United Kingdom

United Kingdom

OFFICIAL -- NUCLEAR COSTS MORE

Wind energy's status as the cheapest zero-emission electricity technology in the UK has been confirmed. Though the confirmation is implicit rather than explicit and comes, ironically, in a review of nuclear power and not of wind energy, it is nonetheless significant. While wind has been careful not to pit itself against the might of the atom, the nuclear industry has had no qualms about promoting itself as the cheap green alternative to renewables. But with the UK review providing the very latest on nuclear economics -- and the latest round of renewables contracts under the ruthlessly competitive Non Fossil Fuel Obligation doing the same for wind -- there can be little doubting that the basis for comparison of costs is as sound as it will ever be.

The UK government has been trying to decide what to do with nuclear ever since it was withdrawn from privatisation plans -- partly because of its high costs -- seven years ago. To help the government make up its mind, a "Nuclear Review" was conducted and a White Paper, stating the government's intended legislation on the issue, is the outcome. Partial privatisation (of the newer nuclear plant) is the solution.

On generating costs the conclusions are less than crystal clear, but the White Paper's overall message is undeniable. Forty years after the possibility of cost competitive nuclear electricity was first championed in a (22 page) government White Paper, the latest version (93 pages) effectively sounds the death knell for future nuclear construction in the UK.

Not that either White Paper makes its statements that clearly. The 1955 version talks about "probable costs" of nuclear electricity and anticipates rises in the price of coal which would enable nuclear to become competitive. (Instead, coal prices fell and nuclear costs rose). The 1995 White Paper concludes that it is "unlikely in current market conditions that nuclear can provide a rate of return competitive with a CCGT station." However, just as in 1955, the White Paper also leaves the door ajar by referring to future developments which may change the commercial climate. So just what is the price of nuclear power -- and how does it compare with its competitors, coal, gas, and wind?

There is no single answer. The costs of electricity generation depend not only on the cost of the plant, fuel and operations, but also on the particular institutional framework of the country concerned. Although there is much talk of "level playing fields" in the energy market, in practice most of these fields are either bumpy or tilted, or both. One of the distortions which led us to believe that the price of nuclear electricity in the UK is low is the fact that until recently the industry was still in the public sector and therefore using public sector accounting practices. This produced a "public sector" generating cost for new nuclear of £0.029/kWh, but was based on low interest rates not available to commercial projects and with capital repaid over the life of the plant -- 40 years. With most of the electricity industry in the UK now privatised, however, it would have been illogical and unfair to allow nuclear to continue under the public wing and privatisation of Nuclear Electric was, perhaps, inevitable.

This puts a question mark over the "private sector" price of nuclear electricity and the White Paper is somewhat vague on this point. However, given that the industry recognises that the appropriate test discount rate would be at least 11% and that it is unlikely that loan finance could be obtained for a period longer than 20 years, it is possible to make estimates, using the data in the White Paper (table). Tucked away elsewhere in the White Paper, what appear to be arbitrary generation cost estimates are put forward in the context of evaluating the cost of carbon abatement and these figures (quoted in the paper at 1990 levels) are also included in the table, adjusted to 1994 levels, which enables comparisons with wind costs from the latest round of the Non Fossil Fuel Obligation. The nuclear cost estimates in the table assume that Nuclear Electric's estimates for the construction cost and performance of a new station are realised; in practice the cost of practically every batch of nuclear stations has escalated after the initial estimates.

The difference between "public sector" and "private sector" nuclear generation costs is quite striking, but not unexpected. In a masterly and detailed analysis made at the time the generating industry was privatised, Lord Marshall, the Chairman of the Central Electricity Generating Board, showed why a "public sector" price for nuclear of 2.2p/kWh corresponded to a "private sector" price of 6.25p/kWh.

Wind's position strengthened

When the contract prices for wind plant awarded under the third round of the Non Fossil Fuel Obligation are set alongside those of nuclear (chart 1), there seems to be little doubt that wind energy's place at the forefront of zero-emission generation technology is assured. What's more, it has even overtaken or is hauling well in on the other principal generation options, coal and gas. Gas remains every major power utility's favourite fuel, although its popularity, predictably, is causing some hiccups in price. Towards the end of 1993 there were supply problems in the UK and prices rose by 30% from their 1992 level, although they have since fallen back. It is still a good buy, provided long term contracts can be secured at current market price.

UK coal prices have moved steadily downward. Most coal for electricity generation is supplied under a five year agreement between the power generators and the British Coal Corporation. Prices have maintained their planned downward movement towards the world price and are now reasonably close to that level. World coal prices, in turn, have been fairly steady in recent years, although they have moved upwards slightly during the past few months.

Comparing like with like

Level playing fields, however, demand that like is compared with like and the busbar generation costs of electricity from large thermal plant are not really directly comparable with electricity costs from renewables for two reasons.

First, generation costs from thermal plant exclude the "transport cost" of delivering the electricity to the customer. Renewable electricity, on the other hand, is fed into local distribution networks nearer to the point of consumption, so a direct comparison of renewable and thermal electricity costs is akin to comparing wholesale and retail prices. To use a simple analogy: just because the world market price for coal, based on the Rotterdam spot market, appears cheaper than UK coal (from a mine next door to the power station), it is not necessarily the "best buy" because the coal has to get across the English Channel and then be transported to the site.

These are simple points, but are not readily acknowledged by electricity utilities, or even by the electricity regulator in the UK, Stephen Littlechild at the Office of Electricity Regulation (OFFER). OFFER tacitly accepts these arguments, but maintains that alternative arrangements would be too complicated. It argues that appropriate comparative prices are difficult to establish and will vary across the country. The regulator's second defence is to hide behind the relevant electricity act which implicitly sets "pool price" (which has virtually no relevance -- except for scheduling plant) as the marker for comparisons. However, it is instructive to track the value of electricity as it passes through the system (chart 2). As the average price of electricity leaving the high voltage network -- passing from wholesaler to retailer -- is about £0.04/kWh, there are very strong arguments for assigning small renewable energies a value of at least this level. This implies that the cost of wind is now very close to its value, as the average price of the latest round of NFFO contracts was also in this region.

The second reason for the difficulty in making comparisons between wind and thermal is external costs. There is an increasing awareness of the fact that electricity costs society a lot more than its mere price of production, enough awareness to warrant a separate article. Staying with this article's direct comparison of UK fuel costs, though, introduction of a carbon tax, as proposed by the European Commission, would be one way of reflecting the external costs of power production. In the UK, wind suddenly looks very competitive indeed once a carbon tax is in place (chart one). The UK government is opposed to a mandatory imposition of such a tax, but may support proposals for guidelines to impose carbon taxes on a voluntary basis. Whether they would actually be applied is another matter.

Released from nuclear

Meanwhile wind will have an unchallenged run in the UK. Two more NFFO orders are planned -- this time without nuclear clouding the issue. The fossil levy on electricity bills to pay for NFFO contracts was originally introduced to support nuclear power; only later were proceeds also used to promote renewables. With nuclear now being partially privatised, its future looks dim. The existing plant have several years life in them, but it is unlikely that any large plants will be built for some time, if ever. Smaller plants are being developed, "safe integral reactors," or SIR, to use a new acronym, but they are probably over the horizon at the moment.

Released from the burden of supporting the nuclear industry, electricity consumers will be pleased to see their bills fall by about 8% next year when the nuclear element of the levy disappears. Ironically, the levy for renewables built into NFFO as an afterthought will outlive the massive nuclear levy of £1200 million. From 1996-1998 the renewables levy will be artificially high as the short term NFFO-1 and NFFO-2 contracts run their course. This will no doubt attract ill informed public comment, just as the high premium prices paid for wind in the first rounds of NFFO did. Sanity will return in 1998, though, when the early NFFO contracts expire, leaving only the longer running and lower priced contracts from NFFO-3 and beyond.

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