COLUMN-British nuclear embrace fails to convince: Wynn

Mon Oct 21, 2013 10:50am EDT

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(The author is a Reuters columnist. The opinions expressed are his own)

By Gerard Wynn

LONDON Oct 21 (Reuters) - Britain's investment in new nuclear power is a result of a previous decision to limit the country's options, and depends on an argument for energy security that fails to convince.

Britain has ruled out new coal power and adopted tough carbon emissions targets as well as a carbon tax on energy, given concerns about climate change.

In addition, European Union pollution curbs on sulphur and oxides of nitrogen require the imminent closure of several of the country's existing coal-fired power plants.

That has created a dependence on gas and low-carbon power.

Britain's Department of Energy and Climate Change (DECC) on Monday outlined the details of a commercial agreement with French state utility EDF to build the UK's first new nuclear power plant since 1995, to be commissioned in 2023.

The agreed contract of about 90 pounds ($150) per megawatt-hour should not be compared with the wholesale power price, which records only operating costs including those from subsidised wind and solar power, which have zero fuel costs.

It should instead be compared with the calculated, full cost of power generation, including capital and operating costs.

In those terms, the contract appears competitive with renewable power but is more costly than gas.

Nuclear has the advantage over gas that it is less carbon-emitting, and over wind and solar power that it is baseload, available on demand rather than according to the weather.

But that is before taking into account the cost of radioactive waste, for which Britain still has not identified a long-term disposal site after a tentative agreement with a local council in northwest England recently collapsed.

And the government does not appear to account for the alternative of building sub-sea interconnectors, with which Britain could instead tap lower wholesale power prices in Germany and Scandinavia.

CASE

Britain committed to building a new generation of power plants long before the Fukushima disaster in 2011.

Then-Prime Minister Tony Blair in 2006 reversed his previous opposition to nuclear power, declaring that the pressures of climate change, rising fossil fuel prices and energy security meant nuclear had to be "part of the debate".

The same arguments are used by the present coalition for the proposed nuclear plant at Hinkley Point C in southwest England.

"Once built, it will provide a clean source of home-grown energy, helping to keep the lights on, cut emissions and reduce consumer bills over the long term," DECC said in a statement on Monday.

Fukushima has in one way improved the case for nuclear power, by boosting the international price of liquefied natural gas (LNG) after Japan shuttered its nuclear fleet.

British wholesale, day-ahead gas prices have climbed 16 percent since March 11, 2011, the day of the earthquake and tsunami that led to the disaster.

COST

Monday's announcement was thin on important details, such as the rate at which the operator will be compensated when its electricity is not required, for example when demand is weak.

"This deal is competitive with other large-scale clean energy and with gas," Energy Secretary Ed Davey said.

The government would support the new plant with a power purchase agreement for 92.5 pounds per megawatt-hour, in present prices, over 35 years and fully index-linked.

The price would fall to 89.5 pounds per MWh if EDF built additional British nuclear power plants at a lower cost.

According to government figures and analysis, published in July, that is higher than the expected cost of generation from gas-fired power commissioned in 2020 (82 pounds), but cheaper than all forms of renewable power (100-123 pounds). (Chart 1)

That analysis may be unduly pessimistic about the rate of decline in the cost of renewable power.

For example, it estimates that the full installed cost of large-scale solar in Britain will fall 22 percent by 2020, while small-scale, rooftop prices have fallen 80 percent over the last decade in Germany, according to a recent European Commission research report.

CHEAP IMPORTS

DECC does not account in its cost rankings of energy technologies for the option to build sub-sea interconnectors to other countries.

Britain has among the highest wholesale power prices in Europe. (Chart 2)

Winter 2014 power prices in Britain on Monday were trading at around 55 pounds ($89) per MWh, compared with German 2014 prices of 38 euros ($52).

The combination of high gas prices and low power prices has seen German utilities mothballing loss-making gas-fired power plants.

Britain could exploit the situation and offer a long-term power purchase agreement to keep German gas plants operating.

"The UK's 'energy island' strategy for security of supply is not practical in light of excess power capacity across the EU," argued the UK-based corporate advisory firm Alexa Capital in a report published on Monday, "UK energy in perspective: is there a better way forward?".

"We ask whether British business and consumers would not be better off contracting for a greater proportion of electricity from interconnection."

The cost of building an interconnector would add only a few euros per MWh to the cost of importing electricity.

The full cost of buying electricity from German gas plants would probably therefore be cheaper than the new nuclear deal, without the worries of radioactive waste disposal.

It may have been better for Britain to invest in new subsea cables and pick up the phone to E.ON and RWE , not EDF. ($1 = 0.6178 British pounds) ($1 = 0.7302 euros) (Editing by Dale Hudson)

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