This is the text of a talk I gave on 24 June 2013 to a group of nuclear experts, politicians and civil servants at the think tank Politeia in London.
Nuclear power in the UK is at the sharp end of a major change, not just in policy but in the whole philosophy of government, namely the question of how far the state should intervene in the economy. This question was more or less settled from the late 1990s until the mid-2000s, based on a rough consensus that in the industrial, commercial and energy sphere the government would largely leave things to the market, while continuing to intervene in health, education and social spending.
What has changed is that the current Coalition government has agreed with the previous Labour government that nuclear, as the sole proven source of low carbon base-load power, must be kept in Britain’s generation mix. This goal, together with commitments to EU policies on renewable energy, has amounted to the reintroduction of Energy Policy.
Given the financial and engineering scale and complexity of nuclear power, it is understandable that the government wants to ensure the full economic benefit of this policy for the British economy, as well as to ensure sufficient skilled people are available to harness the benefits. It also wants to help British companies prepare to exploit a potentially large export industry for nuclear services. This amounts to a revival of what, in the 1970s, was known as Industrial Policy, or more sarcastically in the 1980s and 1990s as “picking winners”.
For 20 years or so from the mid-1980s, energy policy was, in effect, left to the market. Those parts of the gas and power industries which could be made competitive were (gradually) made so and the remaining natural monopoly network activities were explicitly regulated. This system worked pretty well, bringing substantial cost savings. It achieved, we could say, static efficiency gains, namely making the existing assets work better through a mixture of market forces (competition) and regulatory incentives.
The system did not have to deal with dynamic efficiency – investing in new plant sufficient to keep demand and supply in balance. We know from other capital intensive industries such as steel, petrochemicals and car manufacturing that the market doesn’t always smoothly deliver incremental capacity increases but tends rather to surplus and shortage, with consequent swings in prices. This tendency would be more marked in electricity because it cannot be stored. So any government might have been a little nervous about leaving the dynamic aspect of electricity and gas efficiency entirely to the market.
But we never found out. The market-based energy policy has, since the late-2000s been subject to government central planning goals for renewable energy and carbon dioxide emission targets, arising from domestic and European policies. Some of these targets are now legally binding and in theory over-ride any other domestic energy goals (such as affordability).
On the face of it, targets and markets don’t mix. But if a government that wishes to preserve the market as much as possible could minimise its intervention. It could set a price or quota of CO2 which would deliver the desired target and leave the implied price signals to lead market participants to find the least costly way to achieve it. That at least, would be a textbook economics policy, addressing a negative externality through a tax or quota and “correcting” the market.
But for nuclear power this policy would not have worked, even if the European Emissions Trading System had functioned effectively as a source of price signals, which of course it spectacularly hasn’t.
Nuclear power does not meet the criteria for a normal competitive private industry that would smoothly adjust to market price signals. In its current large scale form a new nuclear power station is not a small incremental investment, it is currently almost impossible to finance through normal private capital markets, the construction risk is uninsurable, and there are very few credible players.
So to keep new nuclear power as part of UK power generation in future, the government has been forced to go much further and adopt specific price interventions designed to encourage – we might say bribe – private players to build new stations.
The interventions come in the form of: i) a fixed price guarantee (in the form of a contract for difference) for the power sold by the new nuclear stations, to provide some revenue certainty; and ii) a (partial) guarantee to cover the risk of construction over-runs. Given the dreadful history of nuclear construction in the UK and more recently in Finland and France, the construction risk is enormous, and far beyond the scope of even the largest private companies to take on. At least this is the argument that the nuclear power companies have made. But they have a point. It is hard to imagine any new nuclear station being built in the UK without some sort of sovereign guarantee, for at least the first or second new stations.
Even those interventions might not have been enough. But the British government has been lucky that its enthusiasm to get new nuclear stations built has been matched by the keenness of the French power company EDF and to a lesser extent the Japanese company Hitachi, to build in the UK. EDF, as co-developer and sponsor of the European Pressurised Water reactor (EPR) is keen, one might even say desperate, to have a successful demonstration model built on time and budget in the UK. The EPRs under construction in Finland and France are badly behind schedule and hugely over budget, which has damaged EDF’s competitiveness in the emerging global nuclear power station market.
So we have had until recently a bilateral negotiation between the government and EDF – a game of poker. Both sides truly want a new station to be built but have haggled about what price promise and guarantees the government would need to provide. It appears from the Treasury’s June policy paper “Investing in Britain’s future” that the haggling is over and we can be reasonably confident that EDF’s planned Hinckley Point C twin EPR station will be built. Perhaps Hitachi-GE’s Wylfa plant (or at least the first stage) will follow.
But further new build looks more problematic. EDF’s commitment to more plants is less clear. If it has one that works, thereby achieving its export demonstration potential, then others will depend entirely on the economics. But the prospect of long term lower gas prices across the world makes the economic case for nuclear quite difficult, and puts it squarely in conflict with the government’s goal of affordable energy.
2. Industrial policy
A British civil servant who went to sleep at the end of the 1970s and awoke now would find a surprising degree of consistency in government industrial policy. In 2011 we had a National Infrastructure Plan, to be updated later in 2013. April 2013 saw a raft of documents, including a Nuclear Industrial Strategy, which envisages lots of new committees, consortia and coordination between government and the private sector. Such language and institutions are highly reminiscent of the corporatist days of the 1970s.
But there are two differences. First, many of the policy levers are no longer available to government, since so many of decision makers are in the private sector. The Central Electricity Generating Board, while undoubtedly something of a power in itself, officially at least reported to the government. Now its components are all in the private sector, accountable to shareholders and customers. Second, the amount of actual funding backing the Plan and Strategy appears minimal. The goal remains in practice to get the market to do the work and pay for it, though perhaps at the customers’ expense.
One wonders in particular, just how the Nuclear Industrial Strategy in particular will actually work, clearly well intentioned though it is. We can only hope that the new, enthusiastic technocrats in Whitehall have spent a little time reading the history of government policy in the 1960s and 1970s to find out just why “industrial policy” became a discredited term. The UK has not had a happy record in science-based technology policy, for reasons that are disputed but include the training of civil servants, the lack of cross party consensus on policy goals, a turbulent macroeconomic environment and perhaps an over-powerful Treasury.
Civil servants and politicians might wish to review the fiasco over the choice of reactor type for Dungeness B in 1968 or the long forgotten by unfortunately all too important “reactor wars” of the 1970s. Each of these was marked by conflicts within government and the public sector more broadly over what was best for energy policy versus what was best for exports and employment. In each case the result was a costly decision that failed on both counts.
Both the National Plan and the Nuclear Industrial Strategy contain language that suggests over-confidence about planning, and excessive certainty about the future of nuclear power, especially in the international market. There are good reasons to believe a global boom in nuclear power could happen, and there are areas where the UK could contribute, but we can’t be sure.
3. The outlook for further nuclear stations
Government plans for CO2 reductions after the 2020s look a little fanciful at present, as they depend heavily on a large expansion of nuclear power. It would be quite an achievement from where we start, even to preserve nuclear’s current market share in generation, given that most of the older stations are scheduled to close in the next fifteen years.
We must also wait to see what is the momentum of other countries’ policies. At present the UK and EU appear to be going it alone on CO2 emissions, at least rhetorically, and public support for an expensive policy that makes little global difference is unlikely to last. But we may yet see some major changes in policy in China and the US which could re-motivate climate change policy and bolster public support for power that is likely to be expensive on a narrow economic view for a long time to come. Cheap gas may even allow expensive nuclear, by keeping the overall base-load power costs down.
The optimistic case is that we will achieve through learning by doing large falls in construction costs with later EPRs. The GE-designed Advanced Boiling Water Reactor is somewhat more proven, though new to the UK. Perhaps the Chinese, currently achieving much cheaper and faster construction of EPRs, can help. They may be willing to fund new stations too, though western companies should be realistic about the potential for selling into a protected Chinese market longer term.
In sum, we can now look forward to two, perhaps three large nuclear power stations starting construction in the UK in next few years. That seems quite an achievement compared with where we were only five years ago. But to bring about a wholesale replacement of aging UK nuclear stations, let alone to increase nuclear’s market share to the level needed to de-carbonise the UK power sector in the next thirty years, is going to be much more difficult, in the absence of a huge rise in hydrocarbon prices.
Affordability may turn out to be the key political constraint.
What if the British govt went full on into NP project finance – especially for SMRs (small modular reactors) at home and abroad?