Managing nuclear liablilities: New report on costs of the UK nuclear program

Nuclear Monitor Issue: 

(December 19, 1997) The nuclear industry often states that nuclear power alone amongst major energy technologies accounts for and deals with the effects of the entire fuel cycle, because it internalises the costs involved in waste management and decommissioning. Is this true? A recent report analysing the situation of nuclear liabilities in the United Kingdom finds important problems and offers recommendations for future analysis and action. The report may be of particular interest for other countries because of the ongoing discussion on privatisation. The report's Executive Summary follows:

(483/4.4794) Sadnicki & MacKerronNuclear liabilities are the costs of dealing with the unwanted products of the nuclear age: radioactive wastes, spent reactor fuel, and redundant nuclear structures. The unwanted products of the nuclear age have been accumulating over fifty years of nuclear operation. Even if, as now seems likely, there will be no new nuclear power stations in the UK, the legacy of liabilities is large and unavoidable. Indeed the commonly quoted figure for total UK civil liabilities is £45 billion, but this could well escalate to a staggering £70 billion. (all figures are given in British Pound (£); 1£ =US$1.65). It is important that there is a fundamental reappraisal of nuclear liability strategies. Why is this necessary when two major Government reviews - the Nuclear Review and the Review of Radioactive Waste Management Policy - were published in 1995? There are several reasons:

  • the collapse of the NIREX deep disposal programme for intermediate level wastes;
  • areas of growing concern about BNFL operations at the Sellafield site: the levels of radioactive emissions from the THORP reporcessing plant; the rationale for continued reprocessing of spent fuel; the future of plutonium stockpiles; and the planned opening of the facility to manufacture Mixed Oxide (MOX) Fuels at Sellafield;
  • the need to subject the 1996 nuclear privatisation to critical scrutiny, particularly arrangements for funding liabilities;
  • the advent of a new Government in May 1997.

The aim of the report is to propose and develop a framework for such a fundamental reappraisal. This framework is built around two policy objectives, both advocated by the Government in the course of the 1995 Nuclear Review processes; sustainable development and cost-effectiveness. We explore the practical implications of these policy objectives for nuclear liability strategies.

Our procedure has been to ask two questions:

  1. Are current funding arrangements adequate?
  2. Are official liability estimates complete and adequate?

Even in a case where the liability estimates are complete and adequate, the funding arrangements may still be inadequate and require reassessment. On the other hand, in a case where the liability estimates are incomplete and/or inadequate, then the existing funding arrangements will certainly be inadequate.

A number of different questions concerning funding and liability estimates have been asked:

  • Is there an equitable distribution of financial responsibility for nuclear liabilities between the public and private sector?
  • For those liabilities in the private sector, is it probable that companies will discharge all their long-term responsibilities, or is there a risk that some may by default fall to be met by future taxpayers?
  • For those liabilities in the public sector, is there an equitable distribution of financial responsibility between the current taxpayer and the future taxpayer? Is this distribution consistent with the policy objective of sustainable development, as represented by two of its main instruments: the polluter pays and the precautionary principles
  • For those liabilities in the public sector, whether falling to current and/or future taxpayers, is the proposed method of dealing with those liabilities consistent with the policy objective of cost-effectiveness? In particular, have the technological options been identified which best satisfy cost-effectiveness criteria within a sustainable development context?

Establishing the official liability estimates.
In the first part of the study we use the official framework for liability estimates to derive a fresh estimate of total civil nuclear liabilities. Our estimate for UK civil undiscounted liabilities outstanding in 1997 is, on this official basis, £41.8 billion. Within this figure, the total for the main nuclear generators - British Energy and Magnox Electric - is estimated to be £31.4 billion undiscounted. Of the overall total, almost £3.7 billion is due to be spent in the period up to 1999 and a further £9.5 billion in the following ten years. Over £10 billion of the expenditures to 2009 fall to British Energy and Magnox Electric, mainly on spent fuel.

The analysis of official estimates of liabilities is hindered by a number of difficulties of definition and convention in official usage. The level of aggregation in industry estimates militates against firm conclusions on the equity of the split between public and private liabilities during the privatisation process. Similarly, the level of aggregation makes it impossible to distinguish between liabilities which are genuinely unavoidable costs, and those which are avoidable. Overall, the data available in the public domain for analysis of such very large sums of public money are extremely limited. Nevertheless, there are some anomalous changes in liability estimates from around the time of British Energy's privatisation which have not, to date, been satisfactorily explained. These changes have implications for the equitable distribution of financial responsibility for liabilities between the public and private sector. They appear to have operated to the disadvantage of the public sector. It is therefore of great importance that this issue is resolved.

Are current funding arrangements adequate?
The traditional approach to provisioning for nuclear liabilities in the UK - the internal unsegregated route - has collapsed and left a large funding gap. For British Energy, the arrangements put in place at the time of privatisation fall far short of solving the funding problem. The Segregated Fund only covers Stages II and III of decommissioning, with an officially expected undiscounted cost of £3.7 billion. A further £5.3 billion of undiscounted post-closedown British Energy liabilities are excluded from the Segregated Fund. These liabilities fall due for payment earlier than the longer-term liabilities included in the Fund, and this seriously aggravates the funding problem. There is a substantial risk that a significant proportion of these costs will fall to the future taxpayer. There are also risks that the Fund will not perform well enough to meet the liabilities which it is intended to cover.

On the privatisation of British Energy in 1996, Magnox Electric inherited £2.6 billion of cash, predominantly Fossil Fuel Levy moneys not used by Nuclear Electric. However, on current strategies, the cash available to Magnox Electric will be used up early in the next century, probably by 2005, through meeting the costs of short-term liabilities, mainly reprocessing. At least a further £13 billion (undiscounted) of future taxpayers' money will be needed to meet the company's liabilities. This is considerably larger than the previous Government's undertaking to provide, as needed, £3.7 billion (escalated from 1996 at 4.5% real annually, making about£5.8 billion by 2006). Taking the two main nuclear generators together, some £18.3 billion of their official liabilities of £31.4 billion - nearly 60% - is currently unfunded. In terms of the full £41.8 billion of undiscounted liabilities, about £28.7 billion is unfunded - nearly 70%. Even on the basis of official estimates of liabilities, nuclear power does not make full and secure provisions to meet all the costs associated with its operation. This applies to both private and public sectors. The limited improvements introduced on privatisation are far from adequate as a response to the funding problem. The only secure solution would be adequately funded segregated funds in both private and public sectors.

Are official liability estimates complete and accurate?
In addition to the funding problem discussed above, there are serious weaknesses in official liability estimates. We have carried out two Case Studies, in both of which we conclude that the nuclear industry has significantly underestimated the costs of managing nuclear wastes. The first Case Study looks at High Level Waste (HLW), using industry base data. For Magnox, undiscounted HLW liabilities are estimated to be nearly £1.1 billion, compared to the industry estimate in 1996 of £350 million. For AGRs, undiscounted HLW liabilities are estimated at £540 million, compared to industry estimates of £380 million. If these AGR HLW liabilities were included in its Segregated Fund, British Energy would have to contribute a further £16.7 million annually, in addition to the current annual contribution of £16 million for Stage II and Stage III decommissioning.

The second Case Study considers plutonium, again using industry base data. Under current reprocessing plans we estimate that the UK will have separated in total over 100 tonnes of plutonium by 2020. We estimate that the costs of storing this separated plutonium will be over£70 million a year. It therefore becomes important to consider plutonium disposition -managing the separated plutonium in a manner which minimises environmental impacts, the risks of proliferation, and the costs of care and maintenance. Official estimates do not appear to include such a disposition programme. We have costed a disposition programme based on vitrification with HLW and then deep disposal. This programme is estimated to cost over £2.3 billion undiscounted. This is the first public attempt at such a costing and the error band is wide due to shortage of data in the public domain. In order to meet the AGR component of these plutonium disposition liabilities, BE would have to make contributions to its Segregated Fund of a further£38.5 million annually. The Magnox component of plutonium liabilities is estimated at over£1.6 billion undiscounted, compared to the company's current provision (itself unlikely to be realisable as cash) of £200 million. The potential scale of plutonium liabilities and the lack of funds to meet them raises serious questions about the desirability of continuing the separation of plutonium through reprocessing.

In addition to the above inadequacies and omissions, nuclear liability estimates are also likely to be inadequate because of the cost escalations typically found in large and complex projects. Currently planned liability projects in the UK lie mostly towards the upper end of the spectrum in which high cost escalations can be expected: they are at an early stage of estimation; they are complex, technically novel, often with unique physical characteristics; and their implementation is often expected to be deliberately delayed for long periods. Present institutional arrangements give incentives for under-estimation, as the risks of escalation are not in most cases borne by the estimating organisation. We estimate that the overall UK total could escalate from £41.8 billion to around £70 billion, if current approaches are allowed to persist. These findings are a strong argument in favour of seeking less complex and less capital-intensive strategies for nuclear liability management. There is a further issue arising from current accounting practice, which assumes that the rate of growth of funds for provisioning will be positive until well into the 22nd century. However, the principle of avoiding potential financial burdens on future generations requires that all funds should be in place by the start of the next generation, about 30 years from now. This can be achieved by assuming a 0% fund growth rate after 30 years. Such an approach is consistent with sustainability. Under these assumptions, the British Energy contribution for HLW to the Segregated Fund, which we estimated above as £16.7 million a year, would rise to £30.1 million a year. The extra contribution to the Segregated Fund for plutonium disposition, which we estimated above as £38.5 million a year, would rise to£41.9 millions a year.

There is also an estimation issue related to the timing of decommissioning. Current Government policy is that decommissioning provisioning should be based on allowing future generations the possibility of bringing forward in time the decommissioning Stages II and III, so that we do not dictate to them when they must perform the task. The undiscounted cost of such earlier decommissioning would be higher than that of the current preferred strategy, due to higher radioactivity, by about 35%. For both Magnox and AGR, this means that the total undiscounted liabilities, and therefore the required provisions, would rise by just over 10%.

Overall conclusions on funding arrangements and liability estimates.
The 'conventional wisdom' of the nuclear industry is false. Current arrangements for nuclear liabilities are inadequate, on two counts:

  1. Present funding arrangements are plainly inadequate, even within the context of official estimates of liabilities. This applies equally to the funding arrangements for those liabilities in the private sector with British Energy, and to those for liabilities in the public sector with Magnox Electric.
  2. In addition, there are areas where the official estimates are inadequate and/or incomplete. Again, this applies in both the private and public sectors.

In addition to these inadequacies in provisioning and estimation, we have noted limitations in the current strategies for the management of nuclear liabilities. There are grounds for considerable concern in the following areas.

  • The distribution of financial responsibility between the public and private sectors following the 1996 privatisation seems not to be equitable, to the apparent disadvantage of the public sector.
  • The distribution of financial responsibility between the current taxpayer and the future taxpayer is not consistent with Government policy on sustainable development, as embodied in two of its main instruments: the polluter pays and the precautionary principles.
  • Current strategies for managing nuclear liabilities do not always seem to employ technological options which best satisfy cost-effectiveness criteria within a context of sustainable development.

Can sustainable development and cost-effectiveness be achieved?
There is a real need to identify less expensive ways to manage liabilities. In exploring the deficiencies of the current strategies, we have concluded that in some cases it will be possible to save money within a given framework of objectives. There are alternative ways to achieve given environmental objectives, and some are more costly than others. The old cost-plus structure of the industry has encouraged an institutional structure and a decision process that have often led to the choice of expensive and capitalintensive options. This is particularly serious given the under-provisioning and potential for escalation in estimates that we have noted earlier. It is essential that greater cost-effectiveness is achieved in nuclear liability management. One way to achieve this is to identify less capital-intensive, simpler technological options. We have identified two examples of this:

  1. the possibility of storage of spent fuel prior to disposal rather than the separation of plutonium through reprocessing;
  2. the surface storage of wastes rather than early deep disposal.

The second way to improve cost-effectiveness is to make careful choices about the timing of specific technological options. An example is the 'postpone and research' option for intermediate level waste disposal, rather than a move to early repository construction. This appears to contradict the expectation that sustainable solutions should involve early action, but illustrates the value of good scientific information. While the postponement option is more cost-effective, realistic appraisal of the estimates suggests that the costs will still exceed industry estimates of the costs of early construction.

Earlier analysis in this summary considered the financial implications of alternative strategies on the implicit assumption that in other respects the impacts of the strategies were broadly equivalent. However, other impacts are involved, and it is important to evaluate comprehensively all relevant impacts - financial, health, environmental, security, institutional and political. When selecting a strategy for managing a particular liability, the selection process used must include a clear definition of objectives and a rigorous and comprehensive identification of possible options. For evaluation of options, an approach using multi-criteria evaluation (MCE) should be used where possible. Public participation needs to be made effective, including public access to all relevant information. There is a need for institutional change which establishes a key role for the public in the decision-making process.

Thus we conclude that, in addition to the inadequacy in provisioning and estimation of nuclear liabilities, the 1995 Government policy objectives of sustainable development and cost-effectiveness are not yet being properly implemented. In addition, the policy objectives seem unlikely to be better implemented in the near future, unless significant corrective action is taken.

It is recommended that the Government conducts a fundamental Review of the management of UK nuclear liabilities, in the light of the inadequacies in provisioning and estimation, and of the deficiencies in current management strategies. We have proposed and developed a framework within which such a Review can take place.

The Review and its associated framework should have the following characteristics.

  1. The framework must adopt the twin objectives of Government policy of sustainable development, including the polluter pays and precautionary principles, and of ensuring cost-effective solutions.
  2. Effective public participation should be ensured, including public access to all the relevant information. The Review should encourage institutional and cultural change which recognises the key role of the public in the decision-making process for the management of nuclear liabilities.

Then the following steps (c) to (h) would apply to each category of nuclear liability.

  1. There should be a clear definition of objectives, and a rigorous identification of possible options. Full regard should be given to technological and timing alternatives, and to the potential for identifying less complex and less capital-intensive options than are currently in use.
  2. For each option identified, the impacts - financial, health, environmental, security, institutional, and political - should be evaluated comprehensively.
  3. The financial description of each option will include the future streams of capital and operating cost, having taken into account possible escalations in cost, particularly for processes which are capital-intensive, and/or unproven, and/or very long-term.
  4. The selection process should include a systematic and transparent evaluation of the possible options. This evaluation should utilise where relevant an approach using multi-criteria evaluation (MCE). The chosen option should be the one which best satisfies the policy objectives in (a) above.
  5. For chosen options, there should be an equitable allocation between the public and private sector of the responsibility for managing the future liabilities. This should include equitable allocation of future costs and of risk-bearing.
  6. In both public and private sectors, secure arrangements should be made for future liability costs, ensuring an equitable allocation between current and future taxpayers.

In the case of British Energy, there should be an examination of the scope for extending the coverage of British Energy's Segregated Fund, and for increasing the company's annual payments to be consistent with growth rate assumptions appropriate to a sustainable development approach.

For those liabilities which either remain in, or are likely to revert to, the public sector, segregated funds should be set up so that the costs to future taxpayers are minimised, again using growth rate assumptions consistent with sustainability.

During the course of this paper we have referred to a number of liability issues which should be made subject to the Review process we advocate. These are:

  1. the possibility that AGR and Magnox spent fuel might be dry-stored, with the consequent possibility of early termination of the reprocessing of such spent fuel, and of avoiding the separation of further plutonium;
  2. the disposition of stockpiles of separated plutonium, including reactor and immobilisation options;
  3. the management of Intermediate and High Level Waste (ILW and HLW), covering surface storage and disposal options, including the possible incorporation of plutonium disposition options into HLW management strategies;
  4. the timing of decommissioning of nuclear power stations and of BNFL facilities.

Source and Contact: The full 165 page report 'Managing Nuclear Liabilities' is written by Mike Sadnicki and Gordon MacKerron and published by the Science Policy Research Unit, Sussex UK in November 1997. Copies (UKP20) are available from SPRU at +44-1273-678176.