Monday, 21 October 2013

The Wrong Guarantee

In order to persuade the French company EDF to build Britain’s next nuclear power station, the UK government has agreed to guarantee the price of the electricity generated will be double today’s prices. Commercial providers require a robust business case to be able to mobilise the capital required and the government has decided that it wants additional nuclear capacity. This is, therefore, a logical outcome, but logical does not mean it is sensible.

First, this is not UK technology built by UK engineers and funded by UK investors. The reactor will be built at Hinkley Point on the Somerset coast by a French company using Chinese money. For something as sensitive as a nuclear reactor it should be deeply worrying that we rely on France and China. I am not accusing either our close allies France or our distant rivals China of anything other than purely commercial motives, but that is the problem. This is safety-critical infrastructure with long-term liabilities. It has become normal for commercial operators to stick with a project whilst it is delivering bottom-line returns and walk away when the numbers no longer look attractive. Whatever guarantees the UK government might seek, the ability of corporations to fold their operations when they are no longer commercially viable is unstoppable. EDF and Chinese investors will put into the project a huge investment and draw out of it a huge return, then, walk away. At the end of the reactor’s life there will be a liability for many generations into the future long after we have used the energy, and long after the French and Chinese have left.

Second, this long-term guarantee over energy prices should be offered to other low-carbon energy providers to see what proposals they could come up with. The doubling of energy prices is exactly the incentive that would send the renewable energy industry into overdrive. There are problems to address such as intermittency of supply but these are not show-stoppers, just great challenges for the engineers to solve. Instead of a special case to ensure we have nuclear power, nuclear should be fighting its case against other low-carbon solutions.

Third, the government would be better employed winning the political case for higher energy prices ‒ which is the realistic way forward ‒ free of government subsidy. Business is a very capable agent for change but not if its hands are tied to by politicians using smoke and mirrors to hide the unpopular reality that a low-carbon future is one of valuable energy where bills are affordable because we become very careful with what we use. Forward-looking government officials can see that moving quickly with raising taxes on fossil fuel to drive the price of energy from these sources to the levels required is sensible economics. This could raise cash to invest in low-carbon public infrastructure or their political masters could decide to use this income stream to reduce other taxes to make it politically more palatable.

Politicians are paralysed with fear that to tell the truth will cost them votes so we end up with dangerous delaying tactics such as this special case for nuclear power.  Sometimes we manage to strike a cross-party consensus on issues of prime national interest; has the time come to do this for the future of UK energy supplies?