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.

British policy outcome shows that nuclear is less cost-effective than renewables

See my letter published in the Financial Times on April 28th:

The FT is right to feature a debate about whether subsidies should go to nuclear power or renewable energy. However, the article is in danger of confusing two things: first, allowing nuclear new build to get the same sort of premium price contracts for supplying electricity as may be given to renewable developers; and second, the government agreeing to “underwrite the costs” of new nuclear build. Renewable developers do not get their construction cost overruns underwritten by government.

If the nuclear industry is asking for additional layers of subsidy compared to that given to renewable developers, the nuclear industry is tacitly admitting it is less cost-effective than renewables. The danger is that nuclear developers may be offered unlimited subsidies to cover any construction cost overruns and that this will be hidden in “commercially confidential” contracts given to them. This would amount to the government giving nuclear constructors a blank cheque on electricity consumers’ behalf. What we must demand now is that such moves be made public rather than, as in previous funding streams for nuclear power, hidden from us until it is too late to complain.

FT 28th April 2012

http://www.ft.com/cms/s/0/04d8b5a6-8e00-11e1-b9ae-00144feab49a.html

STOP NUCLEAR GETTING A BLANK CHEQUE FROM THE TREASURY!

The key thing is to try and ensure nuclear does not get given a blank cheque on electricity consumers’ behalf – and to make sure that there is transparency on such a deal

Nuclear power stations (NPSs) will only be built in the UK if their costs are underwritten by Government. In practice this will most likely mean that Treasury accedes to pressure from EDF etc that electricity consumers will pay for any cost overruns in building nuclear power plant (costs including mounting interest charges on debt).

Despite the existence, in the proposed Energy Bill, of ‘strike price’ contracts for nuclear power (that will give nuclear power new subsidy income streams paid for by electricity consumers) pension funds and banks will not fund nuclear power without a government promise to pay any cost-overruns. This is because of the very great uncertainty about the costs of building NPSs, costs which escalate very quickly in the case of NPSs because of the very long construction times and the interest charges which accumulate (often such charges are misleadingly left out of descriptions of NPS costs). The uncertainties have been greatly exacerbated because of the problems with the Finnish (Olkiluoto) and French (Flamanville) European Pressurised Reactor (EPR) projects.

Companies such as EDF would be very reluctant to finance the plant from their own funds because this would lead them open to potential downgrades by credit rating agencies leading to falls in share prices and increases in borrowing costs. Hence they want guarantees underwriting the investments from Government. In the cases of Flamanville and Okiluoto such guarantees were provided, in effect by the French Government, since EDF (was) nationalized – now it is part-privatised and open to part liberalization measures which prevent further nuclear plant being built. Okiluoto was only built because AREVA, the French state owned nuclear construction company gave financial guarantees to the Finnish developers TVO to pay for cost overruns – indeed AREVA have had to pay a lot of money for cost overruns and this has resulted in AREVA itself suffering financial problems. It is possible in theory to have a similar deal whereby the French state effectively pays for a large part of British nuclear construction costs, but maybe AREVA are not in a position to carry on doing this!

Hence it comes down to the Treasury, who are reluctant to give ‘blank cheques’ on behalf of electricity consumers  (this is the phrase that should be used), because, apart from anything else, the renewables lobby would also ask for similar consideration – and the Treasury are imposing some strict funding envelopes on renewable development.

So the key thing is to try and ensure nuclear does not get given a blank cheque on electricity consumers’ behalf – and to make sure that there is transparency on such a deal. The nuclear lobby would prefer such an arrangement to be made in secret, cloaked by commercial confidentiality, although these days this is much more difficult to achieve than it used to be even in the early 1990s when the ‘non-fossil levy’ was used to pay for Sizewell B.

We need real feed-in tariffs for renewable energy (note , not the confusing 'contracts for difference' on offer and tendering etc), not blank cheques for nuclear!

Has the Scottish Government done a deal with George Osborne?

On the face of it the Scottish Government's targets and statements about renewable energy seem impressive, but under the surface doubts are emerging about how strong this policy really is. At the end of 2010 it seemed that the Scottish Government was critical of of the Westminster Government's proposals for Electricity Market Reform (EMR) which threatens to shift subsidies away from renewable energy and towards nuclear power. However, in recent months the Scottish Government has fallen silent on this topic. 


For example, the Scottish Government appears to have accepted without challenge the 10 per cent cut in incentives for onshore wind outlined in the Department of Energy and Climate Change (DECC) review of banding of Renewable Obligation Certificates (ROCs). This is despite the centrality of onshore wind for reaching the Scottish Government's ambitious '100 per cent' renewable energy supply target for Scotland by 2020. 


Of course the reduction in incentives for onshore wind will at least go some way to satisfy the pressures coming from Tory backbenchers to cut funding for so-called 'low windspeed' sites. This is despite the fact that even so-called 'low windspeed' sites represents a cheaper source of energy than nuclear power (given that new nuclear power will require higher levels of incentives and guarantees to go ahead).


However, coincidentally, in November (the same month as the results of the renewable banding review was announced) the Government announced that the Treasury was releasing £103 million to be given to the Scottish Government. This money comes from profits made by the Government in selling electricity generated from old renewable projects set up under the renewable Non-Fossil Fuel Obligation (NFFO) scheme that operated in the 1990s. The Treasury otherwise pockets the money that comes from the sale, by the Non Fossil Purchasing Agency (NFPA which adminisiters renewable NFFO contracts), of renewable electricity through its auctions.


So, has the Scottish Government done a deal with the UK Government so that a sop can be given to English lowland Tories at the expense of onshore wind development? Certainly there seems little financial sense in this if renewable energy targets both north and south of the border are concerned, but the Scottish Government seems very pleased about the £103 million which it can use to pay for direct investments into renewables. Yet while such investment is very welcome, it is coming from Westminster, and not from Scotland. 


Moreover, the Scottish Government has been unable to clear up uncertainty over the future of renewable incentives created by the possibility that Scotland will become independent after the referendum. The financial analysts Citigroup expressed such fears in a recent report. Asked specifically about this by the BBC, Scotland's First Minister Alex Salmond seemed unable to guarantee the continuation of renewable incentives under Scottish independence. On the contrary, he implied that the English would continue to pay for offshore renewables installed in Scottish waters!


Salmond told the BBC that investors 'know that renewable power from the seas around Scotland is going to be required to fulfill England's electricity requirements....it is power for export'.  See


http://www.bbc.co.uk/news/uk-scotland-scotland-politics-15551366 


Salmond seems to assume that the English will have no other choice but to buy Scottish offshore renewable power to keep the lights on. However, given the direction of UK Government policy of cutting incentives for renewables, it seems increasingly likely that the UK Government would simply build more gas fired power stations before they paid extra for renewables from an independent Scotland.

Of course, the power can only be exported if somebody is willing to pay for it to be generated in the first place. It does require a bit of leap of faith to believe that another country will pay the extra incentives needed to produce offshore renewable energy from schemes located in Scottish waters. Given that the UK Government is opposing plans for Scottish independence renewable energy interests can be forgiven for being rather sceptical that the continuation of incentives for renewable energy is more-or-less guaranteed. 


The remaining confidence for continued incentives being available for renewable energy seems to reside in a belief that Scottish independence will not actually happen and that Scottish renewables will continue to be supported by English money. The fact that the Scottish Government seems all too compliant in allowing the UK Government to cut support for the most cost-effective widely available renewable energy source, onshore wind, does not encourage faith in the Scottish Government's ability or willingness to back up their bold pronouncements about renewable targets with the deeds necessary to make them happen.

Storm causes sudden shutdown of Hunterston B nuclear power plant...again

A Scottish nuclear power station was forced to shutdown by the storm on December 8th. Attention has been focussed by anti-windfarm sources on the shutdown of windfarms in and around Scotland in what has been called the strongest winds in 25 years, but what has received hardly any attention was the storm-induced grid failure which shutdown the 480 MW Hunterston B nuclear power station in Ayrshire.

Such sudden nuclear shutdowns are in fact quite common, and, as covered in my blog on a Sizewell B failure on March 14th (scroll down to read this), these quite unexpected shutdowns of nuclear power stations are much more dangerous to grid stability and supply services to consumers than storm-induced shutdowns of windfarms. This is because storms can be predicted in advance, meaning that the National Grid System Operator can take mitigatory measures in good time on the basis of anticipated declines in windfarm production of electricity, and also because the windfarms, which will typically cut out when windspeeds reach 25 metres per second, do not all cut out at exactly the same instant.

Unfortunately when nuclear power stations cut out (and the most 'modern' ones are over 1000 MW in capacity), they do so without warning taking off large chunks of generating capacity off the grid in an instant. That is far more dangerous to the prospects of 'keeping the lights on' than the well known variability of windfarm output. This emphasises how wind power is in fact more reliable for grid stability purposes compared to nuclear power stations. See a report on the storm shutdowns (both wind and nuclear) on http://www.bloomberg.com/news/2011-12-09/battered-u-k-turbines-switch-on-after-halting-in-165-mph-winds.html. This is not the first time a storm has suddenly shutdown Hunterston B. See also the1998 report: http://news.bbc.co.uk/1/hi/uk/244765.stm.

Of course, because nuclear power stations are built to run all the time they are useless in providing so-called 'back-up' to windfarm variability, but they are a major threat to grid variability compared to windfarms. So don't accept any of the nonsense about how nuclear power is better than renewable energy because it provides firm power. It needs plenty of back-up itself!

US to tax solar panels?

As if it was not bad enough that European states are clawing back on the solar feed-in tariff rates, the US is moving towards actually artificially increasing prices of solar panels through putting TAXES on imported solar pv panels. I will explain that even more starkly. While Europe is still subsidising solar pv panels, the US is going to tax them! The US International Trade Commission has, according to the online journal Renewable Energy World, 'unanimously determined that Chinese solar panel and cell imports are harming the American solar manufacturing industry'. This, it seems, is a precursor of  import duties being levied on solar panels imported from China. To add an ironic twist, this policy is being promoted by some US based solar companies themselves. They argue that China is 'dumping' lots of solar panels on the US market and putting them out of business.

Essentially, Chinese manufacturers are selling at cheaper prices than western ones. Partly this is a case of the Chinese having the foresight to invest in green industries, and partly this is a part of the busienss cycle that you get when periodically supply exceeds demand, as opposed to vice versa which pushes up prices.

However, for the solar industry to start arguing that, in effect, prices must be put up through protectionism is the complete opposite of what should be an ecologically driven policy to drive down global prices for renewable energy technologies. The US position is also sacrificing progress in solar technology for protectionist purposes, and this at a time when the world needs to be as internationalist as possible in its trade policies to avoid the selfish nationalism of the 1930s which brought ruin on everybody. If the allegedly idealistic renewable energy industries cannot hold the line on this, who can?

As far as I can see, the main US case seems to rest on claims that the Chinese are putting barriers in front of imports of US solar panels. It is in fact fairly debateable to argue that Chinese barriers are worse than US ones for renewable energy given, for example, the relative availability of incentives like the production tax credit for US based rather than non-US based companies. At its most charitable best the US argument is one for taking the issue to the WTO. It is certainly not an argument for taking unilateral action, such as setting import tariffs on solar panels,  which is likely to adduce retaliation of various sorts. At worst this is sheer hypocrisy as the west in general (including the US) subsidises its own industries in various implicit and often quite obvious ways (as in the case of agriculture) to allow its products to be well and truly 'dumped' on developing nations.

We often hear disparaging noises from the US (even from some solar companies) about European feed-in tariff policies. Well, parts of Europe are developing large capacities of solar pv, led by Germany, that stand in contrast to the sluggishness of progress in the USA. US policies seemed designed not only to fail to give much encouragement to expansion in solar capacity, but actually to stop it happening by increasing prices for solar power through restrictive trade tariffs and policies. What this issue does expose is the sad truth that the leadership of the renewable energy industries has increasingly little to do with the US.

See the Renewable Energy World Report on:
http://www.renewableenergyworld.com/rea/news/article/2011/12/itc-determines-harm-in-solar-trade-case?cmpid=WNL-Wednesday-December7-2011

How Tories have abandoned pre-election solar promises

Those of us who were active in the campaign to install feed-in tariffs for small renewables remember how the Conservatives captured the support of many greens at the end of 2007 with their policy paper 'Power to the People - The decentralised energy revolution'. Now, far from extending the decentralised revolution, the Conservatives are busy destroying the industry that was established by Labour legislation.

The cut of 43 p/KWh to 21 p in the solar pv feed-in tariff will, as we have heard through industrial testaments recently, kill off most of the solar pv industry. Meanwhile, despite the Government's intentions about seeking the most cost-effective renewable policy, it is cutting back incentives for the most cost-effective widespread renewable source, onshore windpower. Its 'ROC' value is being reduced by 10 per cent as a political sop to anti-windfarm campaigners. Essentially, then, this policy is about giving ground to the strident calls from the political right and pro-nuclear interests for incentives to renewable energy to be cut. Never mind that lots of voters thought that they were voting for a Conservative Party that wanted better support for renewable energy at the 2010 election.

Let us remember a few of the bold statements from the Conservatives' 2007 green makeover document:

'Other European countries have shown what can be done. In Germany, there

has been a micro-generation revolution, based principally on photovoltaic

technology, over the last decade (p 19)

‘With a feed-in tariff system, a fixed price is paid for the electricity producedfrom decentralised, low-carbon energy sources, usually with different price

levels set for different technologies. In Germany, for example, the basic tariff

paid for electricity generated from solar photovoltaics was 0.518 euros in 

2006 (p 23)’

Of course, in its 2010 election manifesto itself, the Conservatives were allowing an impression to be formed that we would follow the German example with regard to solar power.

Talking of the city of Freiburg, the manifesto commented: 'Solar panels have been installed across the city – on schools, churches and private houses, and even on the sports stadium and the City hall' (p91)

But the final quote must come from the Conservatives 2007 document which says:

'By contrast with Germany and the Netherlands, the British micro-generation

industry is tiny' (p 20)

Yes, and Government policy will ensure things stay that way!