Use it or lose it: safeguarding Britain’s nuclear industry
Civitas, 30 May 2014
By Candida Whitmill
In less than ten years, a third of the UK’s generating capacity is due to close down, either as a result of EU Directives or simply old age. In particular, our nuclear capacity will drop from providing 18 per cent of our electricity to having just one nuclear plant left at Sizewell by 2023. If the government is to meet legally- enforceable EU carbon targets, then replacing our nuclear power stations is essential; nuclear is the only source of reliable, large-scale, low-carbon electricity. Completing 16GW of new-build nuclear is pivotal to the government’s energy policy to meet carbon targets and to keep the lights on. Additionally, the government believes it is revitalising the UK’s nuclear industry. This is unlikely to happen within the present policy paradigm.
Three foreign companies are positioned to take on the task of re-building the UK’s nuclear capacity. French state-owned EDF is leading the field, with planning permission granted in March 2013 for two 1630MWe EPRs (European pressurised-water reactors) at Hinkley Point C, in Somerset. The estimated cost has risen to £16bn. After nearly two years of protracted negotiations with the Coalition government, EDF has agreed a ‘Strike Price’, the new pricing mechanism that will guarantee a price per MW/h for what the French are hoping will be an index- linked 35-year contract. There has been some controversy over the promised £92.50 per MW/h; twice the price of today’s wholesale electricity. However, not a penny is due until the new plant starts generating, which, if previous experience of EDF’s EPR reactors is any indication, is not likely before 2024 at the earliest. Meanwhile, consumers will have to pay £120 for solar and £155 per MW/h for offshore wind from as early as April 2014.
EDF’s final investment decision rests on the outcome of an ongoing EU investigation to determine whether this ‘subsidy’ complies with state aid rules. A particular concern for Brussels is the combination of price guarantees and credit protection provided by the UK government, which they find to be potentially inappropriate, disproportionate and in breach of EU law. This will inevitably delay construction of Hinkley C but EDF is not necessarily in a hurry. Half of their UK nuclear plant has recently been extended to 2023, including Hinkley Point B. Further extensions are being considered, subject to strict safety compliance, to maximise return on these assets before their retirement. Meanwhile, most of EDF’s 58 operational nuclear plants on French soil are coming to the end of their useful lives and, while some may also secure licence extensions, France will have to decide either to invest in renewables or replace approximately 42 plant over the next 20-25 years. Already heavily indebted, EDF is going to experience considerable difficulties in supplying its own domestic market, hence its perseverance to extract inflated rates and guarantees from the UK consumer. Since Centrica, a 20 per cent equity partner, pulled out of Hinkley C, the project is also dependent on securing 30-40 per cent from other investors. Two Chinese state-owned companies have been encouraged by the Chancellor, George Osborne, with promises of majority shares in future projects and an option to bring Chinese nuclear reactors to the UK.
The second set of new-build development sites are owned by Hitachi, which plans to build up to three 1300MWe Advanced Boiling Water Reactors at Wylfa and Oldbury. Hitachi bought out the formerly German-owned Horizon project when a political decision by Chancellor Angela Merkel to curtail nuclear power in Germany left the partners RWE and EON no financial alternative but to withdraw. Hitachi’s decision to invest came at a time when the fallout from the Fukushima disaster left their own domestic market devastated by the Japanese government closing down all of their nuclear plant. However, the financial impact of having to import gas is costing Japan’s industrial base dearly. Political pressure has seen a new regime restart a few of the reactors, albeit under more robust standards.
The third UK project, Nu-Gen, a Spanish/French partnership, was recently struggling to progress their Sellafield site due to financial difficulties, partly attributed to the Spanish government’s sweeping set of retrospective changes to renewable subsidies and utilities’ revenues, adding to Iberdrola’s financial difficulties. In early 2014, Toshiba plans to buy out Iberdrola’s 50 per cent and 10 per cent of GDF Suez’s equity for a total of £102m with the intention of building three of their own Westinghouse AP1000 reactors by 2024.
Thus the UK nuclear industry is now entirely vulnerable to the political agendas of other countries. Only government-owned utilities have the capacity to fund these massive projects which will each take about ten years to build. Significantly, these global utilities already have their own established supply chains. When Secretary of State for Energy Ed Davey announced the EDF deal on 21 October 2013, he claimed that UK businesses would reap 57 per cent of the £16bn project. This was swiftly denied the next day by EDF’s Chairman, Henri Proglio. Ken Owen, Commercial Director for EDF at Hinkley, was unequivocal in stating ‘most of the available contracts could be beyond UK suppliers which are struggling to meet the complex safety and quality standards of the nuclear industry’. To dismiss the UK nuclear industry on such grounds is disingenuous. He is perhaps unaware that the UK nuclear industry has a total commercial turnover estimated at approximately £4 billion. Our safety record is second to none. Numerous UK businesses have been supplying the international nuclear market for decades across the whole lifecycle of nuclear from fuel enrichment, design, civil engineering, construction, systems, security, operation and maintenance, decommissioning and waste management. Millions of pounds have been allocated by the Technology Strategy Board for nuclear innovation and the National Nuclear Laboratory is leading an exciting new era of R&D.
Nuclear is a global industry. For technical development, continually improving safety standards and strategies to reduce costs, international collaboration on nuclear power is essential. Nonetheless, it makes economic sense to capitalise on our sixty years of nuclear expertise UK nuclear industry is now entirely vulnerable to the political agendas of other countries. It is vital that the UK’s supply chain can fully participate from the outset of the UK’s nuclear new-build programme. Transition cone for the steam generator of a Japanese PWR reactor (Sheffield Forgemasters International) and experience for our own domestic market. If Hinkley C is the first of several new reactor sites to be developed over the next decade, then it is vital that the UK’s supply chain can fully participate from the outset of the UK’s nuclear new-build programme. Yet, with EDF planning to use their own supply chain, UK input of any significant value could be in doubt. The 40 per cent equity to be held by two Communist state- owned corporations adds another complexity. The Chinese have great ambitions to use the gold standard credentials of the UK nuclear industry to launch their ‘go global’ export policy, a policy being pursued at a high level politically utilising China’s economic influence. China has become largely self-sufficient in reactor design and construction, as well as other aspects of the fuel cycle, but is making full use of western technology while adapting and improving it and retaining the IP. In return for their investment at Hinkley C, Peter Atherton of city firm Liberium Capital has calculated that the French and Chinese state-owned firms will earn ‘between £65bn and £80bn in dividends from British consumers over the project’s lifetime’.
Where opportunities for the UK supply chain exist, there may be long time-lapses between the three disparate projects. Such uncertainty is not conducive to investment in the human and physical resources essential to sustain a robust supply chain. Without an additional, more accessible market, the UK’s supply chain may not be able to participate fully in the nuclear renaissance and risks being left behind; a scenario that the government, which has woken up to the value of an advanced manufacturing sector, is surely keen to avoid.
This is the introduction of Candida Whitmill’s paper ‘Use It or Lose It: A business case for an alternative way to rejuvenate the UK nuclear industry’, part of the Civitas series Ideas for Economic Growth. Download the full report here.