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UTILITY Week 11th November 2016

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UTILITY WEEK | 11TH - 17TH NOVEMBER 2016 | 17 Finance & Investment Analysis I t was Lewis Strauss, appointed chairman of the US Atomic Energy Commission by president Eisenhower, who is widely believed to have coined the phrase that the cost of generating nuclear power would be 'too cheap to meter'. In fact, his widely quoted comment in 1954 referred to electrical energy rather than just nuclear. Subsequently, the UK built its first nuclear power plant at Calder Hall in Cumbria, which began generation in 1956. Even at that time, nuclear power was not particularly cheap, all the more so since many of the costs, unre- ported by the Central Electricity Generating Board (CEGB), were excluded. In the intervening 60 years, costs have soared to such an extent that EDF has been awarded a controversial 35-year inflation- proof contract for difference to build Hin- kley Point C: the 2012-based 'strike' price is £92.50/MWh. Given that nuclear generation was promoted on the basis of offering vast amounts of cheap base-load power, how is it that nuclear power plants remain beset by skyrocketing costs? In any financial model, the upfront con- struction costs of a power plant have a major impact on the planned investment's viability. To deliver the proposed 3,200MW of capacity at Hinkley Point C, the pre-interest construc- tion cost amounts to £18 billion. Comparable figures for new gas plants of a similar capac- ity are less than 20 per cent of that cost. Safety's financial toll In recent years, nuclear construction costs have soared, even if the 'first-of-a-kind' argu- ment – so beloved of nuclear supporters – means that future plants of the same design will be considerably cheaper. Aer the three big nuclear disasters of recent decades – Three Mile Island, Chernobyl and Fukushima – safety requirements have rightly become much tougher, driving up the cost base. The cost of top-quality steel has also risen over the years – especially the very high- grade material used in the pressure vessel. Most significantly, perhaps, any nuclear financing model has to make some key assumptions about the cost of capital. A vast amount of money has to be borrowed at the outset, which piles up the level of debt before the plant is actually commissioned. For the first 12 years at least, heavy annual interest payments should be expected. By way of example, the Hinkley C plant is pro- jecting interest costs alone of £6 billion. At the operating level, the cost of ura- nium – used in the fuel rods – also has an impact. The uranium price fluctuates; if it takes off, this is bound to reduce projected returns. And, as with fossil-fuel plants, there are many expenses involved in simply oper- ating a power station, ranging from staffing costs to industrial rates. In the longer term, the back-end costs include plant decommissioning and han- dling and disposing of the nuclear waste that will have been generated. In the case of Hinkley C, decommissioning costs may not actually kick in for up to 70 years, so their cost – in discounted cashflow terms – is modest. If the work has to be undertaken within the next decade, the discounted costs are far higher, as the German govern- ment has recently confirmed for the nuclear plants owned by Eon and RWE that are to be decommissioned. Yet the fact remains that projected costs for nuclear new-builds are very high – and seem to be getting higher. While the returns on building a combined cycle gas turbine (CCGT) plant are highly dependent on the long-term gas supply contract and the resulting power purchase agreements, substantial cost reductions are being achieved in the renewables sec- tor. In particular, recent prices for offshore wind plants are well below the £150/MWh cost that was regarded as the norm until relatively recently. Indeed, Denmark's Dong Energy has agreed a strike price of £60-£70/ MWh for a Dutch offshore project – a remark- ably low figure given previous offshore wind cost estimates. Importantly, too, solar power is increasingly competitive, albeit on the back of substantial subsidies. As for nuclear power, there remains the real possibility that large nuclear plants will be superseded; many of the older plants are now being closed down. In recent years, the nuclear industry has been assessing the prospects for smaller thorium-based reac- tors. Whether they can produce commercial quantities of nuclear power at the right price remains to be seen. Ever since the Calder Hall startup, nuclear power has faced intense scrutiny about its true costs, especially in the lead-up to the privatisation of the electricity supply indus- try in the early 1990s, which culminated in the eventual flotation – and subsequent collapse – of British Energy. Once all the rel- evant costs are included, the overall figures are far higher than in the pre-privatisation days. And they continue to soar. The sole certainty is that nuclear power will never be too cheap to meter. Nigel Hawkins, director, Nigel Hawkins Associates Too expensive to afford? In the 60 years or so since the UK has been building nuclear power plants, the construction costs have gone through the roof and show no sign of stopping there, as Nigel Hawkins explains. Source: World Nuclear Association POWER REACTORS OPERATING IN THE UK Plant Type Present capacity First power Expected (MWe net) shutdown Dungeness B 1&2 AGR 520, 520 1983 and 1985 2028 Hartlepool 1&2 AGR 595, 585 1983 and 1984 2024 Heysham I 1&2 AGR 580, 575 1983 and 1984 2024 Heysham II 1&2 AGR 610, 610 1988 2030 Hinkley Point B 1&2 AGR 475, 470 1976 2023 Hunterston B 1&2 AGR 475, 485 1976 and 1977 2023 Torness 1&2 AGR 590, 595 1988 and 1989 2030 Sizewell B PWR 1,198 1995 2035 8,883 MWe

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