Government must take on some of the financial risk of new nuclear to encourage investment, says report

Out-Law News | 02 Jul 2012 | 5:22 pm | 3 min. read

The Government must take on a share of the financial risk associated with building new nuclear power stations in order to encourage investment from private energy companies, according to a new report from a panel of scientific experts.

The Birmingham Policy Commission, operating out of the University of Birmingham, said in its report (121-page / 4.86MB PDF) that more reliance should be placed on nuclear as part of the UK's sustainable energy mix. It also called for the creation of a statutory 'Nuclear Policy Council' to handle long-term nuclear policy, modelled on the existing advisory Committee on Climate Change.

Rebuilding the UK as a "nuclear nation" was, the report said, the best way to ensure that the country managed to limit its greenhouse gas emissions while maintaining reliable supplies. However, the Government must first acknowledge that the UK has "fallen significantly behind" international competitors in many areas, including fission energy research and the presence of a suitably skilled workforce, it said.

"Only a farsighted, wide-ranging and fully integrated strategy is likely to overcome the numerous significant hurdles that must be negotiated," said the group, which is headed by former Energy Secretary Lord Hunt. "In short, it is not too late to act, but we have to do so decisively and effectively – and the process has to start now."

The report highlighted recent high-profile examples of energy companies withdrawing their investment in UK-based nuclear projects, including the decision by E.ON and RWE npower to sell their stakes in the Horizon Nuclear joint venture in March of this year. It said that the Government had to quickly provide more information about its proposed feed-in tariffs with contracts for difference (FiT CfDs), including how prices would be set, in order to enable other companies to finalise their investment decisions. EDF and Centrica announced their own joint venture to build four nuclear power stations in the UK in 2009.

Nuclear power generation currently accounts for 15% of the UK's electricity generation capacity, however this figure will be reduced to zero by 2035 as existing nuclear power stations reach the end of their working lives. The UK needs to maintain its existing nuclear generation capacity, if not increase this to as much as 40%, if it is to remain on course to meet its climate change targets, the report said.

Energy law expert Chris White of Pinsent Masons, the law firm behind Out-Law.com, agreed that Government support of the UK nuclear sector, which may include financial support in some cases, was "essential".

"Project owners need their investment case to be in a state of readiness before they can take the final investment decisions to commit billions of pounds in order to green-light nuclear new build," he explained. "In practice this may mean the Government enabling new nuclear projects to be de-risked in a number of key areas, such as reallocating local business rates and increasing the visibility of project revenue streams, through the recently announced draft Electricity Market Reform package."

The Government needed to "advocate and demonstrate robust political and policy leadership" in support of the sector in order to ensure that international energy companies and the global supply chain continued to see the UK as a viable investment destination, he added.

A draft Energy Bill (307-page / 1.9MB PDF), intended to implement the Government's "ambitious" programme of electricity market reform, was published for pre-legislative scrutiny at the end of May; however, much of the substance of the reforms is due to follow in secondary legislation. The Bill proposes a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a capacity market aimed to ensure that consumers continue to benefit from reliable electricity supplies at an affordable cost.

FiT CfDs will offer producers of low carbon power, including nuclear as well as renewable energy sources, a fixed price for energy supplied to the National Grid. They will be set up between energy providers and the National Grid, acting as an independent 'system operator', with payments made by reference to a technology-dependent 'strike price' and a market reference price. The payments are intended to replace existing subsidies and incentives such as the Renewables Obligation, and will also protect consumers by "clawing back" money from generators if the market price is higher than the strike price. The first strike prices will be published next year.

The Birmingham Policy Commission report also calls on the Government to establish training and education programmes to ensure a "suitably skilled workforce" for the new generation of nuclear facilities, and "more dialogue and appropriate incentives" around the process for identifying potential sites for the disposal of nuclear waste.