Ed Davey MP writes … There will be no public subsidy for nuclear

Liberal Democrats were at pains in the negotiations for the coalition to insist that if nuclear power stations were to be built in the UK that there should be no public subsidy. This position was reiterated by Chris Huhne in a statement to the House of Commons on October 18th 2010 as reported in his article on Lib Dem Voice. So I would  like to allay Fiona Hall concerns expressed on Lib Dem Voice yesterday by clarifying that there has been absolutely no change in this position.

As Chris Huhne outlined in October 2010 this means that “there will be no levy, direct payment or market support for electricity supplied or capacity provided by a private sector new nuclear operator, unless similar support is also made available more widely to other types of generation.”

One of the characteristics of low carbon generation of electricity is that there tend to be high upfront capital costs of building the generator capacity and then low marginal costs of producing the electricity. Currently there is much caution from investors and considerable competition worldwide for investment in the power sector. This is  at a time when there is a huge demand for new investment – some estimates are of a £110 billion investment requirement in the UK in electricity generation and transmission by 2020, which is double the current rate. So a high value is placed by investors on a degree of price certainty. That is as true for renewable generation such as onshore and offshore wind as it is for nuclear generation.

The  purpose of the Contracts for Differences which Fiona refers to in her article are to provide that greater price certainty in the period of transition towards a low carbon energy future, when investment requirements are so high. I want to make clear, just as Chris Huhne did, that this means that nuclear will not receive a higher price than comparable generation technologies whether they be renewables or indeed gas generation once its emissions have been abated by carbon capture and storage. There will be no public subsidy of nuclear generation.

The Liberal Democrats have always been greenest of the main parties in Britain. Indeed it was that which first led me to join the party. We face many challenges in securing our goal of an 80% reduction in our carbon emissions by 2050. Liberal Democrats should be under no illusion that there are some climate change sceptics who are campaigning vigorously through the media and in Parliament to knock us from this path. Liberal Democrats can be assured that I will be working my hardest to ensure that that does not happen.

* Ed Davey was the MP for Kingston and Surbiton and Secretary of State for Energy and Climate Change.

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22 Comments

  • jenny barnes 20th Apr '12 - 11:30am

    You don’t actually explain how this “Contracts for Difference” actually works, so I remain sceptical that it is still probably some sort of subsidy; also, you fail to explain how you can stop companies walking away from their clean up responsibilities. I am in favour of nuclear power, but it seems to me that the taxpayer is committed to the decommissioning costs; government can borrow money at relatively low rates, so the sensible thing to do would be to build them as a nationalised industry. British Nuclear Power has a nice ring to it. Commercial interests will just build gas as the cheapest and most flexible fuel. There would be no need to provide price guarantees if the government were taking the risk; and effectively what you’re proposing , once again, is the privatision of profit while the taxpayer bears all the risks. Which seems daft – and we’ve done rather too much of it lately.

  • If there is an oil spill as a result of fossil fuel dependency – what cap does this Government propose placing on the companies liability? And what level has the Government capped liability for an equivalently damaging accident at a nuclear station? As I understand it, nuclear gets its damages heavily limited – after that they are paid by taxpayers.

    In the Energy Act 2011, your party voted to curtail the powers the Secrtary of State had to amend agreements with nuclear companies about how they dealt with and paid for decomissioning and waste. In the past had these costs been higher than expected, the Government could have insisted companies make additional money available, or change waste their practice in order to meet any new safety requirement deemed necessary. Thanks to this Government, Ministers can now only make new requirements if the nuclear company agree. This was done to reduce investor risk – but it doesn’t destroy the risk, it just passes it onto taxpayers, as it is highly likely to lead to nuclear companies only agreeing new practices if reimbursed with taxpayers money.

    How about the carbon floor price? It will lead to higher wholesale prices of electricty meaning nuclear (and other low carbon generation) can put their prices up and gain a windfall profit. This additional profit generates no public good, no new capacity is built, no carbon emissions reduced – this is a reward for wimply alredy owning low carbon generation that was viable anyway. The Government should claim this money back through a windfall tax on the generators – whether they be wind, hydro or nuclear generators. Nuclear will make most because they happen to have more capacity as a result of past decisions – that Government will not claim the money back looks suspiciously like they are happy to bung money back to nuclear generators in the hope it subsidises new build. There is no guarantee it will (it could go on bosses bonuses).

    There are other effective subsidies too – nuclear security etc – but I list these three in more detail because they are decisions this Government has already taken, not accidents of history. The promise to offer no subsidy to nuclear is not worth the paper it is written on.

  • Terence Darby 20th Apr '12 - 2:17pm

    If anyone has ever wondered what a minister being captured by his officials looks like, this is it. Somehow DECC has convinced Ed Davey that CfD FiTs are not a subsidy, merely some ingenious device that provides nuclear power with a level of insulation from the wholesale market. The way they work is that a utility (i.e. one of the Big Six) will provide a guaranteed price for electricity from a nuclear plant, in return for some kind of rent from the Government. The latter part hasn’t been worked out by DECC yet, as they haven’t figured out a way to pay someone to do something that doesn’t look like a subsidy, because there isn’t one. The contracts will be awarded by DECC on a six-monthly basis to particular generators. Somehow this is not ‘picking winners’.

    The ‘vision’ associated with CfDs is of an energy market in which the majority of electricity is not actually traded, and our generation mix in terms of technology is determined by DECC. This is de facto nationalisation in all but name, with the regulated companies the Big Six will become dominating our electricity market for the forseeable future, forstalling any attempts at increased competition.

    I cannot believe the classical liberal Ed Davey wants this to happen.

  • Paul Pettinger 20th Apr '12 - 2:51pm

    This is pretty duplicitous and feeble stuff Ed, and goes against the common understanding of the Coalition Agreement. It is also a betrayal of the environment, as so much energy from non-renewable sources is used in the mining and processing of uranium. However, it is analogous with the banking crisis – nuclear needs to be propped up by ‘fixing’ the price for its energy that society pays, while the carbon footprint appears on other countries spreadsheet. This is the policy of civil servants, not the Liberal Democrats. Very disappointed.

  • It seems almost incomprehensible that we have got to a stage where we are proposing to grant monopolies at guaranteed prices to private companies for nuclear power generation, with the financial risks and liabilities ultimately underwritten by the state.

    Time is running out for the commissioning of serious levels of power generating infrastructure. There is no near term alternative to the rapid development of new nuclear power stations. An ideological fixation on private sector build over public sector development is irrelevant. Plant build costs pale in comparison with where we are.with legacy decommissioning and waste management costs .

    With our massive stockpiles of plutonium and nuclear waste Fast breeder reactors and potentially the Liquid Fluoride Thorium Reactor looks like no brainers.

    The new generation plants should be commissioned and built by the state. They can then be leased to the private sector on the basis of a commercial revenue sharing agreement and their generating capacity, on terms compatible with other forms of low-carbon electricity supply.

    The production of nuclear waste needs to be greatly reduced not continued as before with the massive clean-up costs being passed on the public in ever higher energy prices or general taxation. If there is one area where we desperately need some joined-up thinking and bold government initiatives, it is in future energy supply.

  • Richard George 20th Apr '12 - 3:57pm

    I’m the nuclear campaigner at Greenpeace.

    I was wondering what the Minister made of this article in the Guardian, which includes a leaked copy of the submission to the European Union that seeks clearance for the CfD FIT proposals?

    http://www.guardian.co.uk/environment/2012/apr/20/coalition-u-turn-nuclear-energy-subsidies?intcmp=122

    If it looks like a subsidy, walks like a subsidy and quacks like a subsidy, then why is DECC saying that it isn’t a subsidy?

  • Stephen W

    That is both over emotive and wrong. I can’t speak for others, but I want subsidy to be spent on new technologies that need a helping hand at the start. With the best will in the world, nuclear has had subsidies for decades and not delivered. I don’t want to “stiff” anything, I’m just being practical about where we have got to and don’t want to throw good money after bad. By contrast renewables are showing dramatic price falls after just a few years of support.

    And you cannot get away with saying nuclear is “almost essential” when DECC have calculated and published numerous pathways meeting our needs without it.

    Liberal Deomcrat policy was not to build nuclear power stations. I understand why in forming a coalition this became not to subsidise them – a sensible compromise between two parties with different policies. But this is now becoming a policy that says they can be subsidised as long as other things are too. That is a u-turn. It is also worth pointing out that while it may look like a level playing field, the other technologies do not have the benefit of decades of subsidy already.

    What Ed Davey is proposing breaches both LD policy and coalition agreement.

  • The Guardian article that the Greenpeace (anti-)nuclear campaigner quotes says “The leaked document clearly lays out plans to use “contracts for difference” for nuclear energy, which would allow nuclear operators to reap higher prices for their energy than fossil fuel power stations.” Since the whole point of the government’s energy strategy is to reduce our dependence on fossil fuel power stations surely we want fossil fuel power stations to be at a financial disadvantage to all other forms of fuel? That is the point, isn’t it?

    Let’s say that gas costs 5p a KWh, coal 6p, nuclear 7p, and wind 10p hopefully falling in the future. The market, left to itself, will be 100% gas. But that isn’t the socially optimal solution because of global warming. Let’s say that gas emits 3p worth of carbon, and coal 5p worth. The best solution is nuclear, although if wind gets below 7p it becomes wind. Ed and co are forcing energy companies to pretend that there is a tax on gas and coal, so that they buy the cheapest fuel, including the carbon cost, whether it is nuclear or wind (or anaerobic digestion, etc).

    LDs should be really pleased – we are going to deliver lower carbon fuel at the lowest possible cost. I know as a party we like attacking our own, but let’s attack them when they deserve it, not when they don’t?

  • Andrew Duffield 20th Apr '12 - 10:58pm

    “There will be no public subsidy of nuclear generation.”

    I look forward to the first private nuclear company paying its own insurance costs.

  • Richard Dean 20th Apr '12 - 11:05pm

    Nuclear waste seems to be a lot more noxious than carbon and the present cost of its future safe storage could be huge. Taking this cost into account, and considering the health and security hazards and risks, is it really a green or socially optimal solution?

  • Paul Pettinger 20th Apr '12 - 11:23pm

    Unsually for you Tim, you have got this wrong. Nuclear is not carbon free, as I set out above, and there are extra long terms costs that are not factored into the price of electricity generated by nuclear. We could still expand use of gas and reduce our carbon footprint by further reducing use of coal, and if fracking looks viable, which it increasingly does, we have lots more gas reserves in the UK to take advantage of, thus helping our balance of payments. Subsidy should be focused towards renewables, not tired and expensive old nuclear.

  • Paul: clearly there is some carbon expended in mining uranium, but I doubt it is anywhere near as much as the carbon created by burning gas 20 or 30 years. I agree with you that a “dash for gas” to replace coal would be a very sensible thing to do.

  • Increasing reliance on imported gas supplies and the price volatility that goes with it, is not conducive to long term energy security.

    Carbon capture storage is still a nascent industry and will likely require substantial state support before investors have the confidence in the economics of the technology.

    I think it is fairly clear that nuclear power generation is going to part of the mix of energy supply for sometime to come. Once it is accepted that this is the case then the issue is how best to deliver the infrastructure that is required to ensure that electricity demand continues to be met beyond 2020.

    It is evident that the risks of developing new nuclear power stations are unpalatable for virtually all of the big power companies without substantial returns on investment guaranteed by the state and underwriting of any serious downside risks.

    The cost of private capital for development of nuclear installations reflects the risks involved with long lead times and uncertain costs before coming on stream and is a substantial part of the total capital cost. This is where the state can reduce investment costs and risk substantially by financing and developing power stations based on long term leasing agreements with the energy companies. It seems a more practical and straightforward approach than convoluted arrangements to get around state aid regulations.

  • Thanks for the comments.

    The first point to make is that there has been no negotiation yet of a contract for difference for new nuclear so it is not possible for anyone to say that there is or is not a subsidy for nuclear. As I said in the article the contract for difference is to provide price certainty for investment in the transition to a low carbon future for power generation when the intention is that there will be a technology neutral approach to power generation operating within a market. I repeat that there will be no public subsidy for nuclear generation.

    The alternatives to nuclear if we are to achieve a low carbon future are renewables and fossil fuel generation – only if abated by carbon capture and storage. Currently the price of coal and gas powered generation of electricity do not reflect the full economic cost which is why to compare the cost of renewables and nuclear to unabated fossil fuel power generation is wrong. We are also investing large sums in demonstration projects for carbon capture and storage.

    I am determined that we will honour the pledge that was made that we would be the greenest government ever.

  • jenny barnes 21st Apr '12 - 11:25am

    Ed, well done for engaging BTL. However, you don’t address the risk of private companies walking away from their clean up costs…Did you know, for example that after the ExxonValdez disaster Exxon completely eliminated it’s VLCC fleet? They are still shipping crude ofc, but next time there’s a huge clean up bill, it will be Strawman Shipping who will of course go bust and be unable to pay. So were I to be running an energy firm, I think I subsidiary, with a suitably convoluted ownership structure domiciled in at least one tax haven – which could then go bust after about 25 years collecting the “not a public subsidy to nuclear” (repeating something does not make it true, you know) . If we’re going to do nuclear then I support Joe Bourke’s proposal ” financing and developing power stations based on long term leasing agreements with the energy companies. It seems a more practical and straightforward approach than convoluted arrangements to get around state aid regulations.”
    I remember engaging with Chris Huhne at the 2008 (I think) Brighton conference on this topic. We don’t seem to have moved on. CCS has still only been shown to work at very small scale, and takes 25% of the power generated to do the liquefaction of the CO2 – so more coal or gas has to be burnt, even if it did work, and the resulting storage would be safe for thousands of years. CCS is more problematic than nuclear waste – because there’s Gigatonnes of CO2 to store.

  • Rebecca Hanson 22nd Apr '12 - 4:55pm

    Among other things, Fiona Hall also seems to be misinformed regarding the reasons for the German companies pulling out of new build in the UK, which were to do with their domestic issues and resultant cash flow problems.

  • Very good to see a response from Ed Davey – thank you.

    Not sure I understand it though. If we can’t tell if there is subsidy before negotiation of CfD, does that mean you are least conceding that CfD could end up being a subsidy? How will we be able to judge?

    And if CfD provides certainty of future prices, will you then argue we cannot determine whether it is a subsidy until we have reached a point in the future and can compare the agreed price against the market price at that time?

  • Richard George 23rd Apr '12 - 12:14pm

    Hi Ed,

    Firstly, a massive thank you for going below-the-line. It’s great to see a secretary of state being prepared to engage like this.

    I thought your comments that “there has been no negotiation yet of a contract for difference for new nuclear so it is not possible for anyone to say that there is or is not a subsidy for nuclear” very interesting.

    We know from reports in the Financial Times on Saturday that Centrica is demanding more financial support before it commits to new build at Hinkley and Sizewell. As the only companies still looking at nuclear, Centrica and EDF will of course push as hard as they can to get the pill sweetened. There is a risk that government’s determination to deliver nuclear would come at the expense of tax and pill-payers.

    As you say, the question of whether CfD FITs are a subsidy will depend on the terms of the contracts as much as the strike prices, will the contracts – terms and all – be made public so that we can be assured that there are no subsidies?

    As an aside, it appears from comments made by EDF and Centrica (not least in that FT article) that negotiations for ‘letters of comfort’ – the vanguard of the CfD FIT, if you will – have already begun. Your officials may have led you to believe otherwise…

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