Thursday, 21 February 2013

Renewables face delays as nuclear costs are hidden

The debacle over funding nuclear power is increasingly likely to delay the renewable energy programme. If so-called 'negotiations' drag on between EDF and the Government the Government may be delayed in submitting a request to the European Commission for consent for its 'low carbon' subsidy regulations to comply with EU state aid rules. Not only does the uncertainty over nuclear funding delay the Government lodging its application to the EU, but the very fact that nuclear power is involved produces a massive complication in what would otherwise be a much shorter administrative process.

Mark Johnston, Brussels based expert consultant and former FOE EU officer comments that the British Government 'has still not submitted its state aid notifications to EU Commission for consideration and possible veto. For big, complex or controversial, state aid cases the Commission can take 2-3 years to decide, which takes the UK up to and beyond its next general election expected in 2015' 

The 'negotiations' between the Government and EDF are going nowhere. Indeed they  are fated to go nowhere because of the giant differences between what the Government (led by the Treasury) is politically able to offer EDF, and what EDF needs to justify to its shareholders to allow Hinkley C to go ahead.  What appears to be happening now is a long winded attempt by both sides (Government and EDF) to enagage in public relations to demonstrate that it is not to blame for the failure to get the nuclear construction programme going.

For its part EDF and nuclear supporters are trying to minimise - in effect hide - the image of just how uneconomic new nuclear power stations actually are. The impression is currently being given that nuclear power needs a strike price of £100 per MWh and that such a figure is comparable to equivalent support that will be available to renewable energy. This is wrong.

The £100 per MWh figure that is said to be demanded by EDF is buttressed by two important extra capital cost subsidies that renewable energy does not receive. One is a demand for a 40 year contract, which has been discussed on this blog earlier. Another is the demand that the Government 'underwrite' nuclear costs, again something which has been discussed in earlier blog posts. Underwriting costs means that regardless of how long or how much it costs to build the nuclear stations, or how much energy they generate, the Government (that is the taxpayer) foots the bill. Under the Electricity Market Reform (EMR) proposals both nuclear and renewable energy will get guarantees about what will be paid for each unit produced, but this is not good enough for nuclear. In addition they need their costs to be guaranteed to be paid, regardless of what they generate. Renewables do not receive such underwriting guarantees. Of course the Government will not agree to 'underwriting', or, most likely, a 40 year contract, or (if it wants consent under EU state aid rules  in the next 2 years), more than £80 per MWh for nuclear power.

In other words EDF wants, in effect, a much more privileged position compared to renewables. Without the 40 year contracts (and instead with say a 25 year contract) and without underwriting, EDF would in fact need something around £165 per MWh for Hinkley C to be economically viable - and even this assumes that cost estimates do not rise even further (see discussion on earlier posts about nuclear costs, eg 'Nuclear Power is more expensive than offshore wind').

Delays in getting state aid permission

Unfortunately the price for all of this political grandstanding is delay in submitting a 'state aid' request to the EU Commission needed to approve the Government's reform of the renewable energy incentives programme. The Government can, and should, submit a state aid application directly after the Energy Bill legislation is adopted - but even if the Bill is dealt with quickly, some reports suggest that the nuclear strike price negotiations will drag on, potentially delaying a state aid application. 

Added to this are the problems that the UK Government would have in submitting an application that would give nuclear power more incentives than key renewable fuels, especially onshore wind.  It may be that the Treasury is insisting on offering nuclear power no more than £80 per MWh precisely because this is the sort of level that needs to be offered to onshore wind. There are exemptions in state aid rules to allow incentives for renewable energy and for environmental purposes in general, but not for nuclear power. Hence any request to give incentives to nuclear power is bound to be contentious at an EU level. This is doubly so if the Government wants to give more incentives to nuclear power than important renewable generation technologies.

However, whatever the motivations behind Treasury thinking, the Government urgently needs to take two very important steps to save the UK renewables programme from collapse in the next 12 months (when EMR is supposed to be phased in).

First, it needs to decouple the application for renewable energy state aid from that of anything applying to nuclear power. The Government needs to apply separately to the EU Commission for 'state aid' consent to pay 'contracts for differences' feed-in tariffs to renewables. Such an application must not also apply to nuclear power. If it must apply for state aid for nuclear the Government should hand in a separate application for nuclear - although, why bother even on narrow economic grounds? If the two applications are rolled together the result is likely to be years of delay.

Second, the Government needs to extend the life of the Renewables Obligation (RO), and also defer the start and phase -in dates of the EMR implementation. If the application to the EU is going to take say, 3 years, then the RO needs to be extended to be phased in from a 2017 (not 2014) start, and the RO itself needs to be extended from its current end in 2037 to 2040.

If the Government does not urgently take forward both these options, including  ensuring the availability of good power purchase agreements for independent renewable developers, then its 'decarbonisation' strategy becomes a gas carbonisation strategy instead.

The day after this blog post an article appeared in The Times about delays in getting permission for nuclear subsidies from the EU. See

A summary of this blog also appears in 'Utility Week', see

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