Energy: Civil Nuclear Power

Viscount Hanworth Excerpts

Thursday 9th December 2021 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, the Government believe, despite compelling evidence to the contrary, that private investors can be relied on to create and maintain our industrial infrastructure. This delusion is threatening our energy security and it may subvert the attempt to staunch our emissions of carbon dioxide. The belief is due, in part, to the Government’s political ideology, which favours private enterprise and is averse to state interventions in industry. It is also due to a misinterpretation of the recent history of the electricity supply industry. The successful investment of private companies in gas-fired power stations, which have largely replaced coal-fired power stations, has encouraged the belief in private investment, and the faith in the electricity industry has been strengthened by its ability to invest, subsequently, in wind-powered electricity generation.

No more than three years were required for the construction of gas-fired power stations. Such power stations were able to exploit a cheap and plentiful supply of North Sea gas. Nowadays, the available gas is expensive and its supply is insecure. The replacement of coal by gas has been responsible for a considerable reduction in our carbon emissions. An accompanying process of deindustrialisation has also reduced the energy demands of the economy and its use of fossil fuels. From 1990 to 2020, the UK’s emissions of carbon dioxide fell from 800 million to 420 million tonnes per annum, a two-thirds reduction of its former amount. These reductions cannot be expected to continue. Nevertheless, they have provided the basis for a proud assertion that Britain is leading the way in its process of decarbonisation.

The Climate Change Committee has warned repeatedly and with increasing urgency that we are liable to miss the targets that we have set to decarbonise the economy. This reflects the realisation that we have no adequate means of supplying the power that could sustain a green industrial revolution. Abundant electricity will be required to power our transport and heat our buildings. It will also be required to replace the fossil fuels used in the production of such basic materials as steel, bricks, glass and cement and in the manufacture of chemicals. The list can be extended. It seems that the Government have greatly underestimated the magnitude of this demand. There is a growing realisation that nuclear power is the only appropriate means of satisfying the need for a secure and abundant supply of electricity.

Britain’s original nuclear power stations relied on finance from the Government. The present Government have insisted that a new generation of nuclear power stations must be financed by private capital. The demand has been difficult to meet and there has been a succession of failed projects. A problem affecting private sector projects to build nuclear power stations is that no revenue will be forthcoming for as long as it takes to complete the construction, which may be as long as 10 years. The firms and the consortia that have been proposing the projects have been unable to raise the necessary capital from the financial markets to supplement their own limited resources. The high rates of interest charged for borrowing the funds are liable to make the projects to build nuclear power stations unsustainable. The capital funds that are borrowed from the financial markets must be repaid eventually, and the repayments are burdened by surcharges comprised within the rate of interest.

The first of these arises from a discount factor that is applied to future repayments that are valued at less than present payments. The second surcharge is a risk premium that is charged by lenders as an insurance against the eventuality that the repayments will not materialise. Finally, to encourage the funds to be forthcoming, it may be necessary to pay a scarcity premium. These three surcharges can be reduced, if not eliminated, if the Government undertake to finance the project. The Government will be able to borrow the funds without paying a risk premium, under the supposition that they do not default on their debts. If the funds are not readily forthcoming from the financial markets, the Government may resort to creating the money to pre-empt the resources that will be demanded by the project. Finally, a Government who are intent on an enduring social investment may wish to discount future benefits, if at all, to a far lesser extent than lenders within a financial market would discount them.

The only project to build a nuclear power station that is currently under way in Britain is Hinkley C. It has been undertaken jointly by EDF and CGN, which, as we have been told, is the Chinese General Nuclear Power Group. CGN can rely on the Chinese state to provide its funds, whereas EDF has to supplement its funds with money raised from the financial markets.

It is commonly supposed that the markets are charging EDF a 9% interest rate. Borrowing £100 at this rate of interest will require a repayment in 10 years’ time of £236. Conversely, a discounted present value of £100 to be received in 10 years’ time is just £42. It is not possible on this basis to finance a large-scale infrastructure project with a lengthy gestation period via private capital. If such projects were to be financed by the Government, both the scarcity premium and the risk premium could be stripped away, leaving only the discount factor to affect the present value of the future benefits.

The Green Book, which is the Government’s manual for cost-benefit analysis, declares the social rate of time preference, which is the rate of interest to be used in their project appraisals, to be 3.5%. On this basis, the present value of £100 to be received in 10 years’ time would be £71. Borrowing £100 at this rate of interest will require a repayment in 10 years’ time of £141. This implies that a nuclear power plant financed by the Government should be eminently affordable.

However, one is inclined to ask why a discount rate should be applied to the future benefits of a nuclear power station, which will constitute a carbon-neutral source of electricity. If the Government are to be seen as a custodian of our future, they should not be discounting the benefits of a project that might be safeguarding us against the discomforts of global warming, if not against a future catastrophe. An implication of applying a discount rate corresponding to the commercial rate of interest of 9% might be that it is too expensive to undertake measures to save the planet. There are surely times when such commercial logic should go into abeyance.

Nevertheless, the Government have tried to create sufficient inducements to encourage the private sector to undertake investments in nuclear power. A first attempt at creating the necessary inducements was via a system of so-called contracts for difference, which promised sufficient payments to the constructors and operators of nuclear power plants to cover their costs. Guaranteed payments were entailed in the so-called strike price. Any returns to the investment below the strike price would be supplemented, and any returns that were above it would be taxed.

The system of contracts for difference has failed to bring forth sufficient investments and is due to be replaced by another system, known as a regulated asset base. This new regime, which has yet to be enacted in law, will allow the constructors of nuclear power plants to impose a levy on consumers of electricity during the period of construction, when there will be no other returns. Under such a regime, the capital funds would be supplied by the financial markets. The charge levied on consumers would represent a subsidy paid to the providers of capital, and would serve to alleviate the debts of the contractor. It remains to be seen whether this inducement will be sufficient to provide the funds for the construction of a nuclear reactor at Sizewell, which has been proposed by EDF.

Alternative ways to finance the projects that do not appear to have been considered by the Government are either to issue designated bonds, backed by the security of the Government, or to create a supply of funds to enable the projects to pre-empt the necessary resources by increasing the supply of money. Now is the time to adopt one or other of these recourses.