Evidence submitted to the House of Lords Economic Affairs Select Committee investigation into energy policy

 

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Evidence I submitted to the House of Lords Economic Affairs Select Committee investigation into energy policy

 

In justifying its decision to go ahead with Hinkley the Government has emphasised the fact that EDF will bear its construction risk. This is true, albeit with some generous performance standards. However, the commercial risk will fall wholly on Britain’s energy consumers. This underlines the importance of the judgement of whether or not this investment represents value for money.

The Government’s three page assessment of this question amounts to little more than an invitation to take its word for it. Not enough evidence is provided to make any independent assessment of the validity of its conclusions. The recent NAO report on Hinkley provides a reason to treat them with considerable scepticism. It found that the Government’s own estimate of the additional cost of Hinkley to consumers had increased fourfold between October 2015 and the report’s publication in July 2016.

The contract with EDF to build Hinkley does not represent value for money for consumers. It is a 35 year index linked ‘take or pay’ contract at an additional cost to consumers of £37 billion for 90% of 3.2GW of electricity. The attached schedule lists some of other options that are cheaper, faster, cleaner and more reliable ways to meet our need for affordable, secure low carbon electricity without Hinkley.

The costs of renewables and batteries continue to fall each year. It is likely that they will have fallen sufficiently to no longer require subsidy before Hinkley is operational. There is no likelihood that nuclear costs will have fallen below the need for subsidy across the whole of the proposed 16GW programme, not the least because the Government is repeating the mistake of the AGR programme in having four different vendors each offering a different technology thus eliminating even the prospect of series learning.

The Government seems unaware of the profound changes that electricity systems are undergoing globally as the digital revolution transforms them. It continues to formulate policy in terms of technology choice rather than system architecture. This prevents it from securing the best available package of benefits for both consumers and taxpayers.

There is a very broad consensus on the goal of Britain’s electricity policy. It must provide electricity that is secure, affordable and low carbon. Currently, peak demand for electricity in Britain is about 60GW for a very short time on the coldest day. Baseload, the demand that must always be met, is some 30GW. The total generating capacity available to the grid is some 85GW.

This means a great deal of our national investment in electricity generation capacity is unproductive – generating no electricity or revenue much of the time. The critical policy question is how best to match demand and supply so as to make the most productive use of our investment in generating capacity. This is a more useful question than simply asking what technology should be chosen to replace retiring capacity.

Modern data handling capacity and sophisticated software makes it possible to do this much more effectively than was possible even in the fairly recent past. This puts premium on flexibility rather than volume. Both the economics and the nature of the technology make nuclear very inflexible and thus a bad fit with a system architecture that is seeking to maximise flexibility in order to improve capital productivity and lower costs to consumers.

Two examples make this point.

In order to maintain security of supply a grid containing Hinkley must have 3.2GW of additional supply instantly available in case of an unplanned outage – these occur frequently in the current nuclear fleet, largely for non-nuclear reasons. Supply from renewables is variable but its variability can be forecast

with high confidence thus permitting a wide range of flexibility measures to be brought into play at lower cost.

On current forecasts we are likely to be able to meet our baseload demand entirely from zero marginal cost renewables for long periods during the year during the twenty thirties. Under the contract with EDF we would have to forego 3.2GW of that zero marginal cost supply in order to use the electricity from Hinkley.

Hinkley, and the rest of the nuclear programme if financed on a similar take or pay basis, would, in effect, set an unjustifiably high floor on the price at which electricity could be supplied to consumers.

Furthermore, the current 16 GW programme represents a £100 billion bet that electricity systems will retain essentially its current architecture over the next fifty years.

In short, the Government has overvalued the importance of Hinkley’s contribution to baseload and undervalued the importance of flexibility in a modern electricity system.

Despite the certainty implied by the headlines accompanying the Government’s decision to proceed, it still not certain that the project will go ahead. There remain significant doubts over the financing, including the current case in the European Court seeking to annul the State Aids clearance, the possibility of a further State Aids obstacle to the re-financing of EDF necessary for it to proceed and the financial implications of the wide range of investigations by the French nuclear regulator to which EDF is subject.

The Government should restructure the electricity market around the creation of an independent system operator with a duty to ensure a level playing field between supply and demand management options. This would guarantee that Britain makes the most productive use of its generating suite and thus captures most benefit for consumers.

 

 

Tom Burke CBE

Chairman

 

 

About tomburke

Tom Burke is the Chairman of E3G, Third Generation Environmentalism, and an Environmental Policy Adviser (part time) to Rio Tinto plc. He is a Visiting Professor at both Imperial and University Colleges, London. He is a member of the External Review Committee of Shell and the Sustainable Sourcing Advisory Board of Unilever and a Trustee of the Black-E Community Arts Project, Liverpool.
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