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Power Games

Summary:
“UK energy policy since the 2008 Energy Act has largely been built around reducing carbon dioxide emissions rather than security of supply or cost”. It may be too much to expect of recent governments but they should have grasped that, removing fossil fuel dependency would require more electricity in total and nuclear power would be better value than the alternative, namely gas plus carbon capture and storage (CCS), for providing the steady “baseload” generation to complement renewables.  The sun does not always shine and the wind does not always blow. Indeed, the only thing that is certain to blow with the wind is government policy. At the beginning of 2021, the proposed nuclear power station at Wylfa Anglesey was cancelled. The government blamed the change of heart for that, and

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“UK energy policy since the 2008 Energy Act has largely been built around reducing carbon dioxide emissions rather than security of supply or cost”. It may be too much to expect of recent governments but they should have grasped that, removing fossil fuel dependency would require more electricity in total and nuclear power would be better value than the alternative, namely gas plus carbon capture and storage (CCS), for providing the steady “baseload” generation to complement renewables.  

The sun does not always shine and the wind does not always blow. Indeed, the only thing that is certain to blow with the wind is government policy. At the beginning of 2021, the proposed nuclear power station at Wylfa Anglesey was cancelled. The government blamed the change of heart for that, and terminating Oldbury, on “the impact of the falling prices of renewable energy in recent years”. The vital need for the baseload to provide continuity appears to have escaped the minister. In September, in response to surging gas prices, Wylfa was back on the table, albeit with a new partner. 

A Treasury swing-around, from anti- to pro-nuclear, appears to have taken place in the last week or so. It seems to have been prompted by the immediate gas price crisis. Watching these developments reminds one of the “....Goes Wrong” plays. We know what is going to happen but it’s our money and not really very funny. In 1992, the Treasury decided it would cunningly meet the requirement for more hospitals and other capital projects, which it claimed not to be able to afford, with public private partnerships: the Private Finance Initiative (PFI) was born. It was fundamentally a good idea but the civil servants, having little idea of how to manage such projects, consulted clever bankers in the City about how to ensure clever bankers did not excessively profit. Of course, it all went wrong and the clever bankers got excessively rich. By the time PFI was ended in 2018, PFI deals had financed £12 billion of English hospital building at a cost to the NHS, namely the taxpayer, of £79 billion in repayments. Fast forward only one year and history repeats itself.  HM Treasury has been blocking new nuclear plants for 20 years on the grounds that they cannot afford them.  Energy has been privatised so the private sector should pay for new energy plants. The trouble with that is large nuclear power stations can cost £23 billion a pop and take 20 years to get approvals and build. No private companies can afford that. So the Treasury has come up with the Regulated Asset Base (RAB) model for nuclear as their solution.

After 20 years, one might expect the flood gates to be opened but not so: “the government will aim to bring at least one large-scale nuclear project to the point of final investment decision (FID) by the end of this parliament [i.e. in three years], subject to clear value for money and all relevant approvals.” If nuclear is to provide the baseload for a zero carbon 2050 and bearing in mind their long lead times, we probably need not one but 10 new plants (or the equivalent in smaller reactors) and in a hurry. 

On 22 July 2019 the Government launched a consultation on a RAB model for new nuclear projects that would have the following features ……  

a) Government protection for investors and consumers against specific remote, low probability but high impact risk events, through a Government Support Package (GSP);  

b) A fair sharing of costs and risks between consumers and investors, set out in an Economic Regulatory Regime (ERR); 

c) An economic regulator (the ‘Regulator’) to operate the ERR; and  

d) A route for funding to be raised from energy suppliers to support new nuclear projects, with the amount set through the ERR, during both the construction and operational phases (the ‘Revenue Stream’).”

Once again, the Treasury is trying to solve a problem it has itself created. Where does it say, in Holy Writ, that nuclear power stations can only be financed by the private sector? If that logic applied to other infrastructure, we would never have embarked on HS2 and we would all have been better off. However one dresses up major capital expenditures, the government can finance them at less cost because it borrows at lower interest rates.  

The GSP is the Treasury’s promise to keep prices, i.e. total costs, down but, as the respondents to the consultation pointed out, the Treasury has not explained how the GSP will work. Either the government is in charge of the project from day one, and therefore is in at least nominal control of costs and timings, or it is not. The most likely reason for the GSP not being explained is that it is a fudge. 

According to the Government’s consultation response, “17. For the ERR, we proposed a regime whereby the regulator granted a licence to a project company, allowing it to charge an ‘Allowed Revenue’ in return for construction and operation of the asset. The Allowed Revenue amount would be determined by the Regulator. Our initial analysis indicated that it would likely be more appropriate for the regulatory regime to be set ex-ante.” The respondents, being likely investors, supported the ex-ante approach, unsurprisingly as that would be more likely to generate higher returns for them. The Hinkley Point “strike price” was set ex-ante: “the deal guarantees that [the equity owners] NNBG will receive £92.50 (2012 prices), linked to inflation, for each megawatt hour (MWh) of Hinkley Point C’s electricity for 35 years [from when it becomes operational], with electricity bill payers paying top-ups if the market price is lower.” With inflation since 2012 being low, the £92.50 would have been £112 in 2020, i.e. well above the average actual UK wholesale average price of £70.59 per MWh.

The “Revenue Stream” is the whizzy idea that the project company is given all the money it needs to plan and construct the plant before it becomes operational and starts to receive income from selling electricity to the National Grid. The traditional commercial concept of using revenue to make a return on the original investment goes out of the window because the Revenue Stream will have taken care of the investment. As the running costs of nuclear power plants are very low, operational revenue, namely £92.50 + inflation in the case of Hinkley Point, will be almost all profit. I have asked BEIS what the strike price is expected to be for Wylfa but answer came there none. In the case of Sizewell C, where the US is pressing for the removal of Chinese investment, “EDF has been lobbying intensively for a RAB mechanism, arguing that it could slash the ‘strike price’ – the guaranteed price for Sizewell’s electricity – to between £30 and £60 per megawatt hour.” The paragraph above explains why they can well afford to do so. If the capital costs have all been covered by the Revenue Stream, there should be no need for any strike price. The wholesale price of the day should be quite enough. 

But quite apart from anything else, why should the consumer have to pay for the construction of nuclear plants before they receive any electricity from them? Yet that is what is proposed: “65. If a version of the [RAB] model described above were to be used, a revenue stream would need an intermediary body to charge and collect payment from suppliers [who would want it from consumers], and to pass this onto the project company. Both suppliers and the project company would need to have confidence that the organisation which took on this function had the capability to do so effectively.”

It gets worse. Why have one new bureaucracy when one can have two? In addition to the “intermediary body” above, the Office for Nuclear Regulation (ONR) and Ofgem, the government proposes an ERR Regulator who “should have responsibility for protecting the interests of consumers, whilst having regard to the ability of the project company to finance the project i.e. construction and operation of the plant” (para 58). Its main role would be to liaise with all the other regulators: “The intention would be to draw on existing experience of cooperation between economic, safety and environmental regulators in other regulated businesses, whilst also taking account of any considerations specific to the nuclear sector. Each regulator would retain its complete statutory independence.”  There can be little doubt that the interference from all these regulators would delay, and add to the costs of, new nuclear plants. To ERR, after all, is only human. 
 

Reviewing the rest of these RAB proposals would take many more pages and try the reader’s patience. The simple truth is that the Treasury is making a mountain out of a molehill, and a very expensive mountain at that. Unless RAB is rejected consumer prices will be hugely inflated, the necessary nuclear projects delayed, and electricity security threatened. 

Here is all that is needed: 

  1. Government should decide what new nuclear plants are needed and get them built on time and on budget. As civil servants are not known for high level commercial skills or successfully managing major projects, management should be outsourced with incentives to minimise costs and construction time. Where management can identify unnecessary delays caused by any part of government, the latter should be financially penalised. 

  2. Regulation should be left with Ofgem, which itself needs reform. The “intermediary body” and the ERR Regulator proposals should be dropped and the ONR should be closed. It duplicates the safety investigations of the US and Canadian authorities who have agreed cooperation aimed at mutual recognition of nuclear approvals. The UK could join in that. 

  3. Once operational, the nuclear plants should be privatised. 

The Treasury is good at being the Treasury and playing political power games but not at providing the country with the electrical power it needs at least cost. It stepped away from the Bank of England and it should step away from this. 

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Tim Ambler
Tim Ambler (born 1937) is a British organizational theorist, author and academic on the field of Marketing effectiveness. Ambler featured on Marketing's list of the 100 most powerful figures in the industry. He is cited by the Chartered Institute of Marketing as one of the top 50 marketing experts in the world

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