while the price of new nuclear building is rising, renewable costs are falling (comment on that here) to the point where both solar and wind energy’s per kWh costs are now less than those for nuclear. And if that wasn’t bad enough, we have to hedge against something unexpected happening. For example a surge in the construction of CHP plant (which generally competes with nuclear for baseload capacity) something which the recently announced RHI(Renewable Heat Initiative) could provoke. This would further gnaw away at the capacity of electricity that nuclear reactors can sell to the grid.

And of course a nuclear plant operator doesn’t just want to break even from electricity sales. All the while they should be putting money aside in the kitty to pay for that crucial  final step – decommissioning of the plant and final spent fuel storage. There is huge uncertainly of the costs here. Most nuclear supporters seem up beat and quietly confident that these costs will be reasonable. And if they aren’t (I come up with figures, based on recent plant decom costs about 3-45 times higher than the nuclear industry estimates, see here), one can always rely on the taxpayer to bail the industry out. But, again the business risk analyst says, what if they prove to be very high? And what if a future UK government turns around and say’s hang on! You created this nuclear mess, you clean it up, we’re not the nuke industry’s wet nurse anymore!

Short of a signed confession from a future UK energy secretary being available, one has to hedge against the possibility of significant liabilities here. And we are talking potential liabilities high enough to break even the biggest company.

And then there’s the issue of insurance. What if the reactor, unlikely thought it is, pops its cork and does a Fukushima on us? Who is going to pay the costs of dealing with that? Again, the assumption of the industry is that the state will cough up, but again the prudent business man has to say, ya but what if they don’t? At the moment the policy in Japan, at least officially, is that paying up is TEPCO’s problem. They are only going to get involved when the company inevitably files for bankruptcy (meaning shareholders and investors get wiped out first) or (more likely) by nationalising the company.

Weighting up all the above and you can understand why Citigroup in they’re report were less than enthusiastic about investing in new nuclear projects. In short they seem to be of the opinion that they, or any other financial institution, would be insane to invest in nuclear power without first obtaining a signed confession from a national government providing financial guarantees right from cradle to grave. The government would in essence be required to hold the nuclear industries hand, right from sod turning ceremony to final waste disposal and storage.

And should any pro-nuclear supports wish to accuse me or Citigroup of “anti-nuclear bias”, even Robert Peston of the BBC, hardly the sort noted for his love of fluffy environmentalist stuff, doesn’t seem keen on nuclear. And again, it’s largely for reasons of business risk. As he bluntly puts it, the UK government will have to either break its prior commitment of no subsidies, or risk the entire policy unravelling by years end.

So based on what I’ve said one can construct a scenario where the Horizon partners went to the banks and quickly worked out that nobody would be prepared to finance the project without written financial guarantees from the UK government for every aspect of the project. Of course, the UK government has repeatedly said it’s not going to supply any subsidy to nuclear power, and such guarantees, could be construed as a subsidy. And after all, similar guarantees could get a whole host of renewable energy projects (such as the Severn Barrage) off the ground too. For the best part of a year the Tory’s have been trying to outwit the Greens and lib dems by attempting to invent a mechanism for subsidising the nuclear industry, without subsidising it. But up until now they’ve failed. And if Peston’s spies are to be believed the clock is about to run out.

Furthermore, would the UK government be prepared to give financial guarantees to a German company? While I suspect the answer is yes, the political reality (if you know anything about the Tory party or lib dems) is no. This would have likely sent RWE and E.On going cap in hand to the German government and think you can guest the response they got (German word, starts with “n” and rimes with nine ;0 ).

Consider that RWE has also pulled out of a similar project in Bulgaria recently, and again my suspicion is it was a lack of financial guarantees and support that was the cause.

What now?

Replacing either of these two companies in these contracts will be difficult; there are only a handful of companies big enough and with the right expertise and political connections to pull off the building of a new nuclear plant in the UK. And again, the issue of an ironclad financial guarantee will be required, as few will be willing to risk getting their fingers burned after two large companies like this tried and failed. Indeed as I write this, the obvious choice, EDF Energy (who already have they’re own plans for new nuclear plants in Britain) have just declined to rescue the project.

In short, as I’ve been pointing out for the last few years, if the Tories want new nuclear power stations they are going to have to say deficit be damned and put their money where their mouth is and pay for them out of the state coffers…..or rely on the French!

A vous la France

This seems the one get out option for the nuclear industry in Britain, get the French to not only build reactors, but finance the project as well. As I pointed out in a prior post the French nuclear industry is essentially a giant welfare to work scheme, bankrolled by the French state. Could they be convinced to help out here?

A French PWR reactor pressure Vessel under construction [Credit: AREVA]

Well, there is no guarantee they’ll oblige. Consider that they’ve gotten their fingers badly burned with Olkiluoto and they also recenty lost out in the contract to build a nuclear plant in the UAE.

The loss of this UAE contract could be important. I see two plausible reasons. One, the mess that is Olkiluoto (good you-tube video on that here) convinced the Emir’s that they didn’t want any of these incompetent snail eaters anywhere near their country while tinkering around with nuke stuff. Alternatively, the UAE demanded that the French government supply the sort of ironclad financial guarantees I discussed above, and Sarkozy baulked at the prospect. Naturally, the danger is he will say “noi” again to any similar guarantees regarding reactors in the UK.

And also there is internal French politics to worry about. There is an election due in France and the poll numbers for Sarkozy don’t look good. If the socialists get in, with François Hollande being the likely new President, they will likely maintain the status quo (officially they are committed to reducing the nuclear energy mix to favour renewables). But they certainly aren’t going to be keen on bankrolling the construction of any reactors across the channel. This is particularly true if they are forced to rely on the support of smaller left wing (and generally anti-nuclear) parties such as the French Green party, for support in parliament.

Also there’s the internal politics of Areva itself (see articles on that here and here) which can involve more backstabbing and manoeuvring than Machiavelli.

Down the blind alley

Furthermore, relying on the state to bankroll nuclear power projects, be it directly or indirectly (with loan guarantees), is a dangerous game. There is only so much money the state can provide before the more fiscally conservative members of parliament and the environmentalists begin to yell fix! A commentator on energy policy issues, Peter Bradford, discusses this bottleneck here.

Consequently there are only so reactors many you can build this way. The loan guarantee program in the US will only finance a few dozen plants (again see Bradford’s article, indeed only 2 so far have been ordered), barely enough to replace a small fraction of the existing fleet of 104 American reactors. Indeed according to the WNA, its likely only 4-6 reactors will be built in the US any time soon, and there are but 24 applications in the works (and as with the Horizon project no guarantee that any of these will ever be built).

Similarly, a government (French or British) backed scheme in the UK could I reckon get only 2-5 reactors build (and at a fairly slow pace!) again only a fraction of the current nuclear generating capacity. In short, it is difficult to escape the conclusion that if nuclear power manages to stand still in many nations over the next few decades, they will be doing well.

And that’s the best case scenario; the worst case scenario is slow steady decline to extinction. One has to consider the national debt. I’ve described before how I fear the French maybe over stretching themselves financially with nuclear power. The danger is, if push comes to shove, a cash strapped future French government will have to pull the plug and leave a load of expensive half finished plants, something that happened in the US in the 1970’s and 80’s post TMI. Naturally if the UK has decided to rely on the French at this time, they’ll be literally left carrying the can….a rather large can full of radioactive waste!

The real looming energy gap

For sometime nuclear energy supporters have been talking up the risk, practically with glee, of a looming “energy gap” or of “the lights going out” (a typical example of pro-nuke scaremongering can be found here). But if my predictions come true, i.e. they build between 5 plants at most and none at worst, with 2-3 UK reactors being my best guess, it will largely be a gap caused, not by a shortfall in renewable energy production, but a shortfall in nuclear power output. The very reason they’ve written off renewables (it can’t deliver the energy we need quickly enough, or so they say) could well be the very problem they face with nuclear power!

Worst still the nuclear lobby has engaged in a 20 year campaign to cut off renewables at the knees. They have actively astroturfed against windfarms, disrupted wave energy development, got the Severn Barrage cancelled, discouraged the use of CHP (I point to its value and why nuclear supporters hate it here), all with the aim of clearing out a gap in the UK energy market for their new reactors to fill.

But now cometh the hour for them to deliver, it looks likely they’ll be struck by a sudden attack of Mr floppy and they will only deliver a woefully in adequate quantity of power. And they’re new reactors will likely be completed too late to have any influence on either closing this energy gap or averting dangerous climate change. Course if they’d just kept their noses out of the renewable energy sector, its likely wind, wave and tidal energy would be more established and CHP more widely used. I’ve pointed out before how a few reasonable energy efficiency targets, coupled with some modest rates of renewable energy roll out, could cut UK carbon emissions by 25-50%.  We could be at least half way there already if it weren’t for this bungling interference from the nuclear lobby.

Consequently if the lights do start to go out in 2017, don’t blame me or the Greens, don’t even blame BP or Shell, point the finger of blame at the supporters of nuclear energy…such as this guy!….or this Peer!….or this guy!

Sorry to burst you’re bubble

But will the supporters of nuclear energy listen? Ah! no! don’t be silly! What did facts every have to do with a good fantasy! Unfortunately, it is my experience that a good proportion of the pro-nuclear lobby (at least that portion that’s online) are tied up in they’re own little fantasy cocoon and will only absorb facts that support their stance. Unfortunately, it’s a bubble that’s about to be burst by the harshest of forces – reality!