New nuclear – it’s about time (and money)
The Guardian yesterday revealed that nuclear generators could be given subsidies of up to £250 billion over 40 years, under plans to set a ‘strike price’ for nuclear power. The news comes as the government is locked in negotiations with EDF – the only company left willing to build new nuclear plants at Hinkley Point after Centrica pulled out earlier this month.
Nuclear power is a key part of the government’s plan to attract £110 billion of investment in the UK’s energy sector by 2020. The government originally promised nuclear would not be subsidised with public funds – later changing the wording to no “unfair” subsidies.
Negotiations over subsidies hinge on two key questions: how much financial support will nuclear power generators get, and for how long?
Setting a strike price
The main sticking point in the negotiations is how much EDF is guaranteed to make from selling the electricity its nuclear plants generate.
Under a new mechanism in the energy bill, the government will guarantee companies get paid a certain amount for each megawatt hour of electricity the plants produce – known as the strike price.
The strike price protects the generators if the wholesale price of electricity – set by electricity markets – drops. If the wholesale price falls below the strike price, a levy on consumer bills covers the difference. If the strike price is less than the wholesale electricity price, the generators pay back the difference to the National Grid.
In theory a strike price should provide some certainty to operators who want to cover costs and make some profit on top.
There are a number of estimates of what the strike price would need to be for EDF to achieve its desired 10 per cent return on investment. Bloomberg New Energy Finance puts it between £95 and £105 for a power plant costing £7 billion to build. Figures by analysts Citibank shown to the Carbon Brief estimate it at £110. Other estimates we’ve seen, produced by utility specialists Nomura, put the figure in the same ballpark – between â?¬90 and â?¬130 per megawatt hour (around £80 to £115) for a nuclear plant like the ones proposed for the UK.
With EDF the only company left interested in building new nuclear plants at Hinkley Point, and the government really, really wanting new nuclear, EDF is holding most of the cards in the negotiations. The company will probably be looking for a strike price around the upper end of the estimates to maximise profits and get the return it’s looking for.
With funding coming from the public purse, however, the government is desperately trying to drive the strike price below the “politically crucial” £100 mark. Nuclear specialist Antony Froggatt of Chatham House tells Carbon Brief that this is partly for psychological reasons – the same reason it seems better value to buy something for 99p instead of £1.
But there are also suggestions that nuclear power should receive no more support than other forms of energy – such as offshore wind, which receives about £140 per megawatt hour in subsidies.
Long-term contracts
It’s not just the strike price that’s up for negotiation, it’s also how long that price is guaranteed for.
There are two key differences between nuclear power and renewables that affect the length of such contracts: nuclear plants are a lot more expensive to build, and financially much riskier.
Renewable technologies are set to be offered twenty year contracts. Froggatt says it’s logical for the contracts to be shorter than those offered to nuclear as renewable technology is expected to improve over time. This will bring down the costs of generating electricity and makes offering longer subsidies a bad idea.
Nuclear power is different. Building plants involves very high upfront costs, and once it’s built it isn’t going to get any more efficient over time. EDF are estimated to need to borrow at least £12 billion to build the new plants.
Nuclear plants also take a long time to build, and new plants in Europe have been built considerably overbudget. This makes agreeing to build a nuclear plant risky – as it’s uncertain how expensive it will ultimately be.
Professor Stephen Thomas of Greenwich University tells us reducing risk for investors is key to getting them to agree to build new nuclear. If generators can be assured their investments will see a healthy return over a longer period, the investment becomes less risky – so longer contracts are good from their perspectives.
At the same time, longer contracts mean the strike price can be lower, as the subsidy is spread out over a longer period – making them an attractive option for the government. But the contracts mean generators get a subsidy for longer, potentially costing the consumer more if the strike price isn’t adjusted accordingly.
The Guardian quotes figures from Tom Burke of sustainability NGO E3G, who says contracts to build all 16 gigawatts of new nuclear plants could require a £150 billion subsidy over 30 years. He says this increases to about £250 billion if the contract lasts for 40 years, with EDF potentially receiving £50 billion over that time for the Hinkley plants alone.
Froggatt says this means nuclear will seem like a very expensive option down the line, particularly if it is subsidised for twenty years longer than renewables. Offering a longer contract may get the plants built, but it may not be a good move by the government in the long run.
Ongoing negotiations
A DECC spokeswoman tells us the “ongoing discussions are focused on finding a fair, affordable deal, which represents value for money for consumers”.
If the strike price is too high and contracts are too long then it could be extremely costly for consumers. But if the strike price offered is too low, no new nuclear plants. Is there a sweet spot?