What Are The Prospects for Nuclear Power in the UK ?

This paper was presented by Gordon MacKerron, of SPRU, University of Sussex, to the Nuclear Free Local Authorities Irish and UK Annual Meeting of Nuclear Hazards, in the town Hall, Manchester, on 4th December 1998. It is reproduced with permission on the NFLA and with our thanks to them. To contact Gordon MacKerron you can e-mail him

Introduction

Nuclear power has been off the agenda as a new investment option in the UK for some years. After the tortuous process of approving Sizewell B in 1987, it became clear as privatisation approached - that nuclear investment was much too costly to contemplate. A moratorium on new nuclear investment lasted from 1989 to 1994, and no-one has suggested in the 1990s that nuclear power would be a competitive new option.

However, the advent of global warming as a serious political issue since the Kyoto meeting of December 1997 has meant a revival of interest in nuclear power. Kyoto, and other developments, may also impact on the important question of the probable lifetime of the existing stock of power reactors in the UK. There are also major unresolved issues in nuclear waste and decommissioning, which could also have implications for new investment and the lifetimes of existing reactors.

These three issues - new nuclear investment, the lifetimes of existing nuclear units and waste and decommissioning - are explored in this paper. The waste issues are treated more briefly, partly because the central issue of reprocessing is dealt with in another paper to this conference.

Climate change and possible revival of investment interest in nuclear power

The economics of nuclear power in the UK have been doleful. Much the most successful nuclear power project has been the Sizewell B PWR [pressurised water reactor], completed in 1994. According to its former owner, Nuclear Electric, it generates at around 5p/kWh [1] (in 1990 money), around 150 per cent dearer than the present average price of electricity in the wholesale market. It also had construction costs which overran, after taking out the effects of inflation by some 48 per cent,[2] though this was a modest escalation by the standards of the earlier AGR reactor projects

In 1989 it also became clear, during the attempt to privatise nuclear power, that nuclear liability costs (waste and decommissioning) were both huge and deeply uncertain. It was therefore impossible to privatise nuclear power in a competitive generation market, the Government was forced into an embarrassing retreat, and nuclear power remained in the public sector. Somewhat in disgrace, the nuclear industry was required not to invest in nuclear construction until at least 1994, when a Review of nuclear power was promised.

The review was delayed but when the economic results were published in 1995,[3] the moratorium was lifted but, according to Government calculation, there was unlikely to be an economic case for nuclear investment, and certainly no prospect of any Government subsidy in support of nuclear projects.

During the course of the Review, Nuclear Electric had argued a case for a new twin-unit PWR. After making optimistic assumptions on construction cost and operating performance, the generating cost would still be 3.7p/kWh at a minimum realistic cost of capital.[4] Faced with wholesale prices at least 25% less than this figure, no-one would contemplate such investment, especially as all the risks were on the down side. Rumours of the death of nuclear power (at least for new investment in the UK) did not seem very exaggerated.

However since 1990, both Nuclear Electric and Scottish Nuclear succeeded in greatly improving the operating availability of their AGR [advanced gas-cooled reactor] stations, and by the mid-1990s they operated for 75% of the year rather than the 50 per cent typical in 1990. This meant large new income accompanied by minimal extra cost, and it therefore became possible to privatise the AGRs in a new company, British Energy, in 1996. The chief investment strategy of British Energy was, and remains, that of diversification into non-nuclear technology. When asked about the economics of new nuclear investment, those speaking for the company have generally said - appropriately - that commercial conditions were unfavourable to new construction.

Very little has changed in the underlying economics status of nuclear power in the UK, but the context in which investment might be made has moved rapidly. Ever since the Climate Convention signed in Rio in 1992, climate change has been moving up the ,political agenda. By 1997 industrialised country Governments were prepared to commit to legally binding reductions in emissions of greenhouse gases (GHGs) in the interests of slowing down the process of climate change and warming. The British iovemment commitment is to a 12.5% reduction in the six main GHGs over 1990 levels during the 2008-2012 period. Much the most important GHG is carbon dioxide and most carbon dioxide is created by the combustion of fossil fuels. In operation, nuclear power (in common with renewable energy) emits no carbon dioxide, and therefore has - all else equal - a strong attraction as a route to reducing carbon emissions.

In a private market this attraction of nuclear power would need to be translated into a direct financial incentive if nuclear investment were to become competitive. A likely route to such an incentive would be the imposition of a carbon tax on the use of fossil fuels. If such a tax were large enough, it could tip the balance in favour of nuclear power. Given that such taxation together with its close cousin, tradable emission permits, is likely to be implemented within a few years, the question then becomes the level that such a tax would need to reach so as to make nuclear and fossil-fired investment equal in cost

The starting point is a generating cost of the cheapest fossil-fired option - the Combined Cycle Gas Turbine (CCGT)- which comes to around 2.2p/kWh (including profit). The 3.7p/kWh for nuclear in 1994 will be at least 4p/kWh in 1998 money and 5p/kWh is probably a more realistic figure. Put simply, nuclear is currently about twice as dear as fossil-firing if it gets no help from carbon taxation. [5] The level of carbon taxes that would be needed to equalise the costs of the two options would be in the range £200 to £400 per tome ofcarbon (tC). This is a very high level. The aborted EU proposal for a carbon tax in 1992 was at a final level of around £50/tC and the most enthusiastic carbon taxers (the Swedes) have not yet gone above £25/tC. The politics of carbon taxes at levels at least four times higher than those which failed to gain Europe-wide approval in 1992 seem hopelessly implausible. The only possible conclusion is that climate change will not yet do more than bridge a very small part of the large gap between nuclear costs and the costs of efficient fossil-fuel options.

The operating life of existing reactors

Decisions on the closure of electric power stations are, subject to safety clearances, usually economic in character. If a plant costs less to run than the selling price of its output, then it will stay open. More formally, the 'avoidable' costs of a station (those that would stop if the plant were closed down) need to be below the wholesale price of electricity This logic applies to nuclear as to all other generating technologies, though with one practical difference. This difference is that nuclear stations incur large decommissioning costs after closure. Even though many of these costs may be postponed to a long-distant future, some are immediate. There is therefore the added incentive to keep nuclear stations going, when the economics of operation become marginal, that some decommissioning costs can be put off into the future. The commercial logic outlined above may be superseded by other considerations where there is public ownership of nuclear power. It has been argued in the past that a proper economic view of Magnox avoidable costs would lead to early closure of many Magnox stations.[6]

In this section, little attention is paid to the AGRs. They are now all owned privately, but the fact that most are relatively new (all but two of the seven have operated for little more than 10 years) and that British Energy appear to have brought their avoidable costs to quite low levels means that none is likely to close in the period up to 2010.

The case of the Magnox stations is more interesting. At present, there are eight operating Magnox stations in Great Britain (including two early military plants at Calder Hall and Chapelcross). Three Magnox stations have been closed, and there has been a common expectation that more might follow in the reasonably near future. Magnox stations have small electrical capacities but produce very large volumes of waste: all are now owned by British Nuclear Fuel (BNFL) in the public sector. The case for early closure of at least some Magnox reactors has been based on two premises:

that the wholesale price of electricity is tending down and will probably fall quite a lot further as competition in generation becomes more real
that avoidable costs of Magnox stations are already high, and in several cases may already exceed the wholesale electricity price.

Underlying the second argument has been a view that under public ownership there may be a desire to keep Magnox stations open for strategic reasons despite the fact that they may be uneconomic.

The declining price of electricity still constitutes a threat to continued Magnox operation. However there are two factors which now suggest that Magnox lifetimes may be substantially longer than previously expected. They could easily mean that all six Magnox stations could operate until at least 2010.

The two factors are:

BNFL acquisition of all the Magnox stations. BNFL already operate the two oldest of all Magnox stations, Calder Hall and Chapelcross, and have already obtained 'in principle' agreement from the Nuclear Installations Inspectorate (NII) to run them to a 50 year life (2006 and 2007). Even more important is the changed economic incentives on BNFL following the merger with Magnox Electric. The reprocessing of spent Magnox fuel is much the largest element of Magnox avoidable cost. It has always been undertaken by BNFL, and while the company provided this service on a monopoly basis for a separate customer, it had an incentive to charge as much as possible. Controlling Magnox avoidable costs was therefore difficult.
Now that BNFL owns the Magnox stations it now has the opposite incentive: if it minimises Magnox reprocessmg costs it will maximise profit. It therefore now seems likely that Magnox avoidable costs may be held below their previous level, contributing to longer economic lifetimes. It is of course also true that BNFL no longer necessarily has an incentive to reprocess at all, and might now consider storage as an alternative to reprocessing, provided the expected Magnox lifetimes were long enough. Indeed if there were a move towards early close down of the THORP reprocessing plant, it is now much easier than before the BNFL/Magnox merger to see how the ending of reprocessing at the B205 Magnox plant could be organised.

The Government's interest in carbon emission reductions. The commitment to a 12.5% GHG emission reduction by 2008-2012 would be made more difficult if Magnox stations were to retire over the next decade, as they would necessarily be mainly replaced by fossil fuel. While the Government is reluctant to subsidise new nuclear construction, it might well use its control over the Magnox stations to encourage their continued operation even if avoidable costs do start to exceed electricity prices - the alternative might have to be subsidising an alternative carbon-reducing technology.

These arguments do not prove that all Magnox lifetimes will now be extended by a further decade or more. Nor do they prove that Magnox avoidable costs will stay below electricity prices. They do, however, suggest that the chances of early Magnox closures are probably lower now than they were only a year or two ago, unless wholesale electricity prices collapse to levels below 2p/kWh over an extended period, (which is itself a more likely prospect than a couple of years ago as competition levels increase in electricity generation).

The vital point is simply that a continuing and justified presumption that new nuclear construction is extremely unlikely may well be combined with circumstances in which the lifetimes of existing reactors could be extended rather than reduced.

Waste management

The management of nuclear waste has on the whole been kept separate in the UK from decisions about new nuclear construction. It is true that uncertainty about waste costs may raise the cost of capital for new investment as one element of risk, but permission to construct new nuclear capacity has never been made conditional on particular solutions or policies in the area of waste (unlike the case in Germany for instance).

The most obviously pressing issues are the operation of the THORP reprocessing plant at Sellafield and its associated but yet unopened Mixed Oxide Fuel (MOX) Plant. The issue of reprocessing is dealt with in another paper to this conference, and all that need be said about this issue here is that it would obviously be desirable to defer the decision on whether or not to allow the MOX plant to open until a more thorough review of separated plutonium management policy takes place.

More generally in waste policy, the denial of permission to NIREX to proceed with its plans to develop a deep repositoty near Sellafield has obviously thrown waste policy into some disarray. The Government is now promising a major review of waste management policy by about the middle of 1999, following its consideration of the very lengthy House of Lords Select Committee review of the subject which is still incomplete.

The comprehensive rejection of the NIREX proposal suggests that the difficulties of finding any deep disposal site in the UK - already very large - have now reached virtually insurmountable proportions. In such circumstances, it may well be that official policy will acknowledge the de facto current position that, apart from Low Level Wastes (LLW), solid wastes will need to be stored at least into the medium term and that long-term retrievability may become an objective rather than final disposal. Earlier objections to these possibilities from the nuclear industry largely resulted from its fear that failure to provide 'final' solutions to waste problems might in the end be used as arguments against approving new nuclear generating projects.

Whether or not the industry will easily move towards acceptance of longer-term storage and retrievability may depend on the extent to which it believes that new investment is unlikely. If new nuclear capacity is regarded as a long shot, the industry may be less worried about waste policies that do not appear to offer final solutions.

More important is the risk that the industry may embrace the 'new reality' of longer-term storage as an opportunity to delay seeking workable waste solutions and, most important of all, thereby avoid spending too much money in the present. Decommissioning is already a policy area where it is planned to delay the major expenditures for over a centuty [7] and it would be a retrograde step to allow waste policy to slip into the same mode. Even if early disposal of waste is impossible, a sustainable policy for waste and decommissioning should still seek solutions as urgently as possible, on the grounds that the present generation should as far as possible take care of its own environmental problems.[8]

The underlying problem in all waste policy is the lack of any incentive for the industiy to spend money in finding a solution. The costs of waste management are all 'deadweight' cost, a cash drain bringing no corresponding benefit to the industry. A better incentive structure would be to impose requirements on the industry to fund waste policy by setting up 'external segregated funds' (analogous to British Energy's small decommissioning fund) and requiring annual payments by the industry at a level high enough to allow a more vigorous pursuit of waste management solutions. With a high enough required annual payment the industry would have a stronger incentive to find solutions in a reasonable time frame

Conclusions

Prospects for building new nuclear plants remain almost as dim now as they have been since 1990. The economic advantage of gas-firing over nuclear is so strong that there is no credible tax regime - penalising fossil fuels - that could make up much of the economic and financial gap between the technologies. If new nuclear investment has a future, it will almost certainly be postponed for many further years to come.

However the possibilities that existing reactors may operate for longer than hitherto expected is quite substantial. This derives from the new economic incentives given by the transfer of Magnox Electric to BNFL, which are likely to reduce the costs of Magnox operation, and by the possibility that Government may encourage continued nuclear operation on grounds of helping to meet the 2008-2012 commitments on carbon emission reductions following the Kyoto meeting in December 1997

Finally, nuclear waste policy has become less coherent than ever following the refusal of permission to NIREX to continue with a deep repository near Sellafield. New policy development are unlikely until mid-1999 at the earliest, but the pressing need is to implement a financial regime (especially fixed payments from the nuclear industry into a segregated fund) to encourage momentum towards lasting solutions.

References

[1] S Goddard 'Future Programmes' paper presented to Institute of Energy Seminar, 13th March 1991 in London
[2] G. MacKerron 'The Capital Costs of Sizewell C' COLA Volume 3, Submission to the Nuclear Review, Sept 1994 page 2
[3] Department of Trade and Industry and the Scottish Office - The Prospects for Nuclear Power in the UK - Cm 2860 May 1995
[4] Derived from Nuclear Electric - Submission from Nuclear Electric plc - the Government's Review of Nuclear Energy, Volume 1 June 1994
[5] I owe some of the argument in this paragraph to excellent but yet unpublished work by J.Pena-Torres of Imperial College, London, for the British Nuclear Energy Society
[6] M.J. Sadnicki 'Magnox Avoidable Costs' Evidence submitted by the National Steering Committee of the Nuclear Free Local Authorities to the Trade and Industry Select Committee, 2nd Report, Nuclear Privatisation, Volume 11, January 1996 p51-65
[7] G. MacKerron et al UK Nuclear Decommissroning Policy; Time for a Change Report for Radioactive Waste Management Committee. April 1994
[8] M.I. Sadnicki and G. MacKerron Managing UK Nuclear Liabilities STEEP Special Report no. 7. SPRU, October 1997, especially Chapter 1