Leaked report on costs of nuclear spells trouble for the government
The Times reports that EDF Energy is seeking a guaranteed price of £165 per megawatt hour (mWh) from government for energy produced by a nuclear power station it intends to build at Hinkley Point.
This is almost identical to an estimateby Citi bank analyst, Peter Atherton, of £166/mWh.
If true, it could throw the government’s plans for the energy sector into disarray.
To enable the transition to a secure and decarbonised electricity grid the government wants to support investment in a range of low carbon technologies.
EDF, The Times claims, is arguing that they should receive the reported price as it is lower than that required for major offshore wind projects, which they expect to be £180/mWh.
This figure seems high. The current cost of energy produced from offshore wind is about £135/mWh. This may increase as the first phase of ‘round three’ projects get underway because they are in deeper water than previous developments.
But industry sources expect costs above £165/mWh to be unlikely. Moreover, after this phase, costs are expected to fall dramatically, with the government and industry working towards a target of £100/mWh by 2020.
If it is more expensive to get electricity from new nuclear power stations than offshore wind then the government’s commitments will become difficult to maintain.
The energy and climate change secretary Ed Davey has explained the government’s position:
“There will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation.”
“I want to make clear … that this means that nuclear will not receive a higher price than comparable generation technologies whether they be renewables or indeed gas generation once its emissions have been abated by carbon capture and storage.”
This should be a serious concern for the Liberal Democrats who have long opposed any new nuclear power.
As well as casting government policy on nuclear subsidy into doubt, the Times report also undermines the government’s entire rationale for electricity market reform.
For the transition to a decarbonised power system to be as cheap as possible policy should be designed to get the maximum amount of generation from the cheapest technologies first. But the government has set out its ambition to have the maximum amount of nuclear that is currently feasible instead of a similar ambition for offshore wind. This has important implications.
The government’s plans would see up to 18GW of new nuclear by 2030, which will account for 40 per cent of the energy mix. In this scenario the Committee on Climate Change claim renewables would need to make up a further 40 per cent, with offshore wind accounting for 20 per cent.
But the committee claims that it is technically feasible for renewables to make up 65 per cent of the energy mix in 2030, with offshore wind alone accounting for 40 per cent. If offshore wind is, in fact, cheaper than nuclear then the government’s ambition should be to achieve this second scenario.
Some new nuclear is still likely to be needed to achieve a fully decarbonised grid but policy should be designed to get capacity from renewables as close to 65 per cent as possible.
As it stands, the government has proposed major reforms for the electricity market that will help build new nuclear but are unnecessary and potentially even damaging for renewables. The government has proposed that it will introduce a ‘Contract for Difference’ mechanism to provide financial support for both nuclear and renewables.
But financial support for renewables is already in place via the Renewables Obligation and, while it could be reformed to be more cost effective, it is well understood by industry and generally working well. The new mechanism however looks likely to add uncertainty and complexity into the market for the renewables industry and may make it harder for independent operators to do business.
If The Times report is accurate and nuclear ends up being more expensive than offshore wind to generate, the entire rationale for the government’s approach to electricity market reform, including the provision of nuclear energy, will need to be urgently revisited.