An early and radical reform of UK electricity markets is needed to provide a framework to secure large-scale private sector investment in nuclear energy in the UK, consultancy group KPMG has warned. Such investment, it says, will be needed for the country to meet its ambitious emission reduction targets.
The UK government's climate change bill, launched in March 2007, sets a series of clear targets for reducing carbon dioxide emissions - a 26-32% reduction by 2020 and a 60% reduction by 2050, which will be legally binding. The bill also includes a new system of legally binding five year 'carbon budgets', set at least 15 years ahead, to provide clarity on the UK's pathway towards its key targets and provide the certainty that businesses and individuals need to invest in low-carbon technologies.
In a study commissioned by German utility RWE, a joint venture partner in Horizon Nuclear Power that plans new reactors in Britain, KPMG concludes that much clearer planning is required by the UK government on how it will meet its targets. A transition plan of this kind, it says, is likely to show a need for significant investment in new nuclear generation.
"The key issue is
whether there should be
a single market for all
low carbon electricity or
multiple markets for
KPMG said, "Positive investment decisions on the scale of new nuclear generation required under most scenarios are unlikely to be achieved under the current framework." It added, "A carbon price floor may provide some benefits to investors in new nuclear generation but will not be effective on its own in achieving positive investment decisions of the scale required."
"The current approach to low carbon generation relies on government interventions which are inconsistent with one another," the report says. "The creation of a more consistent market design to reward low carbon energy or capacity could enable investment in new nuclear generation - and other low carbon investment - to proceed. The key issue is whether there should be a single market for all low carbon electricity or multiple markets for different technologies."
The study notes, "A large scale and rapid expansion of nuclear generation in the UK would stretch on-balance sheet financing by the current consortium partners. If such expansion is deemed desirable, a more radical change may be needed to de-risk the investments and attract in new sources of finance."
However, KPGM says, "For the purposes of clarity, the report does not recommend government subsidies."
RWE commissioned the study because it wanted an independent assessment of whether it will be possible to secure positive investment decisions and commitment of finance for the scale of nuclear generation investment required in an efficient and timely manner. RWE also requested that KPGM advise on any changes to the policy, market and regulatory framework to make new nuclear build attractive to potential investors.
In writing its report, KPGM consulted with the seven potential nuclear project sponsors in the UK: Centrica, Electricité de France (EdF), EOn, GDF-Suez, Iberdrola, RWE and Scottish & Southern Energy. It also consulted with policy makers, rating agencies and a wide range of potential sources of finance.
Richard Noble, European power and utilities partner at KPMG, commented: "Nuclear energy has to play a central role in an affordable, secure low carbon generation mix if the UK is to meet the government's ambitious emissions targets." He added, "Nuclear represents the least cost low carbon electricity generation; however, our research indicates that radical changes to the current electricity market will be required to secure the large scale private sector investment required for nuclear new build to proceed."
"Currently, low carbon generation investment, other than nuclear, relies on a series of inconsistent interventions that operate outside the wholesale market. We explore a range of scenarios for electricity market reform," Noble said. "While there is no simple answer, it is clear that a more consistent design is needed to reward low carbon generation. This could be achieved through price mechanisms, such as tradable obligations or premium tariffs, which would leave the generators bearing some degree of market risk."
"Ultimately, any modifications will depend on the scale of nuclear new build considered desirable to ensure government policy objectives are met. Early decisions need to be implemented if the UK is to achieve its transition to low carbon electricity generation."
Researched and written
by World Nuclear News