Wednesday, October 23, 2013

UK Nuclear Deal Is A Bet on Baseload Power

  • An agreement to build the UK's first new nuclear power plants since 1995 endorses the role of baseload generation in the future low-emission energy mix.
  • Rather than constituting a choice of nuclear instead of renewables, this looks like nuclear plus renewables as a hedge on rising UK natural gas prices.
Monday's agreement between the UK government and French utility EDF and a pair of Chinese firms marks the start of the long-awaited turnover of the country's aging nuclear power infrastructure. The deal is controversial, not least for the power price of £92.50 per megawatt-hour (MWh) guaranteed to the developers. That's equivalent to about $0.15 per kilowatt-hour (kWh) at today's exchange rates. It's also strikingly different from the choices Germany and France itself have made recently.

The UK has a long history with nuclear power, having started up the world's first commercial-scale civilian reactor in 1956, following demonstration units in the US and USSR a few years earlier. Many of the plants built in the construction wave that followed have already been retired, and none has been started up since 1995. Another 40% of the country's remaining 10,000 MW of nuclear capacity is due to shut down by the end of this decade, with all but the newest, largest nuclear plant at Sizewell scheduled for retirement by the early 2020s. Even if the two new reactors that EDF and its partners will build at the Hinkley Point site in Somerset--adjacent to two 1970s-vintage reactors still in service--are completed on schedule, Britain's nuclear output is likely to shrink before it grows again.

The Hinkley C deal hinged on a question that can still only be answered theoretically today: What is the most effective future electric generating mix for achieving the necessary combination of affordability, reliability and low greenhouse gas emissions? In the aftermath of the Fukushima accident the German government decided that nuclear had no place in that mix and doubled down on its commitment to renewable energy, particularly wind and solar power, though that shift appears to require an increase in coal-fired generation to pull off. Meanwhile, France, which currently gets 75% of its electricity from nuclear, has embarked on a plan to reduce its share to 50% while expanding renewables.

The electricity mix in the UK is already changing as large offshore wind projects and onshore wind farms come online, and as the country's inexplicable flirtation with solar power increases. The gas turbines that dominated the previous wave of power plant construction are becoming more expensive to operate as waning UK North Sea gas output must increasingly be replaced by imported gas, while more coal plants shut down. All of this is underpinned by a legally binding commitment to reduce greenhouse gas emissions by 80%, compared to 1990, by 2050.

The UK's options for devising a reliable low-emission electricity mix are limited. If it wanted to build that mix around the combination of gas and renewables that California has chosen, then it would need a cheaper source of gas. That explains the government's interest in shale gas, although the outcome--both in terms of the rate of development and the future extent and cost of shale gas production--remains uncertain. It also can't rely nearly as much on solar, since it receives on average around half as much sunlight as the Golden State. Coal won't fit without carbon capture and sequestration (CCS) that is still expensive, and large-scale hydropower potential appears to be limited. That leaves nuclear as the largest-scale low-emission baseload option to anchor the energy mix, with quick-reacting natural gas turbines left to even out the fluctuations of offshore and onshore wind, and possible future wave and tidal installations.

In that context, it was surprising that the UK energy minister apparentlhy chose to frame this week's transaction as a choice for nuclear over the "blight" of the tens of thousands of wind turbines required to generate the same electricity, annually. Configuring wind power to provide enough reliable baseload energy to make nuclear unnecessary would require more overcapacity, grid upgrades and energy storage than even California's legislators could imagine. That would cost far more than the £92.50/MWh price tag for new nuclear.

And that brings us back to the price guarantee, or "strike price", which was apparently the key to getting EDF and its partners to commit to proceed on Hinkley Point. Since the UK's coalition partners had previously determined to provide no subsidies for nuclear power, arrangements such as the loan guarantees offered to US nuclear developers were out of the question. Whether the "contract for difference" scheme chosen to support Hinkley Point's future revenue--funded by ratepayers rather than taxpayers--constitutes a subsidy by another name, it is functionally similar to the Feed-In Tariffs (FITs) offered to wind, solar and other renewables in Germany and elsewhere. For comparison, the current German solar FIT guarantees utility-scale installations the equivalent of £84/MWh for a period extending past the planned start-up of Hinkley C.

Solar and nuclear power aren't interchangeable on the grid, but the spread between them highlights the financial risks involved in the current deal. The UK is placing a potentially expensive bet on low-emission baseload power from nuclear energy, while its biggest neighbors on the Continent are turning away from nuclear to pursue steadily rising shares of intermittent wind and solar power, the cost of which keeps falling. The government's call looks justifiable today for reasons of reliability and as a long-term investment--Hinkley C should still be producing billions of kilowatt-hours a year when the wind turbines and solar panels installed in Britain this year are rust and dust. However, if the UK's Bowland shale turns out to be the first Marcellus-like play outside the US, that price guarantee could cost future British ratepayers hundreds of millions of pounds per year.

1 comment:

Trevor H said...

I agree, this looks like a sound decision, and in that light I think I'd have described it as more of a 'hedge' than a 'bet.' If the Bowland does not produce much, whether for reasons below or above the surface, the UK will be quite grateful for the baseline power.