Energy Costs: The Price Of Power

Nuclear Fandango

Last month, UK energy secretary Claire Coutinho declared in the government’s Civil Nuclear Roadmap policy document that “Our nuclear industry is re-awakening”. That document pledges the UK to build 24 gigawatts of new nuclear power capacity over the next two decades. That is equivalent to six times the capacity of the one nuclear plant now under construction. Thus, at least one more massive nuclear plant is envisaged for an as yet unidentified location (although Wylfa in Anglesey, North Wales looks to be the most probable site).

There is currently one nuclear power plant under construction in the UK – Hinkley Point C – and one planned – Sizewell C. But the latest news on these is discouraging. Last month the French majority state-owned energy company EDF announced that the first reactor Hinkley Point C in Somerset would not come onstream until 2029 at the earliest, and probably more like 2031. There is no date set as yet for the second reactor. The final cost of the project, it said, could rise to £46 billion – as compared to an initial budget back in 2016 when contracts were signed of £18-24 billion.

EDF has encountered problems in the construction of other nuclear plants which use the European Pressurised Reactor (EPR) technology deployed at Hinkley Point at Olkiluoto, Finland and Flamanville, France. Some engineers have spoken about a design flaw in this technology. While they were designed for maximum safety – especially in the wake of the radiation leak at Fukushima, Japan in 2011- they have turned out to be more difficult to build than other types of nuclear reactor. (The Fukushima disaster prompted the Germans to decommission all their nuclear power stations – even though Germany, unlike Japan, does not lie on a tectonic fault line and is not prone to earthquakes. As a result, the Germans are still highly reliant of coal for electricity production).

To make matters worse, the French finance minister, Bruno Le Maire, began to press the case for the UK government to cough up more funds to finish the project. Worse still, EDF cast doubt over its commitment to build the new reactor at Sizewell C in Suffolk, in which it will have a 20 percent stake, unless the funding issue over Hinkley Point were satisfactorily resolved.

The funding structure devised for Sizewell C envisaged that consumers would pay a levy on their electricity bills to help pay for construction costs. This is the so-called Regulated Asset Base (RAB) model. Opponents of the project have dubbed this a “nuclear tax” which will endure for decades. In contrast, Hinkley Point C will operate on the old contracts for difference model where the developers enjoy a guaranteed strike price once the reactors are operational. The original £89.50 per megawatt hour strike price has already been adjusted up to £125 in view of inflation. This means that British consumers of nuclear energy will be paying amongst the highest prices for electricity in the world.

The construction of Hinkley Point C was contracted by the UK government to EDF and China General Nuclear (CGN). Both Hinkley Point C and Sizewell C will have the capacity to power about six million households and will have an economic life of up to 60 years. The two plants could be producing 14 percent of Britain’s total electricity output in the late 2030s.

Ms Coutinho rushed out a press release on the evening of 23 January, saying: “Hinkley Point C is not a government project and so any additional costs or schedule overruns are the responsibility of EDF and its partners and will no way fall on [British] taxpayers”. This comment annoyed EDF and its main shareholder, the French government, to prompt a further statement. The substance of that was that unless the UK government offered something towards the shortfall at Hinkley Point, Sizewell C would simply not happen.

Eventually, the UK Department for Energy Security and Net Zero pledged an additional £1.8 billion of taxpayers’ money. The Minister for Nuclear and Renewables, Andrew Bowie MP, later admitted that he needed to raise an additional £20 billion of private finance to ensure that Hinkley Point C is completed.

The Chinese government approved ten new nuclear power stations last year, just as another ten were given the go-ahead in 2022 according to World Nuclear News. Even war-torn Ukraine has commissioned two new nuclear reactors which are due to go live in 2032. In Britain, however, getting nuclear power plants built is more challenging.

Proponents of small modular reactors (SMRs) and advanced modular reactors (AMRs) which are much less expensive to construct and install are watching developments closely. That includes Rolls-Royce which has already built prototypes. Some commentators, such as the Daily Telegraph’s Jeremy Warner, think that Sizewell C should be abandoned in the form envisaged and replaced with arrays of SMRs. To be fair, the Sunak government has not ruled this out.

Of course, if there is a breakthrough in the dream of creating limitless clean energy by means of nuclear fusion, that could change everything. On that more soon.

Labour’s Green Prosperity Plan

In the first week of February, Labour’s putative manifesto promise to spend £28 billion a year on green energy was unceremoniously junked. (Where the figure of £28 billion came from – about half what we spend on defence – is known only to Ed Miliband). The Green Prosperity Plan had become a hostage to fortune as anyone who follows the vicissitudes of our national accounts will know that it could only have been funded either by increasing taxes or by cutting spending elsewhere – or by additional borrowing. The chances are that “Waitrose Woman” (who has apparently displaced “Mondeo Man” as the key swing demographic in the forthcoming UK general election) will not mind too much.

Labour is still promising to increase windfall taxes on North Sea oil and gas production and to discontinue the granting of new drilling licenses. The Tories’ windfall tax is set at 75 percent of profit – how much higher can Labour go? The revenues from these taxes will help to pay for what’s left of the Green Prosperity Plan – for example, more household insulation, although there is nothing to stop householders insulating their homes at their own expense right now.

On the plus side, it seems that Sir Keir Starmer and Rachel Reeves are no longer under the delusion that all green energy will be cheap and that it will create hundreds of thousands of new jobs. Nearly all the windmills and solar panels we shall install this decade will be manufactured in China (where about 60 percent of all electricity generation is thanks to coal). And, given China’s market dominance in these technologies, the price of such equipment is likely to rise over time.

Labour plans to establish a state-owned company called GB Energy which will invest in new green energy technologies such as green hydrogen and carbon capture and storage (CCS). It will create a new infrastructure fund. It promises to reform planning rules and to speed up the connection of new plants to the grid.

And yet Labour still wants the entire UK electricity grid to be net carbon neutral by 2030. The present government’s target date is 2035 – but even that looks highly unrealistic, according to Aurora Energy Research. We currently rely on 32 gas-powered plants which collectively generated about one third of our electricity last year.

Labour plans to more than triple offshore wind turbine capacity from the current 15 gigawatts to 55 gigawatts, and to more than double onshore wind capacity to 35 gigawatts. That’s all very well but when the wind isn’t blowing and the sun isn’t shining, the gas-powered plants will continue to provide critical backup generation capacity. (Although new CCS technology could reduce their net emissions). Moreover, wind turbine array operators such as SSE and RWE point out that onshore wind is gentler than the wind that blows at sea, that onshore turbines are smaller and that most of the best sites are already taken. Onshore wind turbines are also deeply unpopular.

Labour also wants to triple solar capacity to 50 gigawatts by 2030 by covering about 400,000 acres of farmland with solar panels. That is an area about the size of Hertfordshire and would inevitably massively reduce our capacity to grow food and feed ourselves. And even if that were realistic, it is not clear whether even this volume of green power would be enough to power the total electrification of transport, household heating and hot water.

Labour will have to develop a nuclear power strategy at some point. The UK’s four oldest nuclear plants are all scheduled to close between 2026 and 2028; although, at a stretch, their operations could be extended into the 2030s. In fairness, Labour points out that Ed Miliband, when energy secretary over 2008 to 2010, approved ten potential sites for new nuclear power plants that the Tories have done nothing to advance.

History Bites Back

Hinkley Point, near Bridgwater, was chosen as the site for one of the UK’s first nuclear power stations way back in 1957. Hinkley Point A, a Magnox reactor, was operational from 1965 to 2000. Hinkley Point B functioned from 1976 to 2022. Both were built by British companies and were financed in the UK. Although both are now decommissioned, the grid connections, coastal location and community acceptance made Hinkley Point a natural choice for a third generation reactor.

Magnox reactors were replaced with advanced gas-cooled reactors in the 1970s. But not one of these was ever built beyond our shores. We adopted the wrong technology at the wrong moment. Subsequently, with privatisation, most of our electricity generation and distribution industries fell under foreign control. Given that Britain was at the forefront of civil nuclear power in the 1950s and 60s, why is it proving so difficult to construct and operate state-of-the-art nuclear plants in this country? I think there are three fundamental reasons.

Firstly, there are an insufficient number of top level nuclear engineers here such that Britain must turn to specialist companies overseas. British Energy – the rump collection of viable British nuclear power stations privatised by the government of Sir John Major in 1995 – was sold to EDF in 2009. France, the USA, China, Sweden and South Korea all have leading nuclear plant builders and operators: we don’t. It was the Cameron Conservative government of 2015-16 which decided to team up with EDF and CGN at Hinkley Point. But, since Brexit, our French friends have become less amenable – and yet Britain has effectively outsourced its nuclear programme to them.

Second, the main barrier to infrastructure projects generally in the UK is that obtaining planning consents is expensive and protracted. Reportedly, it is much easier and quicker to obtain planning consent for a new nuclear plant in France.

Third, there has been no coherent political consensus around the need for nuclear power in the UK. The 2003 energy white paper published under Tony Blair’s government described nuclear power as an “unattractive option” – although Labour later changed its mind. There is still vocal opposition to nuclear power generation on safety grounds – and even more to the disposal of nuclear waste. The Low Level Waste Repository (LLWR) in Cumbria, operated by British Nuclear Fuels has been especially contentious. Many environmental and political activists associate nuclear energy production with nuclear weapons production. Moreover, there have been nine different energy secretaries sitting in cabinet since 2010. With such a level of turnover of people at the top, it has proven difficult to fashion policy.

At least the optimists foresee that Sizewell C will benefit from the lessons learnt at Hinkley Point C. Though, somehow, I doubt it.

The Price Of Power

You don’t have to be an academic economist to work out that countries with expensive electricity suffer from an economic disadvantage relative to those which enjoy cheaper power. British industry and competitiveness has been blighted by a long-term policy failure at government level to keep the price of power low. This problem is now exacerbated by the rushed net zero carbon agenda. Everyone agrees that we should reduce our CO2 emissions; but the headlong rush to point zero will entail higher energy prices than our competitors.

If you want to see the consequences of an expensive energy infrastructure, just look at the decline of the British steel industry. Tata Steel, part of the huge Indian conglomerate Tata Group, is using £500 million of public money to replace two of the UK’s last four hydrocarbon-powered blast furnaces in Port Talbot with electric arc furnaces (EAFs). Out of 4,000 jobs currently, at least 2,500 jobs will go. EAFs, which melt down scrap metal, produce less CO2 than blast furnaces but are also less labour intensive. Tata expects that the new EAF will be operational by 2027. Meanwhile, back in India, Tata is opening a new coking coal-burning blast furnace at Kalinganagar on the Bay of Bengal.

The other two blast furnaces in the UK, at the British Steel plant in Scunthorpe (owned by China’s Hebei Jingye Group since March 2020), are also likely to close and to be replaced with EAFs if a government subsidy is forthcoming. British Steel told trade unions last October that it has been losing £30 million a month. Two successive sets of auditors have resigned, having been unable to sign off the company’s accounts.

Steel production in the UK has fallen from 24 million tonnes a year in 1971 to about six to seven million tonnes last year. Steelmakers in the UK paid an average of £94.92 per megawatt hour for electricity in 2022. French steelmakers paid £62.73, and German steelmakers £59.02. Industrial users in Britain pay around three times the price for electricity as their counterparts in the USA and Canada and over twice what those in South Korea and New Zealand pay. They pay nearly twice what industry pays in France Sweden and Finland – three European countries with extensive nuclear power. Chinese manufacturers pay around a quarter of what ours do for their electricity.

When and if the remaining blast furnaces in Scunthorpe close that will leave the UK as the only G-7 economy without the capability to manufacture primary steel. That will be directly attributable to our higher energy costs which in turn arise from the failure of the British government’s energy policy over many years, and in particular its failure to build sufficient nuclear power plants.

Afterword

I’m reading Powers and Thrones by historian Dan Jones. Its subtitle is: A New History of the Middle Ages. It spans the “middle age” between the fall of the Roman Empire and the birth of the world we call modern at the beginning of the 16^th Century. Consider that Colombus made landfall in the Americas, Vasco da Gama reached India, Leonardo da Vinci painted the Mona Lisa and Martin Luther triggered the Protestant Reformation all within about a decade or so of each other – when a recognisably post-medieval world emerged.

But why did the Roman Empire fall? At its zenith it spanned three continents and commanded innumerable peoples across the known world. Marcellinus, a Greek-born poet who wrote in the fourth century, claimed that “Rome is accepted in every region of the world as mistress and queen”. The end of the Empire even in the late fourth century was unimaginable. And yet, just a generation later, Rome was forced to withdraw from the province of Britannia in 409-10; and by the end of the fifth century the Roman Empire in the west no longer existed.

Rome, at the end, was undone by four main intractable forces: generations of mass migration into imperial territory by people who could not speak Latin and who did not share its culture; climate change – Europe was getting colder as the Roman Climatic Optimum subsided; successive pandemics, ineptly managed; and an increasingly debauched currency.

Does any of that sound familiar today?

Listed companies cited in this article which merit analysis:

• Electricité de France (EPA:EDF)
• China General Nuclear Power Co. Ltd. (SHE: 003816)
• Rolls-Royce (LON:RR)
• SSE PLC (LON:SSE)
• RWE (ETR:RWE)
• Tata Steel Ltd. (NSE :TATASTEEL)