Utility Week

UTILITY WEEK | 29TH JUNE - 5TH JULY 2018 | 13 Policy & Regulation Analysis T his is a tale of two projects. Both are low-carbon and planned for locations on the Welsh coast. They are also both very expensive, prompting a lot of head- scratching in Whitehall. However, while ministers were prepared to pull out all the stops to approve Horizon's Wylfa Newydd nuclear power station on the island of Anglesey, they were deeply reluc- tant to give the go-ahead to Tidal Lagoon Power's project in Swansea Bay. Wales' first minister Carwyn Jones had pledged £200 million to help finance the £1.3 billion lagoon project and the princi- pality's biggest pension scheme had said it might also pitch in. But on Monday 25 June, 18 months aer former energy minister Sir Charles Hendry recommended to the government that the scheme should go ahead, business and energy secretary Greg Clark announced that it had been rejected for not offering value for money. The main concern was the high cost per megawatt hour (MWh) of the electricity that the project would generate. By contrast, at the beginning of this month, Clark announced the kickstarting of formal negotiations with Horizon on its 2.9GW twin reactor station on Anglesey. Nobody can pretend that getting this far has been a walk in the park for Horizon, which is owned by Japanese multi-national Hitachi. But the recent agreement between Horizon and government heralded a signifi- cant shi in the way Westminster approaches the financing of nuclear power projects. Capital costs Clark said the government is considering a recommendation in a National Audit Office report, published last year, that it should take a direct investment in such projects. Using government borrowing rates instead of commercial project finance arrangements could cut the cost of capital from 9 per cent to 2 per cent, the NAO estimated. It is also exploring use of the "regulated asset base" model, most notably used to finance the Thames Tideway Tunnel, under which investors will receive a return during the project's construction. Lower cost of capi- tal would in turn enable the project to charge a lower "strike price" for the electricity it gen- erates, meaning less of a hit on customer bills. Tim Yeo, chair of pro-nuclear campaign group New Nuclear Watch Europe, says: "If the government is prepared to take a direct stake to make a nuclear plant viable, it is a significant change in direction." The former MP believes it will encour- age overseas investors to get involved in UK nuclear projects. "Other vendors will see that the UK is not a place hung up on the need to have completely private financed new plant and people who might not have considered coming here will be encouraged," he says. Yeo names Moorside's South Korean back- ers Kepco and EDF, which wants to bring forward a second new plant at Sizewell in Suffolk, as likely to be particularly interested. Humphrey Cadoux-Hudson, managing director of nuclear development at EDF Energy, told a recent conference in London the regulated asset base model would reduce the cost of capital for future nuclear projects, particularly if combined with the efficiency benefits that a second project could deliver. He added that the right financial pack- age could whet the appetite of pension funds seeking long-dated, stable returns, such as those available on 50 years-plus inflation- linked bonds. Yeo, former chair of the House of Com- mons energy and climate select committee, says the shi may also reflect concern about how growing demand for power from electric vehicles will be met, especially when they are being charged at night when there is no solar generation available. Nuclear nurtured However, many feel the government has bent over backwards for the nuclear industry. Dr Jonathan Marshall, energy analyst at the Energy and Climate Intelligence Unit, does not have a problem with the government taking a stake in projects, but argues the sup- port should not be confined to nuclear power. The same kind of upfront investment could reap even greater benefits if it was sanctioned for renewable energy projects such as wind and solar, which oen cost more to build than they do to run. Reduc- ing the cost of upfront capital required could drive down the strike prices for such projects by as much as £15/MWh, he estimates. By getting the taxpayer to shoulder some of the risk, ministers are making nuclear projects look cheaper than they really are, argues Doug Parr, head of policy at Green- peace. He believes TLP's larger follow-up project in Cardiff Bay could have delivered cheaper electricity than Wylfa if it had been offered a similar level of support. The Wylfa deal also runs counter to a rec- ommendation in the NAO report on Hinkley that future nuclear schemes should be open to competition, says Marshall: "They [the government] agreed to a bilateral deal with a developer who knows the UK is facing a sup- ply crunch in the years to come and so has an upper hand in the negotiations." Given the number of nuclear projects in the pipeline, he believes it would be feasi- ble to make them compete for subsidies, like renewables projects must via the contracts for difference auction process. Pet project? Parr suspects there are broader geo-political considerations at stake though in the decision to back Hitachi's scheme, given that its chief executive has recently taken the chairman- ship of the Japanese equivalent of the CBI. "At this point, they [the government] don't need a major piece of Japanese investment to go belly up because the government is not committed," he says, with Brexit in mind. The government accepted a recent recom- mendation in the House of Commons Pub- lic Affairs Committee (PAC) report on Wylfa that it should refresh its strategic case for supporting nuclear power before giving the green light to new plants. PAC chair Meg Hill- ier has written to Clark, asking how the Wylfa go-ahead squares with this commitment. Parr concludes: "There is no set of con- sistent criteria applied across technology types, so what we are looking at seems like a pet project approach." Tidal plan is waved away Despite a green light for the 2.9GW nuclear plant on Anglesey, the other Welsh generation project, using tidal energy in Swansea Bay, has been rejected by the government. David Blackman reports.

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