By Gerard Wynn
LONDON Oct 30 Britain is edging closer to its
vision of low-carbon energy based on large-scale nuclear power
and fossil fuels with carbon capture, which contrasts with
small-scale renewable energy which many of its European
But it has yet to square investor demands for returns with
the massive capital outlay of large-scale plants, untested in
the case of carbon capture and storage (CCS), which implies
large subsidies through guaranteed higher power prices.
On Tuesday, the government announced that four proposed CCS
plants had passed the first stage in a competition for public
funding before a final decision expected next year.
And Hitachi announced that it had acquired a joint
venture from German utilities RWE and E.ON,
with plans to build up to six nuclear power plants in the 2020s,
adding to plans from France's EDF.
Britain's plans for new nuclear contrast with plans in
Germany, Switzerland and Belgium to phase out nuclear, and in
Italy, rejecting a new build programme, and France to downsize
And no other European country matches Britain's plans on
The country accounted for half the initial shortlist of
eight CCS projects competing for European Union funding,
published in July, and is all but certain to account for at
least one of the final two to three successful projects.
To make these investments possible the government will have
to be more transparent over the total annual cost to be levied
from energy consumers, and invest more in efficiency to stretch
more expensive electricity further.
Britain will announce its plans to overhaul its ageing
energy infrastructure in an energy bill next week.
It will propose to guarantee to pay the difference between
the variable wholesale power price and an agreed, fixed strike
price, under a contract for difference (CfD) scheme which
effectively sets a minimum power price for nuclear, CCS and
The CfDs will be set administratively (renewable energy) or
through direct negotiation with individual project developers
(nuclear and CCS).
At present, Britain's finance ministry already limits how
much money the Department of Energy and Climate Change (DECC)
can raise from energy consumers to pay for new electricity
generating capacity, under its levy control framework.
As DECC said in May, in an annex to its electricity market
"The Government is minded to instruct the System Operator to
only issue CfDs for low-carbon generation up to the value of the
amount set out in the Levy Control Framework."
The spending limit under the levy control framework rises
from 2.6 billion pounds in 2012/13 to 3.9 billion pounds in
2014/15, with no visibility thereafter.
Nuclear power and CCS plants currently seeking funding will
not be operational until the end of the decade at the earliest.
That raises several questions.
First, what will the spending limits be after 2015; second,
how will the government carve that subsidy between the various
energy technologies; and third, what rates of return will it
allow for investors, when calculating CfDs.
Without knowing these answers there is the danger either
that one technology or other will be favoured unfairly over
another, earning higher rates of return or gobbling up too much
of the available subsidy, or that energy consumers or the
taxpayer are eventually lumbered with much higher than expected
Under the process of agreeing subsidy rates, nuclear and CCS
will get a headstart before other technologies as the government
negotiates with these now, to speed up investment decisions.
That has led to concerns that they will grab the majority of
available funds, and over a lack of transparency over private
EDF is planning to take a final investment decision
on building twin Areva nuclear reactors at Hinkley
Point in southwest England by the end of the year, at which
point its agreed CfD will be announced.
There is no set timeline for publication of CCS CfDs.
Renewable energy CfDs will be announced by the end of 2013,
according to DECC.
There is no transparency over allowed rates of return as a
basis for negotiating these rates, in the draft, 307-page energy
bill published in May, which only says that these should be
"stable" and "reasonable".
The government may announce with its energy bill next week
its preferred mechanism for allocating subsidies between energy
technologies, for example by cost or capacity, but is unlikely
to flesh out details given uncertainty over the allowed budget.
Both coal CCS and new nuclear are massive projects whose
capital cost exceeds 3,000 pounds per kilowatt.
Private sector operators have published plans for up to 16
gigawatts of new nuclear power and about 4 GW of CCS in the
Assuming a 90 pounds strike price for all these (a very
conservative estimate) and a 60 pounds wholesale power price (as
reflected in 2015 UK forward prices), that would imply a 30
pounds subsidy per megawatt hour.
Applying such a rate to 20 GW of baseload power implies up
to 5.3 billion pounds levied annually (assuming constant power
plant operation) from energy consumers.
That is exactly double the allowed budget under the levy
control framework this year, and before accounting for renewable
energy and home efficiency which is projected to cost consumers
2.6 billion pounds this year.
Even after allowing for cost decreases over time, the
implication is that Britain is heading towards a large increase
in household spend on energy to meet binding UK and EU targets
for carbon emissions (in 2050) and renewable energy (2020).
That will require more transparency from government, given
the other calls on limited household budgets, and more
demand-side investment to ensure electricity generation goes