Monday, 29 October 2012

"Does nuclear need a subsidy?"

Tony Lodge, author of this fine pamphlet in today's CityAM:

But what price should Britain be prepared to pay for new nuclear plants? If a strike price – the guaranteed price paid for electricity from the plant when completed – is anywhere near the £140 per megawatt hour (MWh) required by offshore wind, we should be surprised if EDF didn’t line our coast with nuclear plants, like France in the 1960s, 70s and 80s. But this is an absurdly high price. Anything close would rightly destroy nuclear’s low cost reputation and, with it, the case for new nuclear. After all, £140 per MWh is more than double the current market price, and the Department for Energy forecasts that electricity prices will fall over the long term.

A challenge for the government is to make the strike price negotiations as transparent as possible. EDF has now increased the cost of each proposed reactor at Hinkley in Somerset by 40 per cent to £14bn in total*. Why? The outcome of the strike price negotiation risks saddling householders and businesses for a long time to come with further costs – the subsidy for low carbon power is to be financed by the consumer. This is why transparency and parliamentary scrutiny will be vital. Strike price plans mean that, when the market price for electricity is below the level agreed with EDF, all UK energy consumers will be liable for subsidies to top up the difference.

But does nuclear need a subsidy? Two 1,600MW reactors, operating at 90 per cent efficiency over a 50 year lifespan, could generate £88bn in cash at an average market price of £70 per MWh* (which was the government’s median projection for nuclear power last year, making it the cheapest on offer); £126bn at an average price of £100 per MWh; and £163bn at £130 per MWh. These are very large returns on a £14bn capital outlay, recognising the need to count in running costs, contingencies and profit.

* As it happens, his figure of £14 billion appears to be very pessimistic, word on the street is that Westinghouse will build you a 1,000 MW reactor for $1 billion, but even if you multiply that by seven for the usual British incompetence/corruption, nuclear is still economically viable. The author hints that EDF just plucks the figure out of the air in order to justify a higher price/MWh.

** He cheated a bit here, the £88 billion is calculated thus: 2 x 1,600 MW reactors x 24 hrs/day x 90% capacity [not "90% efficiency", whatever that is] x 50 years x £70/MWh. But the £70 is a negotiated figure, so if it turns out that they can only be run at full capacity 75% of the time, the price would have to be £84/MWh and the £88 bn looks perfectly reasonable.


john b said...

BAD STATS KLAXON. When someone uses 'total cash rate of return', rather than NPV, for a long project, this is either a demonstration that they don't understand how to do sums, or that they know the case would look pissweak if they used NPV. "Very large returns on a GBP14bn capital outlay" is just silly.

Infrastructure investment funds typically target a 10% nominal rate of return, which - based on Lodge's cash calculations - would require an upfront capital cost of no more than GBP10.8 billion at the GBP70 per MW price.

Your word on the street seems improbable. The new 1.6GW one Areva are building at Flamanville is coming in at at least GBP5bn, and that's on an existing site with the planning inquiry and so on run under French 'piss off, we're building it' rules. GBP10bn would seem like a good starting point under UK rules, with GBP15bn as a plausible overrun.

So we're not a million miles away from these being privately viable, obviously EdF are trying to maximise gouging levels as much as they can, and obviously the government will probably fuck up the negotiations.

But given the likelihood of cost and time overrun and the questions around disposal, I can't see any private investor stumping up unless the strike price is at least a hundred quid.

Mark Wadsworth said...

JB, Excel tells me that the IRR on £14 bn now, £1.76 bn a year for 50 years is 13%.

£70 per MWh seems quite low, I don't think it's the end of the world if they make it £80 or £90, at this stage, who cares any more? And £90/MWh would give us an IRR of 16.

And yes I know that using IRR's for projects with large closure costs can be a bit dodgy.

Southerngent said...

Where i use to work we had two 5 mw diesel gen sets, each run by an standard diesel engine (used in naval frigates,)am sure they cost less than 500 mil each

Mark Wadsworth said...

SG, yes of course, diesel generators are cheap to buy and expensive to run; nuclear is very expensive to buy and very cheap to run. That's the trade off.

Ed said...

I like the way you casually mention closure costs. Do these not dwarf the construction costs?


Mark Wadsworth said...

BE, no they don't. Let's assume worst case, they are as much as construction costs, well that's the last five years of income spent, so extend life to 55 years, hey presto.

Anonymous said...

"The Department for Energy forecasts that electricity prices will fall over the long term."

I am just killing myself laughing there.

Why will they fall?

They are more likely to rise in my opinion, which of course would make the case for nuclear (and even the dreaded Severn Barrage which at £26 billion and 17 Terawatt-hours a year at £70 per megawatt-hour comes out at 5% IRR) even stronger.

Anonymous said...

By the way, Hitachi reckon on £20 billion for four reactors, so £14 billion per reactor definitely looks steep.

Mark Wadsworth said...

AC, the £14 billion quoted was for two 1,600 MW reactors.

Ta for the link, as the article says, "At a ballpark of £5bn each, that would make Hitachi very competitive with EDF, the French nuclear giant that is planning to build reactors at Hinkley Point in Somerset." Doesn't say how many MW though.