The thin veneer supporting the nuclear industry’s claims of being the lowest-cost clean energy source is being rapidly eroded by a series of cost blow-outs and cancellations in the UK, Europe and the US.
The latest blow to the industry came in the UK, where earthworks for the Hinkley Point nuclear project in Somerset – the first to be built in the country for two decades – have been delayed amid reports of a huge cost blowout. And in the US, the country’s first nuclear plant to be built in three decades has also revealed significant cost over-runs.
The developments come hard on the heels of announcements by two of Europe’s biggest utilities – RWE and E.ON – that they have pulled out of a $25 billion nuclear project in the UK, and setbacks in the Czech Republic, and in Bulgaria, where ambitions have also been scaled down due to costs.
The industry, which is already having to deal with decisions in Germany, Italy, Switzerland and Belgium to reverse nuclear commitments, is also preparing to deal with the likelihood that France – the industry flag-bearer – will review its nuclear ambitions under the newly elected Socialist president, Francois Hollande.
Reports in the UK suggest that the cost of the two nuclear plants EDF intends to build in Somerset has risen by 40 per cent to £7 billion ($A11 billion) each. While this has yet to be confirmed by the consortium, Sam Laidlaw, the CEO of listed UK company Centrica, which proposes to take a 20 per cent stake in the project, told shareholders last week that “the investment case for nuclear has yet to be proven.”
The nuclear industry has long presented itself as the cheapest form of clean energy, indeed the cheapest form of any energy if a carbon price was applied to the gas and coal-fired generators.
But this is a combination of partial truths and the sleight of an accountant’s hand. It is true that nuclear has one of the lowest short-run marginal costs of generation because, surprisingly to most people, the uranium fuel source is comparatively inexpensive.
However, the upfront capital costs are immense. The French nuclear industry, which supplies around 70 per cent of that nation’s electricity needs and is the one cited by most nuclear proponents, benefited from the government absorbing, and then writing off, virtually the entire capital cost of the fleet. The problem the nuclear industry now faces is how it can fund the replacement of those ageing reactors, let alone the construction of new capacity, particularly with new safety requirements and the added scrutiny post Fukushima.
The key debate in the UK is how much the government should support the rollout of nuclear, which it sees as key to its future energy needs, and in what form and at what cost. Peter Atherton, a leading energy analyst at Citigroup, said in a report that if the reports of cost blowouts were accurate, then it may be impossible to construct the Hinkley Point plants.
“We would not be surprised if the cost estimates were indeed rising sharply,” Atherton wrote in the report. “EDF’s Flamanville reactor that is under construction in France is running four years late and at least double its original budget. If construction costs are indeed anything like £7 billion per reactor, then an already very challenging program may be reaching the point of impossibility.”
Atherton said the government proposes to support the Hinkley Point smelter using “contracts for difference,” effectively passing the revenue risk from the developer to the consumer. “Assuming the £7 billion figure is correct, we calculate that the CfD strike price would need to be circa £110/MWh, assuming a 10 per cent post tax return (suggested by EDF), or a huge £166/MWh using a more realistic 15 per cent return.” This compares to the current baseload price of £51/MWh.
“We believe that the UK government will struggle to justify such high strike prices, either economically or politically,” Atherton wrote. “Perhaps a strike price of £110/MWh could be sold to Parliament on the basis that it is still cheaper than offshore wind and that future reactors may cost less. But certainly a strike price anywhere near £166/MWh would, in our view, be almost inconceivable.”
Atherton said it was possible to reduce the cost of capital by transferring the construction risk (as well as the revenue risk) from the developer to the consumer, but this would require more than the contract for difference. He said this would mean the government taking on a huge risk “over which it has little control.”
Last year, Lakis Athanasiou, the utilities analyst with London-based investment bank Evolution Securities, warned that Centrica should “not touch (the new nuclear venture) with a barge pole,” if the UK government is unwilling to take on construction risk. Atherton had said at the time that nuclear was not an investable option for public equity markets, and predicted then that it would require a power price of £150-£200/MWh to make that project work.
Similar issues are being experienced in the US, which has given the first licence for a new nuclear plant since the Three Mile Island incident in 1979. Atlanta-based Southern Energy is defraying the cost of the estimated $US14 billion construction of two new reactors at its Vogtle nuclear facility in Georgia through guaranteed loans of $US8.3 billion provided by the US government, with most of the remaining costs being passed on to electricity consumers.
However, last week, Southern Energy said that costs had already blown out by around $US900 million and further cost increases were also possible, citing construction and regulatory delays and other issues. In February, the Tennessee Valley Authority admitted that the costs of a proposed new facility at Watts Bar was would “significantly exceed” a previous building cost estimate of $US2.5 billion.
Last month, Bloomberg reported on an apparent stalemate for a plan by the Czech Republic to build two nuclear reactors for a total cost of $10 billion. The Czech Republic is the only European country with a nuclear project out to bid, but its energy utility CEZ, despite being 70 per cent owned by the government and with a market capitalisation of $23 billion, will not be able to make the project financially viable. “It’s unrealistic,” Bloomberg quoted Ivan Kotev, an analyst with Prague-based advisory firm Candole Partners as saying. Even Vaclav Bartuska, the Czech government’s special envoy for nuclear energy, told Bloomberg in an interview in Prague. “To be honest, at this point not one of the three bidders has convinced us he can build on cost and on time.”