Saturday, 27 June 2015

What to do with the British electricity market?

This began as a comment to a news article at Chemistry World: Austria to sue EU over UK nuclear aid. But a comment should raise only one point. I can't raise only one point because everything is interrelated.

Summary: British nuclear power is over-regulated, and the market distorted, forcing potential new nuclear power here (Hinkley C) to be the most expensive in the world. Our system of non-carbon energy rewards and subsidy is complex and raises electricity prices far more than it should. This is all the fault of British Governments who have conspired with environment campaigner designs to overprice electricity so that it's becoming a luxury good. The regulations and subsidies introduced are all bits and pieces measures: tinkering here, but ignoring the distortion it introduced there. Living in a pretend world, where they pretend there's a market when none exists. There's been no overall plan and no understanding of how regulation increases cost in unexpected ways.

The solution:

  1. Deregulate British nuclear power to enable competition for new nuclear builds.
  2. Replace current UK non-carbon subsidies with a simple unified system: Fee and Dividend.

I will argue that the problem in British electricity is two-fold.

  1. The market for nuclear power lacks competition due to over-regulation.
  2. The subsidy system is wrong.

1. Weak competition in UK Nuclear power is due to over-regulation.

  1. Only one consortia bid for the Hinkley C CfD. Nuclear power plants are expensive to build but, once built, supply inexpensive electricity. When the government began a bidding process to award the contract for difference, CfD, for new nuclear build, only two consortia entered. Possible consortia are limited to those who have a nuclear power plant design, can raise capital and have suitable experience. One consortium soon dropped out, leaving the Edf consortia with a monopoly as the only CfD bidder!
  2. The reactor design selected by Edf is, perhaps, the most expensive they could've found. The AREVA EPR is huge (1650 MWe), and over-designed. Per MWe it's nearly twice the price of a South Korean, KEPCO APR1400 (1455MWe). KEPCO are currently building their APR-1400 in the middle east for the price of USD $5 billion per reactor. The capital cost comparison: ERP: £4242/kW; APR1400: £2186/kW.
  3. The choices available to a supplier are highly constrained because it takes 5/6 years and £ millions in fees (£200 million per GDA was suggested to me) to obtain approval for a reactor design. UK Office of Nuclear Regulation, ONR, must do a Generic Design Assessment, GDA for every reactor design built in the UK. The GDA timescale is 5 to 6 years: (see page 5).
  4. This monopoly "choice" (of 1 reactor design) suits Edf. Edf and AREVA are both majority owned by the French state. AREVA also own the EPR design, and will build it. They developed the EPR together. In an ideal world an electricity provider will pick their nuclear plant design from the best solution provided by the market. Yet, there's no market here at all.
  5. There are 8 currently approved sites for new build nuclear power in Britain. These are the sites of decommissioned Magnox reactors (excepting Scottish sites where the SNP have banned new nuclear power). Each is owned by a potential nuclear plant builder and any new consortia wanting to build new nuclear power here must obtain such a site.

Five market failures lie at the feet of governments who've closed their eyes to the problems.

Two measures which could resolve this

  1. Force each new nuclear build consortium to pick their reactor from the best solutions available.
  2. Abolish the requirement for a specific UK generic design assessment.

My justifications

1. This requirement seems self-evident. For example, Edf should look at a number of compatible designs and sub-contract the build to a supplier providing the best solution.

2. At first glance, the UK ONR GDA approval process looks logical. ONR scrutinize reactor designs and make sure they're good enough for Britain. Our standards are very high. Yet ONR prefer to scrutinize designs which a peer has already approved. The preeminent ONR peer is the American nuclear regulator: NRC.

EPRUnder Review since Dec 2007, currently suspendedapproved Dec 2012
AP-1000approved Dec 2005expected approval in 2017
ABWRapproved 1997expected approval by Dec 2017
ESBWRapproved Sep 2014
APR-1400Under Review
US-APWRUnder Review

There are far more NRC approved designs available (3 modern reactors), and some of these, such as the ESBWR, are considered superior to similar types undergoing UK GDA certification, such as ABWR.

Britain gains nothing by imposing one GDA on top of another. We lose. We're forced to build the most expensive reactor design available anywhere in the world, or nothing at all. We should scrap the requirement for a specifically British GDA and simply accept that the US NRC do a thorough job. The US NRC have always taken a vanguard position in pushing through new nuclear reactor standards. Provided a new design satisfies core requirements for safety, or improves upon those requirements, it should be good enough for us. The NRC have many more GDAs under their belt than our ONR because the USA is a much larger market and acceptance by NRC is, to a degree, a gold standard. For my first recommendation to make sense, this next measure is essential. One can't select from several possible designs unless many designs are available.

2. The subsidy system is wrong.

Non-carbon energy is subsidised under 4 schemes in the UK:

  • Renewables Obligation, RO. It is only available for renewable energy.
  • Contracts for Difference, CfD. It forces government into decade long price support contracts. The Hinkley CfD is 35 years long.
  • Climate Change Levy aka 'carbon tax'. The carbon tax is now £18/tonne CO2 emitted. In electricity, it raises the price produced via fossil fuel. That increases profits for non-carbon electricity (renewable energy and nuclear power). It also increases minimum electricity prices; by about £1/MWh for each £1/tonne of tax. It hurts coal generation about twice as much as natural gas.
  • EU Emissions Trading System (ETS). This is notoriously gamed by business, and considered a sick joke by climate change campaigners.

[Hopefully I've haven't forgotten any. There are so many now, one loses track!].

The problem with subsidies is they distort the market, but some introduce worse distortions than others. Businesses will build their business model by chasing subsidy. This introduces inefficiencies into the national market. Because such businesses depend upon subsidy to keep them alive, they will lobby and fight tooth and nail to keep those subsidies going. A bad subsidy system is hard to abolish once introduced. A complex subsidy system, such as Britain has, enable businesses to play off one subsidy against another. Subsidies are gamed by business.

Most people pushing forward measures to account for fossil fuel externalities had an environmentalist mindset. It's a mindset that cares nothing for efficiency, and despises cheap, plentiful, energy because many environmentalists see energy as the problem: energy as the preeminent tool allowing humanity to harm the environment. Measures which unduly raise electricity prices are regarded as hidden bonuses by such people. As such we've ended up with an evil system of subsidies which unduly raise prices, and allow business to milk the system. With RO, environmentalists, must've thought they'd gained a major victory in pushing through their 100%-renewable energy utopia. Not quite. It lacks both legitimacy and public support. Because it only favours renewables it is illegitimate. Perhaps that illegitimacy has something to do with it's lack of public support?

The 'Fee and dividend' alternative.

In electricity, an alternative: "fee and dividend", could replace all current UK energy subsidies. It has few of the drawbacks of any of the 4 current systems.

Fee and dividend will work by charging fossil fuel electricity suppliers a fee for carbon burnt. Such a fee might be £40/tonne CO2 emitted. [ Many climate campaigners propose a tax of £75/tonne CO2. Done as Fee and Dividend instead, that would require a £75/tonne CO2 fee ]. In UK, a £40/tonne CO2 fee will raise the minimum wholesale electricity price to a floor of about £75/MWh. Any non-carbon supplier will, get this as the minimum price for their electricity. The fees raised are immediately given back to customers (to lower the actual price paid). The customer sees this 'dividend' on their bill as a refund. A fee and dividend will not raise prices by as much as a carbon tax.


Fee and dividend is simple, hard to game, does not force government into decades-long price support contracts, favours no particular technology over any other (in the same way RO do), cannot be challenged in the courts (as the Austrian Government or Greenpeace may do with the Hinkley CfD). It cannot be toyed and gamed with as ETS is. It increases electricity prices by the least amount possible while being compatible with maximum carbon dioxide reduction. It has an advantage to an environmentalist, of introducing a system to penalize fossil fuel emissions just like a carbon tax would, yet will not raise consumer electricity prices to the same degree. A £75/tonne CO2 tax looks impossible from where I sit. A £75/tonne CO2 fee in electricity generation is almost doable.


Seven criticisms are made of fee and dividend (in the link above), but many of them are clearly nonsense. Just Gish Gallup, piled on. Legitimate criticisms of fee and dividend must acknowledge the existence of externalities in energy production and seek the best means to mitigate these externalities. In other words: if you have a criticism, then what's your, proposed alternative for dealing with externalities?

One legitimate criticism may be that it would be easy to introduce for electricity generation but difficult for other fuel uses. To answer this, for a start, the UK does not need any carbon taxes on vehicle fuel because we already tax motor vehicle fuel at about 4 times the level of the proposed carbon tax! UK motorists pay the equivalent of over £300/tonne CO2 in taxes. That leaves heating and industrial fuel use as two areas to be covered for externalities.


Contracts for Difference. A complex price support mechanism
Renewables Obligation. A complex renewable energy subsidy.
Emissions Trading System. A complex carbon trading system. Shockingly easy to game.
Climate Change Levy. More complex than it need by. It may be traded off against the ETS.
Carbon tax
Climate Change Levy
Office of Nuclear Regulation. The British nuclear power regulator.
Nuclear Regulatory Commission. The USA's nuclear regulator.
3rd generation (Gen III) pressurized water reactor (PWR) design. Developed by Edf and AREVA.
3rd generation (Gen III) pressurized water reactor (PWR) design. Developed and designed by the Korea Electric Power Corporation (KEPCO).

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