Why Treasury may reject nuclear option

 
Smoke coming from chimneys

I am still convalescing, but am easing myself back into work. And because even in my malaise I could hear the agony of the French energy giant, EDF, in its standoff with the Treasury over what rewards it should get for building a new nuclear plant at Hinkley Point in Somerset, that seemed a plausible re-entry point for me.

This dispute does seem more serious than the Treasury's habitual battles with the private sector over rewards that are acceptable for large infrastructure projects where consumers (you and me) end up paying. Which may seem rather extraordinary, in that the Hinkley deal has been ten years of negotiation and preparation, and represents the most significant potential investment in the UK by an overseas enterprise for donkey's years.

Proof of the gravity of the hiatus is that EDF has recently cut its dedicated nuclear workforce by 20% or 150 people, and stopped recruiting, because - in the words of an EDF source - the company felt it could no longer "burn money" (no jokes please about how that might be cheaper than more conventional fuel).

This impasse matters for two important reasons. On the one hand, as the energy regulator recently warned and the Commons Energy Select Committee today reiterated, the UK faces a serious and potentially dangerous shrinkage in its energy capacity over the next few years. Although we've had warnings for almost two decades that if we don't start investing in new plants we risk seeing the lights go out, this time Peter may well have seen the wolf.

And on the other hand, the Hinkley project on its own would create vast numbers of jobs, wealth and tax revenues - at a time when there is not exactly a surplus of big new investments being made in the UK's flatlining economy.

The round numbers of Hinkley are that it would employ 25,000 on the construction alone, at a cost of £14bn, and - according to EDF - would in the process generate taxes equivalent to a few percentage points of what the entire financial sector yields for the exchequer.

Now I am going to park the environmental arguments about nuclear to one side - not because they are unimportant, simply because they are irrelevant to the dispute between EDF and the chancellor.

Broadly what it comes down to (in terms that may seem unenlightening when stated baldly, but I will elucidate) is that EDF feels it needs an internal rate of return on Hinkley of 10%, and the Treasury fears that means it would make excessive profits.

Now the internal rate of return, or IRR, matters to us, because it in turn determines the terms of the so-called contract for difference agreed by the government with EDF, which in turn determines the price that consumers (us again) will pay for nuclear-generated electricity.

Or to put in another way the higher the IRR, the pricier power will be in the next decade.

Now EDF would argue that it is not being greedy, but it can't put its own shareholders at risk at a price - that IRR again - that doesn't properly capture market evaluations of the proper reward for this initial ground-breaking project.

And it has told the Treasury to see Hinckley as part of a long-running programme, so that if Hinkley goes ahead, it would be followed by a new nuclear plant at Sizewell, for which - having learned from Hinkley - EDF would charge a lower IRR.

And, for the avoidance of doubt, recent events lend credibility to what EDF says - in that Britain's Centrica pulled out of being a partner in Hinkley precisely because the IRR being offered by the Treasury was too low.

Now some ministers were hoping that even if EDF does take its isotopes back to France and gives up its British nuclear dream, Hitachi of Japan would fill the radioactive breach. But Hitachi warned ministers last week that if the deal with EDF collapses, they could not count on it to begin work on alternative nuclear generators - and certainly not for many years, in almost any scenario.

So George Osborne and the prime minister have - I am told - just days to make a very difficult judgment. To what extent do they feel it is prudent for the UK to be reliant on power generated by gas, fracked or imported? And how much are they prepared to pay for the putative long-term energy security and stability provided by nuclear?

It would in a way be extraordinary if after all the labour of the previous government and the current one to create a national consensus in favour of the nuclear option, the UK were to join Germany and Japan in running down nuclear. But the rejection of the nuclear option looks a very real prospect.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 425.

    @421 Sean
    For what? HS2 for example, if it's proceeded with. Those locos will be power hungry if rail experts are to be believed.

    High speed broadband. Digital TV. All of this sort of thing is power hungry over and above existing services.

  • rate this
    +1

    Comment number 424.

    How in Hells name can`t a sophisticated modern country end up with a rag bag energy infrastructure..

    My sense is Tim Yeo is right, cough up abit more to settle the uncertainty..unwise to rely on unknown shale gas..

    Last not least, pleasure to have to back in the fold Robert %

  • rate this
    0

    Comment number 423.

    France has been generating electricity using nuclear power since 1956 and currently operates 58 reactors producing about 78% of its total output.They have not had an incident rated above 4 on the INES scale since 1980.
    My EDF charges in France are 10.7p/kwh and 4.5p/day in UK 12.4p/kwh and 14p/day.
    Do any of you REALLY believe the government should be in charge of our nuclear power programme?

  • rate this
    -1

    Comment number 422.

    Our energy system is in complete disarray due to this and the previous governments failure to come up with a feasible energy plan and stick to it. Its already been proven that the renewable favourites, wind and solar, are not viable on a large scale and they have dithered on the replacement of power stations to the point where it wont be long before the lights go out.

  • rate this
    0

    Comment number 421.

    420. Up2snuff
    techno economy requires massive growth in elec generation
    ---
    For what? If we are 'techno', the arrow of efficiency should be pointing up, so "massive growth in elec generation" could be warranted only by population growth "massively" outstripping efficiency gains. There's nothing post-modern about cramming people in to increase the wealth of those (who aspire to be) at the top.

  • rate this
    0

    Comment number 420.

    @399 Grocergirl
    Would you include coal & oil in that package for power?

    The problem is that post post-modern life plus Govt desires (all parties not just Tories) for thriving economy & anti-petrol/diesel dogma, esp. techno economy requires massive growth in elec generation.

    Despite GW that comes from elec motors ... ;-)

  • rate this
    0

    Comment number 419.

    418.anotherfakename & 418.anotherfakename


    More obfuscation.....have you got any EVIDENCE to back up your claims?

    Here's mine:

    http://www.ippr.org/publication/55/9564/beyond-the-bluster-why-wind-power-is-an-effective-technology

    and that is before you even consider the mulitude of cheap energy storage systems available to capture now & release later....

  • rate this
    -1

    Comment number 418.

    @415. Cloud-Cuckoo
    The problem with solar panels - and wind - as micro sources is that come night time everyone needs energy... and it isn't there, so you have to crank up the steam in a proper station. So you pay for BOTH. So it costs the earth. Rivers, wave and tidal offer a proper 'green' solution but not without affecting wildlife.

  • rate this
    0

    Comment number 417.

    Tell the EU we are keeping our coal fired stations open, tough luck. We won't pay any fines, tougher luck. We will scrap all the solar and wind nonsense and thereby cut the cost of energy so we can afford to live and make things.
    Chinese are successful because they have cheap land, cheap energy and cheap capital. All the time we don't we will lose. (Cost of labour is actually insignificant now)

  • rate this
    0

    Comment number 416.

    This is precisely why we should nationalise it all.
    Solar is there... what bull, try midnight tonight and see how much power you get.
    Wind... not much available to heat my house at the moment.
    We need PROPER power not make believe rubbish.
    For renewables wave and tide are the only reasonable options, the rest are mickey mouse pie in the sky expensive rhubarb.

  • rate this
    +3

    Comment number 415.

    403. JamesR1701

    Solar Panel tech is already there. You can go out and buy roof tiles incorporating them. All new build should have them, and town councils everywhere should now be looking at their roof areas to install them.

    Think of all the wasted rooftops we have - micro-generation is the answer, not huge centralised power projects. But micro doesn't generate profits for the energy companies!

  • rate this
    0

    Comment number 414.

    410.firemensaction - "......The ONLY Green technology which does not add the much vaunted CO2 is Nuclear.........."


    Your evidence for that risible claim is what exactly...???

    Here's mine for just one alternative source (one that would be massivle cheaper than nucleur too), from an independant analysis.....


    beyond-the-bluster-why-wind-power-is-an-effective-technology

  • rate this
    +1

    Comment number 413.

    406.Richard


    Your figures have some great big holes in them:


    Mention of nucleur does include us, the tax payer, having the liability for the waste clean up and potential accident costs......every other energy production must pay it's own.....

    ...except for the fossil fuel ones where again we, the tax payer, take on the liability for clean up costs.....

  • rate this
    +2

    Comment number 412.

    Typical Private Sector

    The taxpayer will pay through the nose just to build this neanderthal power plant, then be forced to to pay well over the odds for the energy it produces, only to be left with the enormous clean up bill at the end. Meanwhile - the shareholders walk away enriched.

    "Great" Britain - I think not.

  • rate this
    0

    Comment number 411.

    In an article a few weeks back it was stated that as yet it has cost 62 billion to clean up Sellerfield; who would pick up the tab for the waste from these? Who wants to store that waste ?

  • rate this
    -1

    Comment number 410.

    It really looks as if the GW fanatics have ensured that politicians will make decisions that will adversely affect GB in the future.
    The ONLY Green technology which does not add the much vaunted CO2 is Nuclear.
    Unfortunately for the majority in GB the Greens morphed from Ban the Bomb, and equate nuclear energy to atomic weapons.
    500 yrs of gas and 300 yrs of coal under gb and we build windmills!

  • rate this
    0

    Comment number 409.

    408.NorthernSceptic

    "...Nuclear power is the only mass generation technology that isnt fossil fuel based we have no options left!..."

    ===

    But we are not compelled not to use fossil fuels, e.g. shale gas. The move from coal to this would achieve medium term CO2 reductions too, but any of this is insignificant against Chinese increases anyway.

  • rate this
    -1

    Comment number 408.

    Short term thinking by the Treasury will cause log term damage to the UK
    these power plants are vital and will take about 20 years to become operational, we HAVE to start NOW - Nuclear power is the only mass generation technology that isnt fossil fuel based we have no options left!

  • rate this
    +3

    Comment number 407.

    Years ago, I attended the public seminars on the building of a Mersey barrage.
    The barrage would have had several functions, however the main being electricity generation.
    The barrage would last 100 years and would payback within 25 years. Neither government nor private equity is will to investing in anything with a > 25 year payback.
    A small % of the nuclear subsidy would see it built!

  • rate this
    -2

    Comment number 406.

    Technology Cost range (£/MWh) for Generation of Electricity
    New nuclear 80–105
    Onshore wind 80–110
    Biomass 60–120
    Natural gas turbines with CO2 capture 60–130
    Coal with CO2 capture 100–155
    Solar farms 125–180
    Offshore wind 150–210
    Natural gas turbine, no CO2 capture 55–110
    Tidal power 155–390

 

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