21 January 2021

Bridging the gap: the urgent case for new nuclear investment

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At the tail end of last year, the Government released a flurry of documents on its plans to tackle climate change. 

The Energy White Paper detailed how to power the Net Zero economy of the future, while the National Infrastructure Strategy fleshed out ideas to deliver the assets needed. Before that, the 10 Point Plan for a Green Industrial Revolution set out both proposals and targets for decarbonising various industries, and a Treasury report analysed how the current policy landscape is either helping or hindering efforts to clean up the economy.

As the second biggest emitting sector in the British economy, responsible for 23% of greenhouse gas emissions, decarbonising energy supply will be critical to achieving Net Zero. There’s been plenty of progress here already, with emissions down 62% compared to 1990 levels. A number of factors have driven that impressive change, but two stand out:

First, electricity in Britain is now markedly less polluting. This is explained by the growth of renewables (which now generate over a quarter of Britain’s electricity) and the corresponding demise of coal (now a mere 2%). As a result, in 2012, each kilowatt of electricity generated resulted in the emission of 507 grammes of carbon dioxide – but by 2020, that figure had fallen to 169gCO2/kWh.

Second, Britain is simply consuming far less electricity than it once did, thanks to more efficient appliances, lightbulbs and other gadgets. In fact, electricity consumption peaked in 2005 and has been trending down ever since – with consumption levels now equivalent to those seen in the mid-1990s, despite a bigger economy and a bigger population. 

Taken together, one might therefore expect the energy supply’s journey to Net Zero to be reasonably straightforward. Renewables will grow their share of generation further, consumption will continue to shrink, and, so the argument runs, emissions will dwindle to nothing. While few would bemoan such a future, in all likelihood it will not be forthcoming.

Though renewables have made great strides, they still have their drawbacks. Perhaps the biggest obstacle to renewables is the perennial question of how to store the electricity they produce, so that the lights stay on when the wind isn’t blowing and the sun isn’t shining. Like renewables, battery technology has come on leaps and bounds – and by all accounts will only continue to improve – but even renewables’ biggest cheerleaders accept that they are not yet ready to provide the seasonal storage when demand is at its highest and renewable output is at its lowest. Analysis in our new Centre for Policy Studies report shows how wind and solar provided less than 20% of daily electricity demand on 82 separate occasions in 2020, including a period of over a week in August and a week in November.

Moreover, the trend of falling electricity consumption will soon go into reverse – as the electrification of transport, heating, and industrial processes accelerates. Any future efficiency gains will be more than offset by this rising demand, and if Britain is to adequately meet it, we need to have the capacity on hand to produce enough electricity. 

To that end, the Government has thrown its weight squarely behind nuclear power – with a goal of bringing at least one large-scale project to the point of Final Investment Decision by the end of this Parliament. One nuclear power station – Hinkley Point C – is already under construction and others have been mooted, but the best laid plans have often crashed against the distinct challenges of financing such projects.

Nuclear power stations are expensive and complicated, which makes the cost of capital extremely high, even when the state steps in to agree guaranteed prices for the electricity they will eventually generate. To overcome this, the Government has shown interest in using a so-called Regulated Asset Base (RAB) model to leverage private finance into energy infrastructure.

Under a RAB model, nuclear developers could levy an independently regulated charge on electricity users in exchange for building a nuclear power station. Importantly, the charges would come into effect before electricity generation commences, which reduces the risk involved, and thus the cost of capital for investors. In theory, those cost savings should ultimately trickle through to consumers in the form of cheaper electricity.

Yet, the RAB model is not without its detractors. Some have likened the way it allows developers to charge consumers ahead of time to a blank cheque – something which only becomes more problematic when one considers the nuclear industry’s patchy record on delivering projects on time or in budget. 

Certainly, this is a valid criticism. But, as we explain in our new report, there are ways of stopping the worst-case scenarios coming true. Caps on what consumers or taxpayers might have to pay if costs do overrun should be engineered into any final deal. Project transparency should be insisted upon, to allow for scrutiny from parliamentarians and other bodies. Finally, an objective and rigorous value-for-money assessment will be paramount – ideally considering only how a deal might influence future energy costs and progression towards climate goals (and not the hypothetical and easily manipulated ‘economic benefits’ that some have called for).

There’s also a case for the RAB model only being used for projects which are exact or very near replicas of existing plants, as opposed to riskier ‘first of a kind’ plants.

Britain’s energy system is something of a curate’s egg. It has decarbonised hugely, and yet is in a strange situation whereby the failure to make decisions in the recent past has put the current government in an unenviable position. It must simultaneously balance an ambition for deep decarbonisation against security of supply, without breaking the bank for consumers or taxpayers (or indeed putting a cap on economic activity). 

Nuclear – financed with a RAB model – could spell the way out of that energy conundrum. The Government is right to give it a fair hearing.

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Eamonn Ives is a Researcher and the author of Bridging the Gap, a new report published today by the Centre for Policy Studies.