Wednesday 31 October 2012

Does nuclear need subsidies (2)

Further to my recent post, from yesterday's FT:

Hitachi's purchase of the Horizon nuclear power project in the UK has propelled the Japanese engineering group into a new and uncomfortable role: as the owner of an entire atomic-energy enterprise rather than a simple contract reactor builder.

After returning some of Horizon’s cash to its current owners, the German utilities RWE and EOn, Hitachi said it would have paid £670m for Horizon’s land, organisation and building rights – about twice what most analysts had expected.

The 'organisation' is worth naff-all, and the land itself is worth a couple of million at most. The real value is in the vague outline planning permission to build a couple of nukes.

Now, RWE, EOn and Hitachi between them are the experts, they know how much it costs to build and run nukes (including interest on money invested), so all they then need to know is the likely selling price for their electricity, and the estimated net profit is pure rent/monopoly income, and that bit has an estimated value of £700 million.

IF you set up a spreadsheet with the following assumptions:
- £5 billion cost of building a 1,600 MW reactor
- running 75% of the time (i.e. 18 hours a day)
- fifty year life (not unreasonable, there are working nukes nearly that old), and
- average selling price of electricity £70/MWh (which means that out of every 15p you pay for a unit of electricity at home, the generator gets 7p, heck knows where the rest goes).

THEN the IRR is 15%, which is more than the 10% you'd normally expect, but nuclear power generation is very risky - not in terms of safety, but in terms of political risk - so fair enough.

Here's the subsidy bit: that £70/MWh is decided by the government/the regulator, and let's agree that it's a fair return on investment. Everything above that is pure profit/rent, paid for by electricity users. The discount rate for the pure-profit/rent element is much lower, let's call it 10%, so every extra penny on a unit at home (one kWh) is £10/MWH, and every extra £10/MWH has an NPV in today's money of £1 billion over the fifty year life of a reactor.

So I guess that is what Hitachi was gambling on - it was prepared to pay £700 million for the off-chance that they can stampede the UK government into agreeing a price of rather more than £70/MWH. In this instance, it was RWE and EOn who collected the subsidy, the question is, why is the UK government handing out subsidies to power companies, in particular ones owned by Johnny Foreigner like this?


Old BE said...

If you didn't see Evan Davis' programme on infrastructure I would recommend it. He reveals the current governing mindset which appears to be:

- The nation needs more infrastructure
- We don't have a planned economy so we have to build infrastructure everywhere in case it's needed
- The private sector can be made to pay for it if the market is rigged to guarantee returns on investment

Welcome to Britain: where no investor is prepared to take a risk on their capital, everyone expects a bail-out if their investment goes wrong, and in any case declines to invest without a state-sanctioned return.

And we wonder why the economy is stagnating.


Mark Wadsworth said...

BE, I did see that programme. I don't think he understood the economics of it (in the way that you clearly do), he just enjoys wearing yellow helmets, clambering about in tunnels and over bridges, riding in the front carriage of bullet trains and so on.

Bayard said...

"(which means that out of every 15p you pay for a unit of electricity at home, the generator gets 7p, heck knows where the rest goes). "

Subsidies to renewables? Electricity retailer directors' bonuses?

"Welcome to Britain: where no investor is prepared to take a risk on their capital, everyone expects a bail-out if their investment goes wrong, and in any case declines to invest without a state-sanctioned return."

You'd be a damn fool if you didn't. That the government is prepared to go along with such a scheme is a measure of its corruption.

Lola said...

So let's see.

Department of Energy and Climate Change operating budget for 2012/2013 = £6.5bn (as far as I can tell). Who have failed on Nuclear.

Or, pay MW say, £1m, to do the costing.


Mark Wadsworth said...

B, a penny goes on VAT and the National Grid must get a few pence. The rest is no doubt subsidies for windmills and other fripperies.

L, there are people who know a lot more about it than I do, I'd happily check their workings after the event for free.

Lola said...

MW. Well, yes, but. Mostly they are 'experts', and we all know what self professed experts are? An ex is a has been and a spert is a drip under pressure.

Most often these simple back of the envlope calculations are fine. they are 'near enough' ex all the reg-yew-lay-shuns and politicking and so forth.

neil craig said...

So if, instead of £5 bn plus £670m for being allowed to apply, a reactor could be built for £2.5 bn (twice the cost of 1.6 Westinghouse AP 1000s) the production cost would go down to 3.2p which is pretty much what France managed for decades.

If putting it in place were to cost less than the reactor itself &/or if investors were as confident it wouldn't be closed down or nationalised without compensation as they are with other infrastructure the cost could drop proportionately further - at least another 3rd. If the reactor cost dropped to $600 mill because it was a larger order and there were economiesw of scale you could take off another 25%.

Actually, purely because the government have scared off the free market this is a case where a national reactor programme, building as many as there is a market for, with major economies of scale, would give a very good return - if we trusted our government to be as competent as the French.

Say 50 Gigawatts at £600 mill + 50% installation = £45 billion where proportionately we are expecting the market to be willing to pay £177 bn/

Mark Wadsworth said...

NC, I agree that the UK government might as well just get on with it and hire somebody in to build nukes for us. And I agree that French cost-levels are something to aim at. But even the French are paying about £5 billion for a 1,600 MW job nowadays, so we'll struggle to beat that.

john b said...

Energy bills in NSW are broken down by cost, which shows that about half the total price paid by consumers goes into transmission (both National Grid equivalent and former-EDF types who run wires to your house).

Obviously Australia is much bigger and emptier than the UK, but even so, this is likely to be the main cost aside from wholesale generation cost.

Mark Wadsworth said...

JB, according to Wiki, National Grid charges about/up to 0.7p per kWh for transmission, so it can't be that.

Bayard said...

What about Western Power Distribution and their equivalents in the rest of the country?

Mark Wadsworth said...

B, they're sort of like a local National Grid, aren't they?

john b said...

Yes, but lower voltage (hence higher current / higher wastage) and with a lot more wires to maintain.