1st Annual European Energy Policy Conference, Brussels

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• 1st Annual European Energy Policy Conference,
  Brussels
• Nuclear Energy Economics vs Pragmatics
• A Viable Option For The Future of Liberalised
  Energy Supply in Europe?
• Ian Jackson
• November 29th, 2005

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• Key Themes
• A realistic assessment of European prospects for
  nuclear power and its pros and cons.
• British experience of nuclear powerwithin a
  fully liberalised energy market.
• Market interventions necessary for the economic
  development of nuclear power in a free market.
• Nuclear as an enabling technology to help future
  development of renewable energy sources.

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• A Small Investor's View
• "As someone who invested 1,000 (1,460) in
  British Energy and received for my pains 1.75
  (2.55) back the nuclear industry has got
  tocome up with more convincing figures than
  these to get anybody to invest."
• Mr Roy Winter, The Times, September 14th, 2005
• BE restructuring was completed in January 2005
  and BE relisted on LSE(FTSE 250). Current BE
  share price approx 4.65 (6.80) November 2005.

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• A Prime Minister's View
• "Tony Blair today indicated publicly for the
  first time that he will support building new
  nuclear power stations to meet Britain's future
  energy needs. The Prime Minister told MPs
  that there was fresh impetus to build a new
  generation of reactors because the facts have
  changed over the last couple of years".
• Mr Simon Freeman, The Times, November 22nd, 2005

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• What's Changed Politically?
• Global warming. Carbon dioxide emissions fromoil
  and gas regarded as the prime suspect.
• Gas dependency. Originally self-sufficient from
  North Sea gas, the UK has become a net importer.
• Security of supply. Traditional British
  nervousness about security of gas supplies from
  Europe.
• Price volatility. By 2010 the UK electricity
  market is expected to be 60 dependent on gas,
  coupled with worries of gas price volatility and
  pricing trends.

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• What's Changed Economically?
• Liberalised markets can mean high prices as
  wellas low - the ebay effect where best price
  wins.
• 2003 Energy White Paper assumed maximum wholesale
  peak gas prices of 0.30p/therm.
• By early 2005 wholesale gas price rises
  hadactually reached peaks of 0.40p/therm.
• Last week Nov 22nd, during first cold spell in
  UK, wholesale gas prices jumped 40 to
  1.70p/therm, five times the average gas price
  during 2005.

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• What's Changed Structurally?
• Within the next 20 years nearly all of Britain's
  existing nuclear power stations will be
  shut-down.
• Britain will lose 20 of its electricity supply.
• The hope is that renewable energy - mainly wind
  and wave power - will fill the nuclear energy
  gap.
• But last year renewables delivered just 3 with
  intermittency problems limiting grid capacity to
  10.
• Intermittency of wind and wave generation beyond
  10 risks knocking-out the electricity supply
  grid.

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• What Hasn't Changed?
• UK energy market remains liberalised.
• Private sector delivery of electricity supply.
• No government funding for nuclear power.
• No state aid subsidy for nuclear power.
• No carbon credits for nuclear power.
• Strategy relies on private sector investors to
  finance construction and operation of new nuclear
  stations.

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• Nuclear Liberalisation in Britain
• Margaret Thatcher Conservative Government.
• Energy market liberalisation began in 1982
  designed by Energy Minister Nigel Lawson.
• Energy Act 1983 set out a framework to introduce
  gradual competition to energy supply markets.
• British Gas privatised 1986, British
  Petroleum1987, National Power 1990, National
  Grid 1990.
• British Energy (BE) privatised 1996, nuclear last
  sector of the UK energy market to be privatised.

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• How Has Nuclear Performed?
• Mixed performance in liberalised energy market.
• 10 years since privatisation (1996-2006).
• 7 AGRs plus 1 PWR 1,200 MW reactors generating
  20-24 of UK electricity over past 10 years.
• BE stock raised 2.1 billion (3.1 billion)
  from1996 initial public offering IPO public
  flotation.
• But UK government had to grant 450 million(658
  million) emergency state aid to BE in 2002.
• Stockholders lost 87 of the value of their
  shares.

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• What Went Wrong at BE?
• Homeowners and businesses allowed to choose
  electricity supplier from June 1999.
• Severe NETA competition forced wholesale market
  prices down to the marginal cost of generation.
• Price reductions of 10-15 were expected but
  electricity prices actually dropped 40.
• BE locked into expensive reprocessing contracts
  with BNFL equivalent to 25 of BE operating
  costs.
• BE financially restructured, government now owns
  majority equity (effectively has renationalised
  BE).

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• Upsides of Nuclear Power
• Important to say that despite economic
  problemsBE continued to reliably supply power in
  Britain.
• Nuclear is an excellent baseload supplier, andat
  certain times - night time and summer - BE
  produces most of the electricity used in Britain.
  
• Nuclear remains an important source of low carbon
  energy and must remain an option for anybody
  serious about global warming and climate change.

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• Downsides of Nuclear Power
• Ability of nuclear accidents to deliver shocks to
  energy supply markets, damaging confidence.
• No experience of financing and building
  newnuclear reactors in a liberalised energy
  market.
• Uranium stockpile limited to 10 year supply. New
  cycle of exploration-exploitation-production
  needed.
• High capital costs of nuclear build mean that
  nuclear option is largely a 60 year gamble on
  interest rates.
• Locks governments into a 100 year energy
  lifecycle (10 yr build 60 yr operate 30 yr
  decommission).

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• Household Retail Preferences
• Not much nuclear power sold to UK household
  consumers, roughly 10-15 of electricity mix
  compared with UK average of 20.6 nuclear.
• Mainly because British Energy does not have a
  vertically-integrated retail supply outlet
  business(i.e. BE does not sell directly to
  households).
• And market research shows that 40 of household
  consumers are strongly anti-nuclear anyway.

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• Industry Wholesale Preferences
• Most UK nuclear power sold to large industrial
  consumers who need reliable baseload generation.
• Industry consumes roughly 40 nuclear electricity
  mix compared with UK average of 20.6 nuclear.
• British Energy sells wholesale directly to
  industry, big consumers the most natural market
  for nuclear.

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• Implications for Europe
• Viability of nuclear power in a liberalised
  European energy market will depend on several
  factors.
• Design of the market structure and supply chain.
• Availability of private sector finance for
  utility companies and especially new nuclear
  build.
• Ability to negotiate bulk long-term energy supply
  contracts between producer and consumer.
• Carbon credits for nuclear power withinthe EU
  Emissions Trading Scheme (ETS).

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• Viability of nuclear is linked to EU
  manufacturing trends, especially outsourcing to
  China, India, Asia.
• Possibility of long-term trend in the decline of
  European manufacturing base, if Europe gradually
  shifts towards a knowledge-based economy.
• A smaller number of large industrial consumers of
  electricity would result in a corresponding
  decline in market demand for baseload nuclear
  power.

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• Financing New Nuclear Build
• Best example is new Framatome 1600 MW EPR under
  construction at Olkiluoto 3, Finland.
• Financed by a consortium of energy intensive
  users with advance contracts under the company
  TVO.
• 60 year reactor lifetime, 92 plant
  availability,3 billion capital cost, delivering
  power by 2009.
• However not much real experience in EU of nuclear
  power operating in a liberalised energy market
  yet.
• In Britain the private sector is wary about
  investing after previous British Energy share
  price losses.

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• Need for Carbon Credits in ETS
• If EU is serious about combating global warming
  then we need a mechanism to include nuclear
  within the new EU Emissions Trading Scheme (ETS).
• EU harmonisation is about creating level playing
  fields for competition across Europe, but at
  present nuclear is disadvantaged against gas and
  coal.
• But nuclear generation is so hugely carbon
  efficient that it would distort the ETS trading
  market.
• Also must be careful to avoid nuclear stifling
  investment in renewable energy technologies.

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• Price of Nuclear Carbon Credits
• Carbon prices in ETS currently 20-25/tCO2.
• Single nuclear power station would generate
  about8 TWh/yr producing 32 thousand tonnes CO2.
• Gas power station generating 8 TWh/yr electricity
  would produce 3.5 million tonnes CO2.
• Coal power station generating 8 TWh/yr
  electricity would produce 7.6 million tonnes CO2.
• A nuclear power station saves 3.5-7.6 million
  tonnes carbon, worth between 70-190 million/yr
  in ETS.

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• Nuclear Enabling Renewables?
• Europe needs both nuclear and renewables to help
  minimise emissions and combat climate change.
• Worrying possibility that next 10-20 years could
  be the critical tipping-point before runaway
  global warming is triggered (environmental
  overshoot).
• Nuclear is really an interim enabling
  technology- something which helps achieve
  something else more important - preventing
  climate change.
• In essence new nuclear stations could help buy
  time for renewable output to catch-up with gas
  and coal.

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• Regulatory-Driven Costs
• Understandable public concern about nuclear
  safety after accidents at Three Mile Island
  (1979) and Chernobyl (1986) and Davis-Bess
  near-miss (2002).
• Public acceptance - or at least non-rejection -
  is a vital requirement for success of nuclear
  power.
• Regulatory safety ratcheting is really the public
  expression of difficulties with public
  acceptance.
• Some truth in nuclear industry concerns that
  regulation and regulatory ratcheting increase
  costs.

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• But not so much the regulatory measures
  themselves - cost increases are really driven by
  the impact of time delays from regulatory due
  process.
• For example US nuclear plants built in early
  1970s cost 170 million whereas similar plants in
  the early 1980s cost 1.7 billion - 10 times more
  expensive.
• Why? - Construction times were much longer
  increasing from 7 years to 12 years, partly
  driven by regulatory delays and regulatory
  uncertainty.
• Reform of the nuclear licensing framework is
  essential to overcome these financial problems.

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• International Nuclear Licensing
• Ideally would want a simpler, faster,
  single-stage planning and licensing process for
  new build.
• For example combined construction permit and
  operating licence process developed by US NRC.
• Multi-National Design Approval Programme MDAP
  international licence proposed by NRC for OECD.
• At EU level already French-German-Finnish
  collaboration on harmonised EPR safety standards.

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• Two-Speed Nuclear Licensing
• Sensible to decouple timing of reactor licensing
  from waste storage-repository licensing (new US
  reactor licenses not linked to Yucca Mountain
  availability).
• Accelerated reactor licensing is justified
  because reactors are not permanent installations
  (lifecycle60 years operation 30 years
  decommissioning).
• Slower progressive licensing for waste storage
  repository is justified because facility might be
  permanent for all time (probably a million years).

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• Conclusions
• A limited replacement programme of new nuclear
  build is likely in the UK. PM Tony Blair expected
  to announce an energy review this week reaching
  policy conclusions on new nuclear by July 2006.
• The major sticking point (from an economic
  perspective) will be financing. Some new market
  incentives will be needed to encourage
  investment.
• The private sector will be very wary about
  investing after previous British Energy share
  price losses.

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• Europe needs both nuclear and renewables to help
  slow-down the worst effects of global warming.
• Some modification of the new EU Emissions Trading
  Scheme may be needed to incentivise nuclear
  investment, ideally via carbon credits.
• It is unclear how nuclear will fare in a
  liberalisedEU energy market. Higher gas prices
  mean a UK style dash-for-gas seems unlikely in
  the short term.
• Choosing nuclear is largely a bet on
  sustainedlow interest rates in the future, while
  choosing gas is largely a bet on sustained low
  gas prices.

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• Reference Sources
• Financial Times. November 2005.www.ft.com
• The Times. November 2005.www.timesonline.co.uk
• The ENDS Report. October 2005.www.endsreport.com
• Nuclear Engineering International. September
  2005.www.neimagazine.com
• National Audit Office. February
  2004.www.nao.org.uk

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• Further Information
• A free library of nuclear energy reports and
  nuclear policy resources is available from
• http//www.jacksonconsult.com