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Last Updated: Monday, 10 July 2006, 22:18 GMT 23:18 UK
Investors to calculate nuclear returns
Analysis
By Jorn Madslien
Business reporter, BBC News

On Tuesday, Energy Minister Malcolm Wicks is expected to make public Britain's intention to invite the private sector to build a series of new nuclear power plants.

Nuclear sign painted on barrel of waste
Investors are wary about taking on unquantifiable risk

He will most likely argue that such newbuilds would not only be cleaner than fossil fuels, but also be a commercially attractive alternative that could be achieved without subsidies.

And he will no doubt be met with a host of naysayers who will point out that that so far nuclear power plants have been hugely expensive to build, their running costs have been large, the bill for cleaning up after them is set to run into billions of pounds, and across the board cost overruns are common.

But while the antis feel empowered by their arsenal of economic arguments, proponents insist costs have plummeted.

And in truth, who is right depends largely on who does the maths, and how.

Risks and rewards

It may be tempting to think that the private sector would be perfectly capable of figuring out whether their involvement in the construction of new nuclear power plants is a good idea or not.

But investors and companies, who carefully balance risks versus potential rewards, will only get involved if the government first creates a framework that dramatically reduces uncertainty.

The suppliers claim that this new generation of plants will be cheaper and quicker to build (and) safer to operate... [but] there is no commercial operating data to support these claims at present
Deloitte

Therefore, given that the government will be eager to ensure that the private sector carries the financial and reputation risks of building and operating nuclear power plants, it will do all it can to facilitate investment.

"They've got to provide the framework," says energy expert Mark Spelman of Accenture, a consultancy.

Removing red tape by simplifying licensing and planning rules with regards to newbuilds would go some way towards mollifying concerned investors.

Nuclear power production is nearly carbon free, unlike alternatives like gas, oil and coal, so raising the cost of rival energy generation from fossil fuel would also make nuclear investment look more tempting.

Measures such as carbon pricing, emissions trading and polluter-pays style taxes would help "encourage investment in low carbon technologies", according to the Royal Society.

Again, points out Mr Spelman, investors want a clearly mapped out framework. "People want to know where they stand," he says.

Investors will also want to make sure that that the demand is there for the power they will be producing. Unlike fossil fuel plants, nuclear power plants cannot be mothballed during periods of low demand.

It is therefore likely that nuclear plants will be held as part of diversified portfolios also containing oil, gas, coal, wind and biofuel investment.

Safe investment?

If private investors can be convinced they will be permitted to build the plants needed, it will then be time to consider the price of bricks and mortar.

Nuclear waste reprocessing at Sellafield
The government must still take responsibility for the waste

They will be looking at a catalogue of new generation nuclear reactors, on offer from suppliers in France, Germany, the US and Canada.

"The suppliers claim that this new generation of plants will be cheaper and quicker to build, safer to operate through more passive safety systems, and enhance performance," observes Deloitte, a consultancy, in a report.

But not so fast.

Deloitte also adds that "there is no commercial operating data to support these claims at present".

Major commitment

New generation nuclear power plants might be cheaper to construct then they used to be, but they would still require a huge financial commitment.

"Nuclear suppliers have indicated that savings on subsequent plants can be between 10% and 40% of the cost of the first plant," observes Deloitte.
Deloitte

One likely way forward, therefore, would be for investors to join together in a consortium that jointly decides on building a fleet of identical power plants - rather than each investor choosing different, competing reactor designs.

Such a consortium, Mr Spelman predicts, is likely to be composed of major power generators such as British Energy, as well as RWE and E.ON of Germany and EDF of France. Investment banks would also get involved to raise the finance, he adds. p> The consortium model, then would take advantage of economies of scale - and it might also operate something like a monopoly, creating high barriers to entry into the market by rivals.

The risk to reputations should the projects run into problems would also be shared.

And a consortium would also be able to negotiate hard with reactor suppliers, who could find themselves in an all-or-nothing situation: the chosen reactor supplier would rake it in, while its rivals would be left out of the game.

A fleet of identical power plants would also be an efficient way of using scarce manpower in the UK. Building the first plant would enable a single group of specialists to apply what they have learnt to the entire fleet. Upfront licensing costs for one design could be spread across each duplicate plant.

"Nuclear suppliers have indicated that savings on subsequent plants can be between 10%-40% of the cost of the first plant," observes Deloitte.

But even more crucially: huge cost savings could be achieved from dealing with just one type of nuclear waste.

Politically, this would be crucial for the government, which would probably have to take on the responsibility - if not all the cost - of decommissioning and waste disposal.


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