Germans give up on UK nuclear
The two German utilities, E.ON and RWE, have announced they have decided not to proceed with plans to develop their UK joint-venture, Horizon Nuclear Power. Instead they will look for a buyer for Horizon, which was planning to develop up to 6.6GW of new nuclear capacity across two sites – one at Wylfa on the island of Anglesey in Wales and the other at Oldbury in Gloucestershire, South West England.
RWE said the global economic crisis has meant that capital for major projects is at a premium and nuclear power projects are particularly large scale, with very long lead times and payback periods. The effect of the accelerated nuclear phase out in Germany has led to RWE adopting a number of measures, including divestments, a capital increase, efficiency enhancements and a leaner capital expenditure budget. A combination of these strategic factors, together with the significant ongoing costs of running the Horizon joint venture, has led to a situation where capital investment plans have been reviewed. E.ON says in the UK, it will now focus on projects that will deliver earlier benefits, rather than the very long term and large investment new nuclear power calls for. Nevertheless E.ON and RWE both say they believe that for the right company Horizon remains an attractive project.
Despite promising that it would not subsidize new nuclear stations the UK Government has been working to implement an Electricity Market Reform program, which former Government advisor and Friends of the Earth Director, Jonathan Porritt describes as “…rigged in order to support nuclear power … at great cost to UK consumers, UK businesses and the long-term interests of the entire nation… the Coalition Government’s continuing pledge that any new nuclear programme will not get any additional public subsidy is now palpably dishonest”.
According to one Labour MP, Alan Whitehead, a member of the House of Commons Energy and Climate Change Committee, what the Government is trying to do is to design a subsidy system without incurring any action on ‘state aid’ from the European Commission. But even the promise of subsidies was not enough for E.ON and RWE. Keith Allott, head of climate change at WWF-UK, said: "Despite the Government's efforts to bend over backwards to support the nuclear industry, it is now blindingly clear that the economics just don't stack up.” And Greenpeace's policy director Doug Parr said: "The Government's energy strategy is crumbling. Not even the billions of pounds of taxpayers' money they have offered as incentives to the German and French nuclear industry are enough to make a new generation of power stations economically viable.”
UK Energy Minister Charles Hendry attempted to play down the significance of the decision, insisting that it was based on pressures on the two Companies in Germany and not on any doubts about the role of nuclear in the UK. He claimed that Horizon represents an excellent ready-made opportunity for other players to enter the market. Whitehead says this idea is ‘whistling in the dark’ – it is pure whimsy. There are no new players. There are two other consortia already involved in the UK nuclear program. EDF Energy and Centrica are looking at building two EPR reactors at both Hinkley Point in Somerset and Sizewell in Suffolk. NuGen – a consortium made up of GDF Suez and Iberdrola are planning up to 3.6 GW at a site called Moorside adjacent to Sellafield.
The Nuclear Industry Association says it fully expects a new consortium to come forward for the “viable” project. A number of investors and utilities are already said to be talking to each other about forming consortia to bid for Horizon. For some time, these potential buyers, who are geographically spread from Europe to Japan, have been looking to take stakes of 10-30 per cent in Horizon. All that has changed is that they now have to buy the whole venture.
Speculation about who might be persuaded to buy Horizon and progress the idea of building new reactors at Oldbury and Wylfa seems to range across the whole global nuclear industry. EDF says it has enough on its plate with building four EPRs at Hinkley and Sizewell without taking on Horizon. Vattenfall has been mentioned. The NuGen consortium Iberdrola and GDF Suez might be interested – their current site adjacent to Sellafield is a long distance from large populations centers and needs expensive new grid connections that might have to cross national park land, and it is recently emerged that mineral rights on the site are owned by someone else who wants to be paid for them. NuGen is saying publicly that it is not pursuing an interest in Horizon, but privately saying there is a “fair chance” it will look at what’s on offer because of the complications at Sellafield.
The Daily Mail (March 31 issue) was virtually apoplectic about the possibility that the Russian company Rosatom might be a potential buyer. It said the company is known to have been looking for a way into the UK for a while. Under a picture of Chernobyl the right of center daily says Government dilly-dallying has opened the floor to a bid from the Russian firm that built Chernobyl. “No one with an ounce of common sense could be entirely comfortable with that prospect.”
The Financial Times (March 29) says sovereign wealth funds and Asian utilities are seen as possible buyers. According to the Lancashire Evening Post (April 2) the Government is talking with global sovereign funds in the Middle East and Far East about buying Horizon. According to The Express, Toshiba/Westinghouse is considering teaming up with GDF Suez. This could mean the construction of up to six AP1000s across the two sites. GE Hitachi is also said to be interested.
Some sort of consortium involving Westinghouse and funded by sovereign funds is perhaps most likely because the cancellation of these reactors would be a big blow to Westinghouse. The Company has been waiting for months for a decision from Horizon about which reactor design it would choose in the hope that its AP1000 reactor design would be selected. Many in the industry had assumed Horizon would choose Westinghouse, and the Government hoped to have two suppliers. But recent reports have hinted that Horizon might plump for Areva’s EPR giving the French - in the short-term at least - a monopoly on new British plants. The delay in the announcement by Horizon about its reactor choice was due at least in part to lobbying by Westinghouse, allegedly with officials from the US Embassy in tow. The reactor builder has even taken legal advice over whether it could mount a legal challenge on European competition grounds should it lose out to Areva in the Horizon bid. So the row threatened to develop into a full-blown legal confrontation.
The concern now is that, if no buyer is found, it will put EDF in an alarmingly powerful position. EDF is planning to make its investment decision about whether to go ahead with the first new nuclear station at Hinkley Point at the end of this year. The decision will hinge on whether the incentives the UK Government is prepared to countenance are large enough. As a result the French state-owned EDF will have the UK “over a barrel”. The current path will see the UK pay a French state-owned company to build new nuclear plants on what is effectively a “cost-plus contract.”
The UK Government is planning to introduce a new Energy Bill in Parliament in May which will include provision for a kind of feed-in tariff for nuclear known as a “contract for difference” which will guarantee nuclear electricity receives a certain price. That price is yet to be determined.
In a briefing note to Prime Minister David Cameron four former-Directors of Friends of the Earth argue that the Energy Bill will have significant implications for the future cost of electricity. It will replace our current liberalized market with one that is much more heavily planned and regulated, which is difficult to reconcile with the Government’s commitment to deregulation. They say even EDF cannot finance new nuclear in Britain on its own balance sheet and will rely on an implicit guarantee from the French and UK Governments to lower its cost of capital. The four former directors estimate that the Contracts for Difference Feed in Tariffs will provide a subsidy of £63 - £75 billion to EDF over the next 35 years –around £2bn (US$ 3.2bn or 2.4bn euro) per year.
Of course many of the same economic forces which made the German utilities to pull out will apply to all the other companies as well. The unfavorable attitude of the ratings agencies towards nuclear power, for instance, stems largely from the scale of investment required, together with future uncertainties surrounding power prices. The risks are writ larger when you think of a nuclear project compared with other forms of generation, because construction and planning is that much more tortuous, construction risk is higher and from an operational point of view they have a high fixed cost base. Moody's pays particular attention not only to nuclear power but to any large capital investment projects where the financial risk profile of a given utility may be affected by whether or not the project is completed on time and on budget.
Anglesey-based People Against Wylfa B spokesman Dylan Morgan said: “Now rather than focus on the fantasy that another consortium will come in [the Government] should follow the German lead and ditch nuclear altogether.”
For further information: NuClear News No.39, April 2012, available at http://www.no2nuclearpower.org.uk/nuclearnews/index.php
Source and contact: Pete Roche