The Economic Challenges of UK Nuclear New Build
Written By James Hargreaves
3rd July, 2020
Introduction
Achieving the UK’s ambitious target of net zero greenhouse gas emissions by 2050 will require a transformation of the way in which our country generates its electricity and process heat. In recent years significant progress has been made towards electrical decarbonisation, however a two-fold increase in low-carbon generating capacity will be required to meet the new 2050 goal (OFGEM, 2020). Nuclear power has been identified as a secure, reliable, and cost-effective source of low-carbon electricity by the Government’s Clean Growth Strategy, which proposes to build a fleet of new reactors to aid in achieving net zero. However, since the turn of the century, many proposed nuclear new build projects have been cancelled on financial grounds without a single drop of concrete ever being poured (Nomura, 2019). If the low carbon and sustainable benefits of nuclear power are to be realised the economic barriers to nuclear new build must be overcome. This article seeks to explore the challenges that the UK nuclear new build (NNB) programme faces and suggests novel strategies for combating them with a focus on providing value for money to consumers and taxpayers.
Construction Risks
The construction of a modern nuclear power station is a capital-intensive exercise that can take many years. For example, the construction of the Hinkley C nuclear power station (Fig. 1) will take roughly a decade to complete and is presently projected to cost circa. £22Bn - equivalent to ~1% of UK annual GDP (Keohane, 2019). However, once operational, the generating costs of a nuclear power station are stable, and comparatively low. Servicing the construction debt is a significant operating cost of a new nuclear power station, and thus securing competitive financing during the construction phase is a key factor in determining the overall electricity price.
One of the reactor containment baseplates under construction at the Hinkley C worksite, Somerset, U.K (Credit: EDF Energy)
However, the risk that construction is delayed, goes over budget, or is cancelled is often reflected in the high interest rates offered to constructors seeking to raise capital for a NNB project. Budget and schedule overruns in any large construction project are common, and NNB projects are no exception. Their lengthy construction phases can also disproportionally expose investors to low probability, high impact ‘act of god’ risks such as earthquakes, hurricanes, or global pandemics (World Nuclear Association, 2020).
Construction risks may also be increased when using imported power station designs (C.Wang, 2019). Any imported designs must be carefully adapted to suit domestic construction and engineering standards, as undiscovered non-compliance can result in expensive remedial work and significant schedule overrun (WENRA Reactor Harmonisation Working Group, 2006).
The Realised Asset Base (RAB) financial model is one proposed solution. Under RAB, specific low probability but high impact financial risks would be underwritten by Government. These risks may include disruption to debt markets, political risks, and ‘acts of god’. It is hoped that the mitigation of these severe but improbable risks could attract sufficient low-cost capital to finance future new build projects. RAB would also provide protection to consumers through the creation of an economic regulator charged with securing favourable energy prices from energy companies. The RAB model was successfully used to raise capital for the Thames Tideway Tunnel project. and a Government consultation on the RAB model for new nuclear projects took place late last year, with the results to be published shortly ( Dept. Business, Energy and Industrial Strategy, 2020).
"Since the turn of the century, many proposed nuclear new build projects have been cancelled on financial grounds without a single drop of concrete ever being poured”
The Mankala model is another possible solution that has been used extensively for nuclear energy investments in Finland. Under Mankala, new build projects are undertaken by shared-ownership cooperatives of utility companies and large-scale industrial electricity users. This shared ownership model distributes the construction risks and improves the confidence of investors, lowering the financial costs of new build projects. Once the nuclear power station has been commissioned, the cooperative sells the electricity produced to its shareholders at cost-price to be sold on to consumers (Pohjolan Voima, 2018). The adoption of a Mankala-like model could potentially reduce the price of electricity for UK consumers, and could work in-tandem with a ‘green finance ISA’ that offers a reduced interest rate to consumers but is ringfenced for investments in low-carbon sustainability projects.
It hoped that the development of small modular reactors (SMRs) will alleviate construction risks. SMRs will require less capital and be faster to build than their larger counterparts, and a continuous pipeline of new build SMR projects could help to revitalise UK domestic build capability and drive down construction costs. A consortium of UK business led by Rolls Royce and including Nuvia, Amec Foster Wheeler, and ARUP are developing designs for a 440MW UK SMR , however any SMR built in the UK will be a first of a kind (FOAK) plant and will have to successfully complete the generic design assessment licensing process before construction can be approved (Bell, 2018).
Wholesale Price Volatility and Strike Price
In addition to construction risk, severe volatility in the UK’s deregulated wholesale electricity market (Fig. 2, overleaf) can contribute to investor wariness. As the wholesale price at the end of a 10-year construction period is difficult, if not impossible to predict, operators and investors are understandably cautious about committing to nuclear new build projects. Usually, a strike price agreement with Government is sought to offset the risk of a wholesale price depression. These agreements are essentially a government guarantee that the electricity produced will be bought at a given price per kWh, indexed to inflation. However, the agreed upon price often becomes a highly politicised and criticised issue – the agreed upon strike price for Hinkley C of £92.50/MWh (2012) was a highly contentious figure and is often quoted alongside strike prices for renewables of ~£50/MWh by critics of nuclear power. However, this direct comparison neglects the external costs of storage and grid integration associated with intermittent energy resources, which can range from £10-50/MWh (G. Strbac, 2015). Strike price comparison is also flawed, as it neglects broader social factors such as the impact of a proposed project on national energy security, the generation of employment opportunities in rural regions, and potential gains in social mobility.
Sadly, nuclear power is unable to exploit the volatility in wholesale prices. Gas-fired power stations are ‘dispatchable’ and can be turned off to save fuel (and hence costs) when wholesale prices become depressed and generation is uneconomical. Nuclear power is a quasi-dispatchable energy source – while technically reactors can be switched off to follow a decrease in load and save costs when the wholesale electricity price decreases, it is rarely done as reactor poisoning makes a quick return to full power difficult, and fuel costs are a minor proportion of overall generating costs (Buongiorno, 2019).
Price Volatility of Electricity by Month: Day-ahead contracts (GB) (Ofgem Wholesale Market Indicators, 2020)
Political risks
Political risks may also pose a barrier to NNB success. Considerable shifts in both domestic energy policy and the international political landscape can occur during lengthy design and construction phases - For example, when Hinkley C was first proposed in January 2008, Gordon Brown was UK Prime Minister, nobody had ever heard of the word “Brexit”, and the countries of Kosovo and South Sudan did not exist. Domestic policy shifts such as energy market deregulation or liberalisation can have profound effects on the profitability of a project, and NNB projects are highly susceptible to cancellation by governments - especially in response to public anxiety in the wake of highly publicised nuclear accidents such as Fukushima (New York Times, 2011). While elections and changes of government can often result in policy U-turns, some confidence can be drawn from the fact that in the UK, both Labour and the Conservatives appear to support the UK NNB programme (Nuclear Industry Association, 2019).
These political risks may be amplified when new build projects are funded or executed by the state-owned energy companies of foreign nations. For example, during the US-China trade ‘war’ of mid-2019, the US Department of Commerce placed the Hinkley C partner China General Nuclear Power group (CGN) on the US export blacklist, which prevented the state-owned Chinese firm and its subsidiaries from procuring any US-originating materials (Financial Times, 2019). CGN’s technical and economical involvement in the Hinkley C project is under renewed scrutiny due to recent diplomatic tensions between the UK and China over Hong Kong (The Telegraph, 2020).
External political risks are difficult to avoid but may be reduced by improving the competitiveness of NNB projects through technological innovation and cost reduction, which could reduce the likelihood of project cancellation. While highly publicised reactor accidents can produce large swings in public sentiments towards nuclear power, opinion has been found to quickly recover and this should be made clear to policymakers to reduce the risk of knee-jerk project cancellations (Bauer, 2019).
Conclusions
Nuclear new build has great potential to meet future demand for a secure and reliable source of non-intermittent electricity, while providing value for money to taxpayers and consumers. However, project risks must be sufficiently low if affordable finance is to be obtained and projects are to be economically competitive. RAB and the SMR programme hold great promise to improve the economic case for nuclear new build and develop domestic build capability, but it remains to be seen if further intervention will be required to achieve the desired continuous pipeline of new build projects.
James Hargreaves is a First Year PhD Student at The University Of Bristol. His PhD involves the investigation of the effect plasma excursions on the structure of Eurofer Steel
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