Sunday 11 November 2018

How Greg Clark's Hitachi deal could lead to a £20 billion plus loss for the Treasury

Greg Clark looks likely to go down in history as the Minister who signs off on a nuclear construction deal with Hitachi for the proposed Wylfa power plant that led to a stupendous loss for the taxpayer. That loss might be £20 billion or more.

Clark has apparently put no discernable effort into the objective of securing 'subsidy' free contracts for onshore wind and solar. However, he has been spending a lot of time concocting a plan to finance the Wylfa nuclear power plant that will, on the basis of past performance, generate huge losses for the public purse years down the line. All the talk from BEIS (the energy ministry) is of the new 'Regulated Asset Base' (RAB) financing of nuclear power plant. Except that what's really happening is not really an RAB model at all. It's a piece of brownwash to obscure the reality of Government blank cheque to cover whatever it costs to build the nuclear plant.

That's because the whole plan hinges on the constructors being able to pass on cost-overruns onto the Government. And that's the point. Nuclear power stations being built in the west have almost always tended to have large cost overruns. Recent ones have ALL suffered horrendous cost overruns - in the USA (4), France (1) and Finland (1).

Yet, some otherwise sensible, financial analysts seem to ignore this fact as they extol the virtues of RAB financing. They implicitly assume that Wylfa will proceed precisely on target, in which case, they say the Government will deliver the project at a 'cheaper' price than Hinkley C through the provision of Government loans with low interest rates. Sure, the headline price that will be paid by the electricity consumer, over 35 years, will be a bit cheaper. But that's likely to be at one hell of a cost to the taxpayer.

In fact, real RAB modelling as applied to nuclear power construction in the USA has actually bankrupted Westinghouse, and nearly bankrupted Toshiba who owned it. The model operates in the USA whereby consumers pay in advance for the power stations. They cover the costs while the power plant are being built through an addition to their electricity bills. That would be good for the company constructing the plant who is guaranteed to get their money back, provided of course, the project comes in at or below planned costs. But while that might work for other infrastructure, it doesn't work for new nuclear. Nuclear power plant take longer to build than planned meaning that the workforce has to be kept on and paid and also extra interest charges accrue on loans - If a nuclear plant is supposed to be finished in 7 years, but takes 12, the costs double in that time.

The trouble is that nuclear power plants have horrendous costs overruns, as they have in the USA with the Vogtle 3&4 and Virgil Summer  2&3 plants being built in respectively Georgia and South Carolina. The constructors, in effect Westinghouse, has to cover the costs themselves. Result: bankruptcy. Indeed Summer has been abandoned and Vogtle only staggers on with the help of a 12 billion dollar Federal loan and continued payouts by consumers.

But then  Mr Clark is not considering the (real) US system - Hitachi would never buy into that because they don't want to go bankrupt. Instead the Treasury will take the hit on cost overruns. A very big hit, it's likely to be too. The 2.9GW Wylfa project is slated to cost £20 billion. If there is a 5 year construction overrun that means the costs will jump to £40 Billion. That means the Treasury will be on the hook to pay the extra £20 billion. The costs, pro rata, for the only western nuclear constructions going in (in USA, Finland and France) look even larger than this. Yes, the Treasury could end up paying a lot more than £20 billion extra for this project over and above the large amounts electricity consumers will have to pay for power from he project.

I'm sure we'll get a lot of brownwash about the marvellous tried and tested nature of the Hitachi 'Advanced Boiling Water Reactor' (ABWR) in Japan. Rather, what is proposed is a pretty new design that includes a lot of features demanded by our nuclear regulators to bring the power plant up to present required safety standards. I can assure you that there's a long list of changes. So, we're in the forever 'First of a kind' land of nuclear power. Besides which nuclear power plant are always unique to each site.

We're told how important it is to have 'firm' power in the shape of nuclear plant to compensate for renewable energy variability. But in practice nuclear power plant are not shut down to make way for wind or solar plant, rather the renewable energy is wasted. On top of this even if the plant 'only' cost  £20 billion to build, that is an awful lot to pay for providing generating capacity. If you provide it with basic, 'peaking', gas fired plant (open cycle and reciprocating engine) you can get 3 GWe for little more than £1 billion. That's likely to be very roughly a £39 billion saving if you don't build Wylfa.  In fact the nation's plans are awash with too much combined cycle gas plant already, which are really not the first choice technology for balancing renewables anyway. But that 's another story. The story here is that far from the Wylfa project looking to be cheaper for the consumer than the Hinkley C deal, it is likely to be far, far worse.


https://www.thetimes.co.uk/article/97c7a1de-e514-11e8-aa8a-1a554b586cbd

https://timera-energy.com/investment-in-uk-peaking-assets/

https://sandbag.org.uk/wp-content/uploads/2018/05/Coal-To-Clean-May-2018.pdf

2 comments:

  1. This article makes some good points. Primarily, that a cost analysis looking at long-term eventual cost needs to be done, and that subsidies should not be included in the cost analysis. What it fails to mention is that wind and solar usually don't look at long term costs, and they are far more subsidized than nuclear. Interestingly, very few wind or solar farms have even recouped the total cost to put them there (meaning energy and ££ for manufacture, transport, and setting up). However, nuclear, even with the overruns, still tend to cost less for TWh produced than wind and solar farms, and make back their full costs within a decade or less.

    The "£20 billion loss" assumes the plant is fully built but never turned on. "Loss" means the costs are not recovered, and for power plants, costs are recovered. The off-short wind in England cost £1 billion for 370 MW (worded in articles to sound like capacity, which means it likely normally delivers around 100 MW). The proposed nuclear plants are 3000 MW (nearly 10x more than the capacity of the offshore wind, and 30x more than what will likely be delivered), at a cost of 20x more. Factor in that offshore wind lasts 3-15 years before the turbines fail and need replacement, while the old Wylfa plants have run for over 45 years, and are still going. Sounds like a good financial gamble to me!

    A little more math for fun: Assuming the offshore wind actually delivers 300 MW continuously and all turbines last a full 15 years (both assumptions are generous), then you'd need 10 of those wind farms (a £10 billion investment) replaced twice times (total up to £30 billion) to produce the same power that the proposed nuclear will provide for £20 billion. And, as a bonus, the nuclear plant won't leak oil or chip off toxic plastics and paint into the ocean. Financial analyses make it clear that nuclear is better, not the other way around.

    Sources:
    - https://www.power-technology.com/.../walneyoffshorewindfa/
    - https://www.horizonnuclearpower.com/our-sites/wylfa-newydd

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  2. Also, there are a good number of plants finishing up in the middle east (UAE specifically) that came in on time and under budget. The problem is not that "nuclear power plants have horrendous cost overruns", but that the Western powers fail to be able to tackle large engineering projects anymore, and a nuclear plant is a large project. Wind and solar farms, while combined are pretty large projects (that have also had large cost overruns, by the way), but they are repetitive, small projects, and construction companies in the West seem to be able to handle that kind of construction just fine.

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