Our political unit has been trawling through the fine print of this morning's nuclear White Paper. Here's their initial analysis, outlining some of the more subtle ways the government has understated the real risks to the taxpayer and the lack of clarity on economics:
- The White Paper shows how nuclear companies will be able to cap their liabilities, leaving the tax payer exposed if estimates for dealing with waste change.
- It openly admits the government will have to provide extra money if cost estimates are wrong.
- It uses questionable financial estimates to build the nuclear economic case.
Decommissioning and waste
The critical issue for a new generation of nuclear power stations is ensuring there is enough money to decommission the stations at the end of their life and store the highly radioactive waste produced until it is safe. The cost of doing this, at this stage, is impossible to estimate. The length of time between starting a new nuclear plant and eventually putting the waste into a geological repository could well be over 150 years. Any discount rate or estimate on what costs might be in 2170 is pie in the sky.
Exposure to potentially exponential liabilities will make finding investment virtually impossible, so there is only one way to ensure money is available: cap the risk and provide a mechanism for the taxpayer to meet the costs. There are a number of specific paragraphs which show how the government will do this.
3.73 In response to the consultation, energy companies have indicated that they could be prepared to pay a significant risk premium, over and above the expected costs of disposing of waste, in return for having the certainty of a fixed upper price.
3.74 The Government plans to use the exercise on waste cost modelling to set a fixed price or upper limit for nuclear operators. This price would be set at a high level, including a material risk premium over and above expected costs. This risk premium will help to ensure that the operator bears the risks around uncertainty in waste costs and will provide the taxpayer with material protection. Should the actual costs of providing the service prove lower than expected, these lower costs will not be passed on to nuclear operators, who would have gained from certainty of a fixed price and would not have been exposed to the risk of price escalation.
These two paragraphs mean an investor will be able to limit the exposure to future costs - should they escalate beyond predictions.
3.52 Our policy on waste and decommissioning for new nuclear power stations is designed to ensure that operators make adequate arrangements to cover the full costs of decommissioning and a full share of waste management costs. Operators are responsible for decommissioning and waste management costs. If the protections we are putting in place through the Energy Bill prove insufficient, in extreme circumstances the Government may be called upon to meet the costs of ensuring the protection of the public and the environment.
3.58 The funding arrangements should ensure that the prospect of the operator's liabilities having to be met in whole or in part from public funds is remote at all times.
These paragraphs are even more blatant. The government admits that they will pick up the liabilities if the money is not available. In both para 3.52 and 3.58 there is also the implicit admission that the companies that build new nuclear stations could go bust. The recent example of Metronet shows that supposedly secure private companies with constant guaranteed revenue can still go into administration.
2.53 ... As mentioned in the consultation document, in accordance with our international commitments, there will continue to be certain potential liabilities that may fall to the Government as a result of a nuclear event.
This paragraph shows the government also remain the insurer of last resort for a large-scale nuclear incident. Para 2.66 on accidents "We have not estimated a monetary value that might be associated with potential accidents.... Though we cannot dismiss the risk"
Capping liabilities, and providing public insurance, lowers risk for the investor, and thus lowers the cost of capital. This dramatically effects investment decisions as accepted in para 2.46. Transferring liabilities to the taxpayer makes financing cheaper.
Economics of nuclear
Much of the argument for new nuclear stations is predicated on the assumption that it is now an economic form of generation. However, the white paper admits that the base case costs are not currently known. Indeed, they are planning a consultation on what they might be later this year.
Paragraph 2.48 uses a range of possible costs for new nuclear power in their cost-benefit analysis. Yet the UPPER end of their possible cost of construction (£1625/kW) is just over half the current cost (£3060/kW).
In addition, the White Paper makes various assumptions about the cost of connecting new nuclear stations the National Grid. Para 2.51 states that the government cost modeling has taken into account these costs, but Para 2.281 acknowledges that allocation of costs for large nuclear plant remains for Ofgem to review with the industry.
It is clear from reading the whole white paper that the economic case for new nuclear is far from certain. The government uses estimates in one paragraph to justify the economic benefits. In others they admit they have no idea where these costs will fall.
