Nuclear power is more expensive than offshore wind

The Government are developing a 'strike price' system under which guaranteed prices would be paid for long periods to 'low carbon' electricity generation. But this process exposes the Government to the danger that nuclear power would be seen to be much more expensive than its previous public relations based calculations had suggested - more expensive than offshore wind, never mind onshore wind. This analysis below 'blows the gaffe' on the Government's strategy. Note: On 21st June I amended this analysis to take account of the fact that costs for a 1.6 GW EPR nuclear power station have risen to £7 billion

Under the analysis below nuclear new build will need a  strike price of over £180 MWh (18 p/KWh), making nuclear clearly more expensive  than offshore windfarms. – That is from a vantage point of an adviser to a credit ratings agency who people like EDF can ill-afford to ignore. This is as measured by what nuclear would need to be paid for developments to occur and also what offshore windfarms are being paid – that is unless nuclear gets a ‘blank cheque’ from us all through the back door – which offshore windfarms certainly don’t get! Onshore wind looks like a real breeze by comparison of course.

What strike price for nuclear?

This costing is based on what strike price (under the Government’s Electricity Market Reform [EMR]) an adviser for a credit rating agency may advise is necessary for EDF to achieve in its new nuclear build plans. This will be in order to avoid evidence that would support a downgrading of EDF’s credit rating. In short, a ‘strike price’ of over £180 per MWh would be required, a sum that is considerably in excess of what offshore windfarm owners are currently being paid for their output.

It needs to be emphasised that major utilities are trying to avoid new power plant investments under pressure from credit rating agencies, with nuclear power investments being especially poorly regarded by the agencies. Utilities can ill-afford to risk credit downgrading as this is likely to lead to declines in share prices and increases in borrowing costs.

The calculation for a price of new nuclear power assumes a European Pressurised Reactor (EPR) is being built similar to that being constructed at Okiluoto and Flamanville. Key elements of making the calculation are a) test discount rate (TDR), b) length of power purchase agreement (PPA) during which ‘strike price’ is payable, c) capacity factor (proportion of time that plant will be generating at the equivalent of full output) d) overnight capital costs (ie construction costs before interest charges are added for capital spent before generation starts) e) length of construction period. f) operating and fuel costs. Going through these in turn:

a)Test Discount Rate (TDR). It seems that in contrast with the case with TVO, the Finnish developer of the Okiluoto 3 plant, construction cost guarantees (ie commitments to pay for cost overruns) are unlikely to be forthcoming from AREVA who is building the Finnish plant on a ‘turnkey’ basis. AREVA is in a poor financial position and further backing from the French Government looks unlikely. There is no chance of banks  or institutional investors lending to a nuclear power construction project without such guarantees, and hence the only source of available capital will be EDF’s own equity.

Conventionally returns to equity are expected to be high, with 15 per cent being regarded as a minimum even for a confident investor. Often nuclear power plant costs are calculated at a 10 per TDR (eg by the Committee on Climate Change). However this is very inappropriate in this instance since the much cheaper source of bank lending will not be available. Moreover the European Pressurised Reactor (EPR) is a new design leaving open uncertainties compared to other investments, including renewable energy where there are fewer cost and production uncertainties and where bank lending is usually available, or at least the costs can be shared between different institutional investors. In this case it seems likely that EDF will have to bear all or, at the very least, the large majority, of the costs, risks and uncertainties that are involved. In France EDF has now been part privatised and also has to compete on a part-liberalised electricity market. It no longer has access to the Government backed low interest borrowing used to support its nuclear power stations in the past, and it can no longer rely on being a monopoly electricity supplier to pass on the high costs of nuclear construction. Hence there will be no new nuclear power stations in France.

b) Length of power purchase agreement. This is assumed to be 30 years. This is considerably longer than the longest PPAs given to renewable energy developments which are around 20 years. A shorter PPA period would increase costs.

c) Capacity factor. There is uncertainty about whether a new design, the EPR, which has no track record, could achieve higher than the average capacity factor for UK nuclear power stations which is 70 per cent. Even Sizewell B has a capacity factor of barely more than 80 per cent, and this power station is based largely on the much better known PWR reactor design paradigm. A credit rating judgement must be based on plausible risk estimates, and it is plausible that the capacity factor of an EPR could fall significantly below 80 per cent, especially in the first few years of operation.  Hence calculations are done for both a 70 per cent capacity factor and for an 80 per cent capacity factor.

d) Capital Costs. An overnight capital cost of £4375 million per GWe of generating capacity is assumed. This is based on a wideley reported cost revision published in the Times and used also as a basis for analysis for the Citigroup analyst Peter Atherton. See http://uk.reuters.com/article/2012/05/08/uk-nuclear-britain-edf-idUKBRE8470XC20120508 

e) Construction period. The longer the two EPR projects have continued, the longer have their estimated construction periods. Indeed this is not entirely unexpected if previous UK nuclear constructions are considered. This is very important for consideration of costs since the longer the construction period becomes, the higher are the interest charges during construction. The same construction period and proportional spread of construction costs in this period is assumed as was the case in Sizewell B. Sizewell B was given consent in 1987 and completed in 1995, although a small proportion of the costs were expended prior to 1987. This example is used because the author has data on the proportional spread of costs during the construction period. It should be noted that Sizewell B took around 8 years to construct (ie. before electricity generation started ) after planning consent  was granted. Yet it now seems that both Flamanville and Okiluoto will take longer to construct than this. Hence my estimate of interest during construction is likely to be an underestimate of these costs for these projects.

f) Operating and fuel costs. These are assumed to be 1.2 p/KWh, in line with US experience. However, it should be noted that this also may be an underestimate since this cost is associated with PWRs about which there is much more experience compared to the novel EPR design.

These costs are then converted into a cost per MWh using the standard formula:

Price = [C x 1.rⁿ x (1.r – 1)] divided by [P x (1.rⁿ  - 1)] where C is the capital cost (including interest during construction) r is the discount rate (%), n is the length of the PPA in years and P is the annual electricity production.

As a result, the ‘strike price’ necessary to induce a tolerant credit rating agency report would have to be at least £186 per MWh –assuming a 80 per cent capacity factor. If an 70 per cent capacity factor was assumed then this strike price would be £200 per MWh.

By contrast, costs for renewable energy schemes can be adduced from what is paid in the market. In the case of new UK offshore windfarms the operators are currently being paid 2 ROCs worth just over £42 per MWh each plus the (roughly year-average) available wholesale electricity price which will be around £50 per MWh, making a total of around £135 per MWh for offshore wind. Of course onshore wind receives much less than this (around £92 per MWh –an incentive that is being reduced from next year to about £87 per MWh). But regardless of this it can be seen that even in the case of comparison even with offshore wind, new nuclear as proposed by EDF comes out as being more expensive.