December 16th, 2014
in Op Ed
An experiment in liberalising power markets has been underway in the UK since the 1980s and three phases can be identified. The first ran from around 1989 to 1999, beginning with the privatisation of the generating industry and grid and ending by giving customers the freedom to shop around for their supplier.
When liberalisation proper started in 1999 the system was well supplied – even oversupplied – with generating capacity. So the next stage was one of cut-throat competition for market share. This led to a collapse in the wholesale price of power.
Another decade on and new problems emerged as power plants approached the end of their lives. Competitive markets are efficient at getting best value out of existing infrastructure but much less so at deciding when and how it should be replaced – especially when there is uncertainty about how much business coal and gas-fired plants will secure in an era where there are green energy targets to meet.
It still comes down to intermittency
The problem is that renewable power is not reliable enough to supply all demand, and is often least reliable in the middle of winter when most power is needed – the UK needs about three times as much electricity on a late January afternoon as on an early July morning. This means that to have security of supply, someone needs to build coal/gas/nuclear plants that offer enough reliable capacity to meet peak demand while knowing that for much of the year they won’t have a market at all.
On top of this, the economics of building new carbon-free power are very different from carbon-emitting power. Coal and gas-fired plants tend to be quicker to build and have relatively low capital costs – certainly in the case of the combined cycle gas turbine (CCGT) – but they are expensive to run. Markets prefer this: investors get their money back quite quickly and if the gas price surges, consumers have little choice but to pay the higher power prices that result.
By contrast nuclear power and renewables are expensive and slower to build though they use little or no fuel. Private investors find their capital tied up for longer periods of time without a cash flow. If the project runs over cost and time, as has been seen recently with a number of offshore wind farms, CCGT companies can pick up the business by having a new plant up and running in a couple of years.
To choose a mix or not?
So governments in the UK and elsewhere have faced real challenges. Do they stick to the market mantra, knowing that to do so they will need to transfer large portions of the risk associated with nuclear and renewables onto the consumer to prevent all investment going into CCGT? Or do they unequivocally renationalise the responsibility for plant mix (while still supporting a competitive market in operation)?
So far the answer has been the former. To persuade companies to build renewables, they are not expected to bear the costs of the hugely expanded grid necessary to support their output. When there is too much wind or solar being produced, threatening melting the wires or blowing electronic equipment, renewable generators also get paid to shut their plants down, a benefit not extended to any other players. On top of these enormous hidden subsidies, they also get guaranteed wholesale prices through the “Contracts for Difference” system – a subsidy from which nuclear benefit too.
Crunch point may be coming. Mitigating climate change is coming under threat from an alliance of Big Green and Big Sceptic. Both broadly agree that global warming is probably happening (Big Sceptic less enthusiastically than Big Green but there are very few who do not accept that carbon dioxide is a greenhouse gas). But in practice both argue that the costs of mitigating it are too high –- Big Sceptic focuses on the financial costs, while Big Green frets about nuclear’s environmental costs. (The complete lack of any criticism of increased greenhouse gas emissions in Japan and Germany as they shun nuclear power for purely political reasons is highly illuminating.)
If the fight against greenhouse gas emissions is abandoned under this twin attack from Nigel Lawson and the Greens, all bets are off. And don’t expect an explicit decision so much as a failure to change at the rate needed to meet the very long-term carbon reduction targets. A fracking revolution in Europe like the US one could then reduce dependence on Russia and Iran enough to make a second dash for gas (dwarfing the first) look acceptable.
On the other hand, if the concerns about security of supply and carbon emissions persist then nuclear power is in effect the only source which is both reliable and low carbon. (Two others come close – large dam hydro, which is not quite secure, and biofuels, which are not quite low carbon.)
This means that at least as far as the irreducible 20,000MW of power demand that exists throughout the year is concerned, nuclear is the obvious choice on economic grounds when all costs are concerned. It retains considerable support among British people – even more than before Fukushima, as people realise that in unimaginably stressful circumstance even 1970s nuclear technology did not release enough material to cause detectable health problems. The inevitable waste legacy from the experimental days in the decade or two after fission was discovered will be expensive to resolve but new plants have learned those lessons and volumes of waste will be much lower.
Two questions remain though – can the industry deliver to time and cost, and will the government abandon its attempts to persuade investors to carry out public policy at private sector rates of return and instead resume responsibility for the plant mix, allowing it to be carried out at public sector rates of return and slashing the cost to consumers? A yes to both would revolutionise nuclear power’s prospects and return it to its position as the only major technology that can be brought on line quickly. At this uncertain stage, the UK government’s deal over Hinkley Point C and its preliminary agreements over two other new nuclear builds are the only sensible course of action.
To get an alternative viewpoint on nuclear power, now read this piece.