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2006 Nuclear Issues v28 03 |
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Written by Nuclear Issues
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Wednesday, 01 March 2006 |
Nuclear Issues is also available as a pdf download
No British builder
When, hopefully at the end of its current energy review, the UK
government decides it wants more nuclear power it will have a shock.
There will be no British company able to build a new plant. This will
be not only the lack of technical capability but also lack of money
because the Treasury ‘black hole’ is planning to absorb all those
lovely billions that BNFL made selling itself to the Japanese. The only
thing the British nuclear industry, once a world leader, can now do is
pull plants down at ridiculous cost.
It is no surprise therefore to hear reports of Electricite de France preparing, with German partners and Constellation Energy Group of the US, to build a new nuclear plant in the UK. They are also said to be talking to British Energy but this is most likely only about the sites BE owns suitable for new nuclear plants.
EdF is, of course, already involved in the UK having bought one of our most desirable energy companies, London Electric, which uses electricity from France supplied through the cross-Channel link. It makes good sense therefore to be also looking to provide further sources of supply in the UK.
They are likely to want to build the European Pressurized Water Reactor (EPR) similar to that now being built in Finland. This will be built at a cost that EdF can well afford and produce electricity equivalent to more than 4000 wind turbines the size of the Milenium eye. The full cost of waste management and decommissioning will be incorporated in the generation cost which will be well bellow that of combined cycle gas turbines.
The Restructuring of British Energy
The second report from the National Audit Office on The Restructuring of British Energy (14th March 2006) deals with the events from September 2002 when BE ran into financial difficulties up to January 2005 when the company was relisted. This is a surprisingly restrained report. The NAO does little more than provide a factual account of the Government actions and does not venture to offer any comments or criticisms on the course of events. It starts by noting that the sharp fall in wholesale electricity prices in 2002 pushed BE into financial difficulties but does not consider the extent to which the whole fiasco was directly caused by the DTI itself in imposing the new trading arrangement, NETA on the electricity generation industry in, what Lord Tombs has described as, “the naive belief that the internal forces of a manipulated market mechanism would provide a long-term strategy for the energy market.”
Robbing the shareholders
The NAO also makes no comment on the anti-Robin Hood policy of the DTI in taking from the poor to give to the rich. It relates the bare facts. The value of the shareholders holdings in BE before 3 September 2002 was £307 millions. Under the reconstruction they lost 87 percent of their holdings so that by 17th January 2005, when company was relisted, the value of their holdings had fallen to £66 million, to rise a year later, by Feb 2006, to £107 million. In contrast BE’s creditors, mainly the bond holders, and banks which had financed the purchase of the Eggborough coal-fired station (purchased in a vain attempt to cope with the requirements of NETA), given new bonds and 97.5 percent of the share capital in the reconstructed company, saw the £834 million they were owed in Sept 2002 rise to £1 871 million in Jan 05 and further to £3 867 million by Feb 2006 – almost a fivefold increase on their original loan. The Government did even better, by Feb 2006 the amount extracted from BE, mainly through the nuclear cash sweep payments into the Nuclear Liabilities Fund, had amounted to £7 753 million.
Who can now pretend that nuclear power is uneconomic and requires a Government subsidy? It is BE which is subsidizing the Government.
The nuclear sweep
Under the reconstruction the DTI, through its Nuclear Liabilities Fund, takes responsibility for BE’s decommissioning costs and most spent fuel costs. In return BE pays a fixed contribution of £20 million per year (indexed to RPI) and £150 000 per tonne of uranium fuel loaded into Sizewell B. In addition BE also has to make an annual Cash Sweep Payment set at 65 per cent of its net cash flow. The NAO report unashamedly admits that the amount of the cash sweep is not calculated to match the potential liabilities but is “intended to secure the maximum contribution whilst maintaining the viability of the Company.” It is not unreasonable for BE to make a payment to cover the costs now taken over by the NLF although this is little more than a continuation of the arrangement when, before the reconstruction, BE was making payments into the Nuclear Generation Decommissioning Fund. This was a segregated fund supervised by independent trustees, with a five yearly review to which BE was the only contributor, with its final payment to be made in 2035, the projected date at which Sizewell B would be taken out of service. That the nuclear sweep goes beyond this to secure the maximum it can without driving BE once more into a financial crisis seems extraordinary. Could it be that the then DTI Secretary of State, Patricia Hewitt was seeking to penalise BE for offering nuclear power as an alternative to her preferred backing of renewable energies, or was it merely the desire of the Government to secure a continuing financial gain from BE’s operations? Any surplus in the NLF is to be paid to the DTI.
The DTI also has the option to convert the cash sweep into shares in the Company. For “each increase of 10 pence in the Company’s share price, the potential value of the taxpayer’s interest in British Energy increases by £104 million, compared to an increase of £55 million for the Company’s creditors and £1.4 million for shareholders.” A full conversion of BE’s payments into the Nuclear Liability Fund would give the Government 65 per cent of the enlarged equity in New British Energy. If, as revealed in the Budget announcement, this is to be sold off it would ease the Government’s own financial problems. The only losers in this are the original shareholders, everyone else has done exceedingly well.
Decommissioning
The NAO stresses that the Government (taxpayer) now has the responsibility for contracted and uncontracted spent fuel liabilities (£2 573 million and £350 million respectively) and decommissioning the BE stations at the end of their operating lives (£2 364 million). But the detailed figurers show that far from being a liability BE is making a massive contribution to the Government finances. As at the end of Feb 2006 the total costs of BE’s liabilities is put at £5 287 million, the greater part of which will fall due over the nest 80-100 years. But against this BE’s contribution from the cash sweep already amounts to £7 753 million giving the government a net benefit of £2 466 million, or with some further payments from BE taken into account, £2 713 million.
Despite this large net payment to the Government, the concern of the NAO however is that the interests of the taxpayers are fully protected and it recommends that the DTI should have a plan to take account of serious outages at one or more nuclear station or for any significant falls in the price of electricity which could again put BE’s future at risk and hence reduce the amount taken by the cash sweep.
While the risk of early closure of one or more stations cannot be totally excluded, the recent 10 year life extension, approved by the Nuclear Installations Inspectorate, for Dungeness B which could now continue to operate until 2018, suggests that this risk is not high. Sizewell B for instance could on a fifty year life could be operating, and contributing to the NLF, until 2045. The second possibility that there might be a significant fall in electricity price is even more remote. As long as the UK relies to an increasing extent on gas-fired power stations burning increasing quantities of imported gas the price of electricity can only continue to rise. The gas cost in a CCGT generating station amounts to around 60 per cent of the total generating cost. Since September 2002 the wholesale price of electricity has risen from under £20/MWh to over £50/MWh.
BNFL
The role of BNFL in the whole affair is odd. BE had for some years complained about the high cost of reprocessing its spent fuel and fuel services, and when faced under NETA with the fall in wholesale electricity price it sought more favourable terms from BNFL. For some reason, which has never been explained, BNFL was unwilling to meet this request and in effect seems to have preferred to contemplate the bankruptcy of its main, and only UK, customer. More than 63 per cent of the original amount BE owed to the main creditors was owed to BNFL. Yet once the reconstruction package had been put into place BNFL was quickly able to accept renegotiated contracts which were intended to be helpful by creating a stronger link between the price charged to BE for spent fuel management and the wholesale electricity price. The discounted cost of this to BNFL (and hence the taxpayer) was estimated at that time as £462 million at prevailing electricity prices.
But with the increase in electricity price which quickly followed, instead of a rebate BE is now paying BNFL £714 million more for its back end fuel services.
Fees to advisers
Amongst those who also profited from the restructuring were three financial and legal advisers to whom fees totalling just over £28 million were paid. The NAO report notes that these were appointed without competitive tender, but accepts that this was dictated by the urgency of the situation.
The loan facility
A key feature of the reconstruction was the granting of a loan facility to BE, initially set at £410 million which was increased almost immediately to £650 million. But a diagram in the NAO report shows that BE’s drawings under this loan which peaked at around £400 million ended after only six months, by February 2003,. It also shows that BE used the proceeds from the sale of Bruce Power to reduce the amount of the loan facility from £650 to £200 million by February 2003 and no further drawings were made apart from for a short period Sept-Dec 2003 at around £100 million.
Although the NAO does not comment on this it seems that the main purpose of BE’s drawings under the loan facility were not disembursed but held to provide the cash holdings for collateral required for trading under the NETA rules.
BE’s financial crisis, when the wholesale electricity price in Sept 2002 at £12/MW fell below the generation cost, was only short term; within a few months the spot price had risen to between £15-20/MWh (so that no further drawings on the loan facility were required) and the price continued to rise to reach around £30/MWh early in 2005 and £50/MWh by the end of 2005. This raises the question of whether the complex process of the reconstruction was necessary or whether the matter could have been more simply and quickly resolved by a short term loan or collateral guarantee which would have left BE to continue to operate as a highly profitable company as it had done under the previous pool pricing system. The key seems to have rested with the financial advice given by Credit Suisse First Boston and Deloitte on electricity price projections which apparently only considered a range between £15-£21/MWh. The main concern was lest electricity prices fell below the lower figure; the possibility of steep prices increases does not seem to have been considered. Yet given the known and growing reliance on gas-fired power stations in the UK electricity system together with the awareness that North Sea gas supplies were about to decline and that imports of gas would increase this range of future prices, even at that time, was unduly cautious. On the other hand this advice could have been welcomed by the DTI. It has enabled the Government to acquire, at minimum cost to itself, a valuable and profitable asset.
Bruce Power
We have commented previously on the loss of future earnings through the forced sale of Bruce Power. The following extract from the NAO report (which again fails to offer any comment or criticism) shows how the short-sighted forced sale reduced the price obtained for such a valuable asset. An example of how ministerial prejudice reduced the value of an asset from around a possible £900 million to £275 million.
“The Department’s requirement that Bruce Power should be sold within a specified timetable resulted in significantly reduced receipts to British Energy and reduced the money available to support the restructuring. But the decision took account of the potential loss of all the value of the holding should the Company have fallen into administration, the additional cash collateral requirements that the Department would have had to fund to allow Bruce Power to continue trading, and a requirement for state aid purposes that recipients of Government aid divest themselves of assets in order to minimise the level of aid. In September 2002, the Department’s advisers, Credit Suisse First Boston, had valued the Company’s interest in Bruce Power at between £853 million and £962 million, subsequently revising this estimate to between £390 million to £487 million.
In November 2002, a consortium of three Canadian concerns made an initial offer of £410 million for British Energy’s share of Bruce Power. The consortium subsequently reduced their offer, firstly as a result of the Ontario government’s announcement of a cap on the price of electricity and because Ontario Power Generation, a government owned company responsible for electricity generation in Ontario which had to agree the price, disputed the size of the offer made. On 14 February 2003, British Energy accepted the revised offer of £275 million. The Department considers that this was a fair price as there was still a significant danger at that time that British Energy might have gone into administration.”
Searching for a reason
“Apalled”, shocked and bewildered by the Government ruling that plans for the deveopment of 27 wind turbine of over 110 metres height should not be built on a ridge betweeen the Borrowdale and Bretherdale valleys in the Lake district, the environmental lobby – Greenpeace and the Friends of the Earth – searching for an explanation, finds “it hard to believe that the nuclear industry has not played some role” in this, for them unwelcome, decision. Unfortunately, as we have previously pointed out there no longer is a British nuclear industry which might intervene to oppose any wind power development. The objections raised in the six-week planning inquiry came from bodies such as the Campaign to Protect Rural England, The Countryside Alliance, the Open Space Society, the Friends of the Lake District, the Council for the National Parks and the Wildlife Trust as well as local residents – all deeply concerned about the future of our environment.
The opposition to wind farms comes not from the nuclear industry which is in no position to lobby anyone – British Energy for instance, is now classified as in the public sector for the production of the National Accounts as a quasi-subsidiary of the DTI; BNFL, having sold off its profitable Westinghouse divsion to a Japanese company is now little more than a nuclear waste company. The real reason for the growing lack of enthusiasm for wind farms is the public realisation of the need for substantial and reliable supplies of carbonfree electricity which are not dependent, as are oil and gas, on foreign suppliers. Covering what is left of our country side with subsidised windmills is not the answer.
Nuclear expansion in China
It is reported that the Chinese State Council has approved future energy plans for 2005-2020 in which nuclear will play an “integral role” in meeting the country’s growing energy demand.
By 2020, the country’s nuclear power generation capacity is expected to reach 40 000 MWe, or four percent of China’s total power output at that time. This will require the construction of at least one 1 800 MWe nuclear power station per year. The ambitious plan is being implemented in an effort to overcome ongoing energy shortages and to build up alternatives to massive coal use, which is causing serious air pollution, acid rain and killing thousands of miners.
China already has 11 nuclear reactors in operation.
China’s nuclear drive has sparked huge international interest. Russian President Vladimir Putin lobbied during his two-day visit to Beijing this week for his nation’s nuclear industry to have a greater role in China while French and US firms are currently bidding to build four reactors. Australia is also in negotiations with China to supply it with uranium.
Unfortunately the UK will not be able to enter this large market for nuclear power reactors and fuel supply since BNFL, having sold off its Westinghouse division to the Japanese, is now no more than a nuclear decommissioning company. Perhaps BNFL is taking a long view in anticipation of a large demand for decommssioning services in some 50 -100 years time when the projected Chinese reactors may be reaching the end of their lives. – or is to too facetious?
Wishful thinking
The publication by DEFRA of its lengthy 200 page report Climate change- The UK programme 2006 is full of warm words and optimistic projections explaining how, although the UK target for a 20 per cent reduction in greenhouse gas emissions from the 1990 level by 2010 is not likely to be met, real progress is being made towards the longer term target of a 60 percent reduction by 2050.
The figures however show that emissions of carbon dioxide have remained almost stationary for the past ten yeas at about 150 MT carbon with an indication of a slight rise over the last three years to 152.5 MT carbon by 2004. This is explained as being due to higher than anticipated levels of economic growth and an increase in coal burning following the recent increases in the price of oil and gas. But with the possibility that oil and gas production may be about to peak future prices are only likely to rise further; the ‘dash for gas’ which produced the fall in carbon emissions from the 1990 figure of 161.5 MT carbon could be reversed. The projection for 2020 at 146.6 MT carbon is only slightly below the 1995 figure of 149.9 MT carbon. (The figures for total greenhouse gas emissions, including methane nitrogen oxides etc do hoever show slightly larger reductions.)
The details of how the 2050 target of a 60 percent reduction from the 1990 level might be met are not given, but it clearly unrealistic even impossible unless a sharp reduction in economic growth, or some other dramatic social change, is to be contemplated. The DTI paper for the energy review assumes that the UK GDP will grow on average by 2.5 percent per year to 2050.
To meet the 2050 target for cabon emissions the amount of carbon produced per unit of output would have to be reduced by 90 percent from current levels. As the DTI paper comments “this is a hugely demanding goal”.
This goal may be even more demanding than the DTI believe. Their paper gives a graph illustrating the fall in carbon intensity – energy related carbon dioxide emissions per unit of GDP – over the years from 1975 to 2004 for several countries. But either through wishful thinking or more probably an error in transcription, the UK is shown to have the best performance of all, and with emissions /GDP well below those of France. This is implausible as fossil fuels account for only about 10 per cent of French electricity production as against 75 per cent for the UK. Taking figures from the USDOE the French carbon intensity in 2004 is 0.29 Mt tons CO2/ GDP compared with 0.37 for the UK.
To achieve any significant fall in carbon intensity the UK must reduce its usage of fossil fuels for electricity generation. Setting aside wishful thinking on what might be achieved over the next fifty years in the development of solar electricity, wave power, carbon capture and sequestration, etc the only large scale nonfossil electricity source which is already available and could be increased in the intervening years to approaching the French figure is nuclear power. The sooner a start is made the easier the task will be.
Next generation is here
Japan’s fourth third-generation plant is now operating commercially. It is an Advanced Boiling Water Reactor at Hokuirku Electric’s Shika nuclear power plant. With a capaciry of 1358 MWe this large reactor is helping Japan to show the way with an evolutionary design of plant. The first two such units have been operating at Tokyo Electric’s Kashiwazaki-5 & 6 for ten and nine years respectively and at Chubu Electric Power’s Hanaoka-5 plant for a year. They are all plants that have taken less than six years to build and with advanced technology they are demonstrating exceptional safety and economic performance.
Floating nuclear power
Floating nuclear power plants are to be built at the SevMash naval base in Severodvinsk in the Arkhangelelsk region of Russia by a subsidiary of the state utility Rosenergoatom. The plants will have an output of heat and power equivalent to 70 to 600 MWe. Construction of the first buoyant nuclear power plant (BNPP) is expected to start in 2006 with completion by the end of the decade.
It will be appreciated that Russia has extensive experience of building plants of this size for its nuclear submarine fleet and for nuclear powered icebreakers. The BNPP will be assembled in a shipyard on a barge that is 140 metres long by 30 metres wide and towed to the intended site for generation of power and heat. There are several such sites on the remote northern Siberian coast. It will be capable of supplying the needs of a community of up to 500 000 people.
Like a large nuclear powered aircraft carrier the BNPP will have an initial core that will run for 10 to 15 years without refuelling. The plant will be designed for a lifetime of 40 to 50 years.
Subsidised renewables
In striking contrast to the net payment of £2 713 million to the Government from British Energy, the paper from DEFRA - Climate Change, The UK Programme 2006 - puts the cost of supporting renewable energies as increasing up to £1 billion per year by 2010. This comes from the renewables buy-out price of £32.33 per MWh, the cost of which falls onto the electricity consumer, and exemption from the Climate Change Levy.
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Last Updated ( Monday, 19 June 2006 )
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