United Kingdom

United Kingdom

WindEconomics: Nuclear escalates as wind prices keep falling

Nuclear power is too expensive. That is the implicit conclusion of the UK government, which has issued a consultation document on possible ways of reducing the electricity price.

This would be possible if the government -- which can borrow money cheaply --shouldered some of the risks and/or provided some finance.

The consultation focuses on "regulated asset base" models. The document describes these models as "typically used for funding UK monopoly infrastructure" and involving "an economic regulator who grants a licence to a company to charge a regulated price to users of the infrastructure".

One of the advantages for developers is that charges can be levied before the project is completed.

The range of possible prices quoted in the consultation document, shown in the top below, bears out the maxim that "prices are what you want them to be".

They range from a minimum of -£6/MWh, when the state shoulders all the risks and the rate of return for the government is 2%, to £137/MWh, when the investors demand a 12% rate of return and bear all the risks. In the first case, the cost to the taxpayer would be £18 billion.

The present contract for the under-construction Hinkley Point C power station, which has been widely criticised, is based on a 9% rate of return and an electricity price of £92.5/MWh (2012 prices). That is about £106/MWh (€119/MWh on 1 October) in 2019 prices.

It was announced on 25 September that the estimated cost of the project had risen by nearly 10% — to £21.5-22.5 billion.

The price of electricity to the consumer will not increase, but the profitability for developer EDF will be reduced. This gives a new benchmark price for nuclear of £6,750/kW, as the facility’s output will be 3.26GW.

The effects of moving away from state funding can be illustrated by looking back to the first public inquiry for Hinkley Point.

In 1988, before the UK electricity industry was privatised, the inquiry was told that the generating cost from the proposed power station would be £22.4/MWh — around £60/MWh in 2019 money.

When the industry was privatised, the potential owner of the power station reckoned that the remuneration would need to be about £62.5/MWh — more than £150/MWh in 2019 money.

Construction consent for the power station was granted, but lapsed. The project was later revived and the controversial electricity price agreed in 2015. The price will be index-linked and will be paid for 35 years.

CfD auction

Around the same time the nuclear consultation document was published, the UK government announced the results of the latest allocation round for contracts for difference (CfD).

This covered offshore wind and "remote island" wind.

The results showed a dramatic fall in offshore-wind prices since the last CfD round: they fell to €52.5/MWh for projects to be commissioned in 2023/24 and €55/MWh for those coming online in 2024/25.

The chart below  shows the dramatic fall in prices since the first allocation round in 2015, when prices for offshore wind were close to €200/MWh. Prices fell sharply in the second round in 2017, and the latest prices show a further fall.

Onshore wind has not been eligible since the first round, but the downward trend in onshore prices has continued, based on the $19.9/MWh (€18.2/MWh) price for Saudi Arabia’s 400MW Dumat Al Jandal wind farm.

These low prices are likely to be due to a combination of lower wind turbine prices, improved and more efficient methods of working offshore and increased investor confidence — leading to lower required rates of return.

Although UK CfD contracts run for 15 years, developers are less constrained by these, now that wind prices are below the current wholesale electricity prices.

At a glance — This month’s report conclusions

Regulated Asset Base model for nuclear (consultation document), Department for Business, Energy and Industrial Strategy (UK), 2019

Presents a series of options that might be used to fund future nuclear power stations and reduce the price of electricity

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