1st Annual European Energy Policy Conference, Brussels Nuclear Energy: Economics vs Pragmatics A Viable Option For Th

1. 1st Annual European Energy Policy Conference, Brussels Nuclear Energy: Economics vs Pragmatics A Viable Option For The Future of Liberalised Energy Supply in Europe? Ian Jackson November 29th, 2005

2. Key Themes A realistic assessment of European prospects for nuclear power and its pros and cons. British experience of nuclear powerwithin a fully liberalised energy market. Market interventions necessary for the economic development of nuclear power in a free market. Nuclear as an enabling technology to help future development of renewable energy sources.

3. A Small Investor's View "As someone who invested £1,000 (€1,460) in British Energy and received for my pains £1.75 (€2.55) back… the nuclear industry has got tocome up with more convincing figures than these to get anybody to invest." Mr Roy Winter, The Times, September 14th, 2005 BE restructuring was completed in January 2005 and BE relisted on LSE(FTSE 250). Current BE share price approx £4.65 (€6.80) November 2005.

4. A Prime Minister's View "Tony Blair today indicated publicly for the first time that he will support building new nuclear power stations to meet Britain's future energy needs. …The Prime Minister told MPs that there was fresh impetus to build a new generation of reactors because the facts have changed over the last couple of years". Mr Simon Freeman, The Times, November 22nd, 2005

5. What's Changed Politically? Global warming. Carbon dioxide emissions fromoil and gas regarded as the prime suspect. Gas dependency. Originally self-sufficient from North Sea gas, the UK has become a net importer. Security of supply. Traditional British nervousness about security of gas supplies from Europe. Price volatility. By 2010 the UK electricity market is expected to be 60% dependent on gas, coupled with worries of gas price volatility and pricing trends.

6. What's Changed Economically? Liberalised markets can mean high prices as wellas low - the ebay effect where best price wins. 2003 Energy White Paper assumed maximum wholesale peak gas prices of £0.30p/therm. By early 2005 wholesale gas price rises hadactually reached peaks of £0.40p/therm. Last week Nov 22nd, during first cold spell in UK, wholesale gas prices jumped 40% to £1.70p/therm, five times the average gas price during 2005.

7. What's Changed Structurally? Within the next 20 years nearly all of Britain's existing nuclear power stations will be shut-down. Britain will lose 20% of its electricity supply. The hope is that renewable energy - mainly wind and wave power - will fill the nuclear energy gap. But last year renewables delivered just 3% with intermittency problems limiting grid capacity to 10%. Intermittency of wind and wave generation beyond 10% risks knocking-out the electricity supply grid.

8. What Hasn't Changed? UK energy market remains liberalised. Private sector delivery of electricity supply. No government funding for nuclear power. No state aid subsidy for nuclear power. No carbon credits for nuclear power. Strategy relies on private sector investors to finance construction and operation of new nuclear stations.

9. Nuclear Liberalisation in Britain Margaret Thatcher Conservative Government. Energy market liberalisation began in 1982 designed by Energy Minister Nigel Lawson. Energy Act 1983 set out a framework to introduce gradual competition to energy supply markets. British Gas privatised 1986, British Petroleum1987, National Power 1990, National Grid 1990. British Energy (BE) privatised 1996, nuclear last sector of the UK energy market to be privatised.

10. How Has Nuclear Performed? Mixed performance in liberalised energy market. 10 years since privatisation (1996-2006). 7 AGRs plus 1 PWR 1,200 MW reactors generating 20-24% of UK electricity over past 10 years. BE stock raised £2.1 billion (€3.1 billion) from1996 initial public offering IPO public flotation. But UK government had to grant £450 million(€658 million) emergency state aid to BE in 2002. Stockholders lost 87% of the value of their shares.

11. What Went Wrong at BE? Homeowners and businesses allowed to choose electricity supplier from June 1999. Severe NETA competition forced wholesale market prices down to the marginal cost of generation. Price reductions of 10-15% were expected but electricity prices actually dropped 40%. BE locked into expensive reprocessing contracts with BNFL equivalent to 25% of BE operating costs. BE financially restructured, government now owns majority equity (effectively has renationalised BE).

12. Upsides of Nuclear Power Important to say that despite economic problemsBE continued to reliably supply power in Britain. Nuclear is an excellent baseload supplier, andat certain times - night time and summer - BE produces most of the electricity used in Britain. Nuclear remains an important source of low carbon energy and must remain an option for anybody serious about global warming and climate change.

13. Downsides of Nuclear Power Ability of nuclear accidents to deliver shocks to energy supply markets, damaging confidence. No experience of financing and building newnuclear reactors in a liberalised energy market. Uranium stockpile limited to 10 year supply. New cycle of exploration-exploitation-production needed. High capital costs of nuclear build mean that nuclear option is largely a 60 year gamble on interest rates. Locks governments into a 100 year energy lifecycle (10 yr build + 60 yr operate + 30 yr decommission).

14. Household Retail Preferences Not much nuclear power sold to UK household consumers, roughly 10-15% of electricity mix compared with UK average of 20.6% nuclear. Mainly because British Energy does not have a vertically-integrated retail supply outlet business(i.e. BE does not sell directly to households). And market research shows that 40% of household consumers are strongly anti-nuclear anyway.

15. Industry Wholesale Preferences Most UK nuclear power sold to large industrial consumers who need reliable baseload generation. Industry consumes roughly 40% nuclear electricity mix compared with UK average of 20.6% nuclear. British Energy sells wholesale directly to industry, big consumers the most natural market for nuclear.

16. Implications for Europe Viability of nuclear power in a liberalised European energy market will depend on several factors. Design of the market structure and supply chain. Availability of private sector finance for utility companies and especially new nuclear build. Ability to negotiate bulk long-term energy supply contracts between producer and consumer. Carbon credits for nuclear power withinthe EU Emissions Trading Scheme (ETS).

17. Viability of nuclear is linked to EU manufacturing trends, especially outsourcing to China, India, Asia. Possibility of long-term trend in the decline of European manufacturing base, if Europe gradually shifts towards a knowledge-based economy. A smaller number of large industrial consumers of electricity would result in a corresponding decline in market demand for baseload nuclear power.

18. Financing New Nuclear Build Best example is new Framatome 1600 MW EPR under construction at Olkiluoto 3, Finland. Financed by a consortium of energy intensive users with advance contracts under the company TVO. 60 year reactor lifetime, 92% plant availability,€3 billion capital cost, delivering power by 2009. However not much real experience in EU of nuclear power operating in a liberalised energy market yet. In Britain the private sector is wary about investing after previous British Energy share price losses.

19. Need for Carbon Credits in ETS If EU is serious about combating global warming then we need a mechanism to include nuclear within the new EU Emissions Trading Scheme (ETS). EU harmonisation is about creating level playing fields for competition across Europe, but at present nuclear is disadvantaged against gas and coal. But nuclear generation is so hugely carbon efficient that it would distort the ETS trading market. Also must be careful to avoid nuclear stifling investment in renewable energy technologies.

20. Price of Nuclear Carbon Credits Carbon prices in ETS currently €20-25/tCO2. Single nuclear power station would generate about8 TWh/yr producing 32 thousand tonnes CO2. Gas power station generating 8 TWh/yr electricity would produce 3.5 million tonnes CO2. Coal power station generating 8 TWh/yr electricity would produce 7.6 million tonnes CO2. A nuclear power station saves 3.5-7.6 million tonnes carbon, worth between €70-190 million/yr in ETS.

21. Nuclear Enabling Renewables? Europe needs both nuclear and renewables to help minimise emissions and combat climate change. Worrying possibility that next 10-20 years could be the critical tipping-point before runaway global warming is triggered (environmental overshoot). Nuclear is really an interim enabling technology- something which helps achieve something else more important - preventing climate change. In essence new nuclear stations could help buy time for renewable output to catch-up with gas and coal.

22. Regulatory-Driven Costs Understandable public concern about nuclear safety after accidents at Three Mile Island (1979) and Chernobyl (1986) and Davis-Bess near-miss (2002). Public acceptance - or at least non-rejection - is a vital requirement for success of nuclear power. Regulatory safety ratcheting is really the public expression of difficulties with public acceptance. Some truth in nuclear industry concerns that regulation and regulatory ratcheting increase costs.

23. But not so much the regulatory measures themselves - cost increases are really driven by the impact of time delays from regulatory due process. For example US nuclear plants built in early 1970s cost $170 million whereas similar plants in the early 1980s cost $1.7 billion - 10 times more expensive. Why? - Construction times were much longer increasing from 7 years to 12 years, partly driven by regulatory delays and regulatory uncertainty. Reform of the nuclear licensing framework is essential to overcome these financial problems.

24. International Nuclear Licensing Ideally would want a simpler, faster, single-stage planning and licensing process for new build. For example combined construction permit and operating licence process developed by US NRC. Multi-National Design Approval Programme MDAP international licence proposed by NRC for OECD. At EU level already French-German-Finnish collaboration on harmonised EPR safety standards.

25. Two-Speed Nuclear Licensing Sensible to decouple timing of reactor licensing from waste storage-repository licensing (new US reactor licenses not linked to Yucca Mountain availability). Accelerated reactor licensing is justified because reactors are not permanent installations (lifecycle60 years operation + 30 years decommissioning). Slower progressive licensing for waste storage repository is justified because facility might be permanent for all time (probably a million years).

26. Conclusions A limited replacement programme of new nuclear build is likely in the UK. PM Tony Blair expected to announce an energy review this week reaching policy conclusions on new nuclear by July 2006. The major sticking point (from an economic perspective) will be financing. Some new market incentives will be needed to encourage investment. The private sector will be very wary about investing after previous British Energy share price losses.

27. Europe needs both nuclear and renewables to help slow-down the worst effects of global warming. Some modification of the new EU Emissions Trading Scheme may be needed to incentivise nuclear investment, ideally via carbon credits. It is unclear how nuclear will fare in a liberalisedEU energy market. Higher gas prices mean a UK style dash-for-gas seems unlikely in the short term. Choosing nuclear is largely a bet on sustainedlow interest rates in the future, while choosing gas is largely a bet on sustained low gas prices.

28. Reference Sources Financial Times. November 2005.www.ft.com The Times. November 2005.www.timesonline.co.uk The ENDS Report. October 2005.www.endsreport.com Nuclear Engineering International. September 2005.www.neimagazine.com National Audit Office. February 2004.www.nao.org.uk

29. Further Information A free library of nuclear energy reports and nuclear policy resources is available from http://www.jacksonconsult.com