Covid-19 has upended the world. The New Normal is a 10-part series looking at the dramatic ramifications it has had for the world of economics and business. This final article looks at the energy sector, where a fall-out with China has led to a rethink on future power generation.
Standing outside Taishan nuclear power plant in October 2013, George Osborne made a momentous pledge. The then-Chancellor had travelled to the southern Chinese province of Guangdong to announce a bold new ambition for Britain’s energy industry.
Britain would throw open its doors to Chinese investment in the next generation of the country’s nuclear programme. The decision, Osborne said at the time, would pave the way for a Chinese company to one day wholly own a nuclear power station in the UK, and ultimately lead to cheaper energy bills for British households.
“I want to see Chinese investment in the British nuclear power industry,” he said, as construction roared on behind him. “First as a partner with others, but I can see the Chinese becoming majority owners of a British nuclear power plant.”
In the short term, Osborne continued, it would free up British taxpayer money to invest in schools and education. And further down the line, consumers in the UK would reap the rewards through lower energy costs.
That vision now lies in tatters, experts and industry veterans say. In the post-Covid age, Britain’s energy demands will continue to rise, but these must be balanced with the need for a greener economy.
Towards new funding models
With China’s investment in future British nuclear projects looking uncertain given the increasingly fraught relations between the two countries, the conversation has turned to new funding models that rely on taxpayers picking up the bill.
“If there is such a thing as evidence-based UK energy policy, then a new large nuclear plant looks more or less [to be] a thing of the past,” says Professor Paul Dorfman, a nuclear industry expert .
One of the few viable alternatives to Chinese investment is the so-called regulated asset base (RAB) model, which would add a fixed charge to consumers’ energy bills to finance the development of new nuclear power plants.
The Government is currently considering using the RAB model for future projects, and industry sources say that it is likely to publish an official study in the autumn outlining its decision on the matter.
Since Osborne’s declaration about Chinese funding for nuclear energy in 2013, the UK has only made headway on one project, the £22.5bn Hinkley Point C nuclear plant in Somerset.
A joint venture between French state-owned energy giant EDF and Chinese state-owned nuclear contractor CGN, it will provide low-carbon electricity for about six million homes and meet 7pc of the country’s electricity needs.
But the project has been plagued by setbacks and cost overruns. The pair have contributed the vast majority of funding upfront.
As part of their initial agreement, after Hinkley Point C they would go on to build Sizewell C in Suffolk, and eventually Bradwell B in Essex – which is unique in that it will see CGN owning the majority stake and introducing its own nuclear reactor. Each project is expected to cost roughly the same amount.
For the past two years, EDF has called on the Government to switch to a taxpayer-funded model for Sizewell C, as it heaves under the strain of funding such costly projects on its own.
“If applied to Sizewell C, [the RAB model] would lead to lower financing costs and significant savings for consumers,” the company says.
But opponents of the model argue that it leaves British households on the hook for any delays or additional costs.
The issue of funding has taken on a central role once again in the past month, after it emerged that the Japanese group Hitachi was still interested in developing a new nuclear plant in Wales.
The company paused construction on the £20bn project in 2019, after it failed to reach a breakthrough with the Government over who would pay for the plant.
Hitachi decided that the project posed “too great a commercial challenge”, despite an offer from the Government to take a one-third equity stake.
Now, the company has announced it could quickly begin work on the project if the Government agrees to move to the RAB financing model.
“The Japanese are clearly not going to fund it,” says Dorfman, adding: “So essentially it comes down to whether large nuclear is manageable, and the answer is no.
“It has proven to be unmanageable, it never comes on time, it’s always over cost, and always needs large state funding.”
Hitachi is keen to show the Government it is still committed to developing the plant in Anglesey – just in case this autumn’s assessment opts for a taxpayer-funded approach, a source says.
Future energy sources must be clean
The UK Government has repeatedly insisted that nuclear power is central to its clean energy ambitions. Nuclear offers the benefit of being highly reliable when compared to renewable energy such as wind and solar, despite the latter two being vastly cheaper.
According to the engineering group Atkins, nuclear power will be essential to Britain’s hopes of being net zero in the next three decades.
Currently, Britain has eight operational nuclear reactors remaining, four of which are currently offline due to safety concerns about their ageing reactors.
“New nuclear has an important role to play in providing reliable, low-carbon power as part of our future energy mix as we tackle climate change,” the Government says.
In June 2019, Boris Johnson stated his “passionate” support for nuclear power in his first address as Prime Minister to the House of Commons. "It is time for a nuclear renaissance and I believe passionately that nuclear must be part of our energy mix," he said.
But despite an insistence that countries and companies are queuing up to build new nuclear plants in Britain, the list of those who can actually afford to do so is limited to just China.
While a handful of companies still have the expertise to develop nuclear reactors – Japan’s Hitachi and Toshiba, and South Korea’s Kepco to name a few – none are able to manage the onerous costs on their own.
“It was difficult to find co-investors in the private sector for these projects. The only reason EDF got involved is because they are owned by the French state, who have their own reasons for wanting to get involved,” says David Toke, professor of energy politics at the University of Aberdeen.
China’s CGN is different in that it enjoys the backing of the central government in Beijing, something that has caused much consternation in Westminster.
Senior Conservatives have demanded a review of the Hinkley Point C plant after an investigation by The Sunday Telegraph found that CGN was more closely involved in the project than previously disclosed.
As security concerns over Chinese involvement in critical infrastructure are escalated by diplomatic tensions, a project meant to herald a new era of co-operation on nuclear energy faces renewed scrutiny.
And with mounting opposition to transferring the risk of these mammoth projects on to British consumers via the RAB model, Britain’s nuclear industry finds itself at a crossroads.
If ties between Westminster and Beijing continue to deteriorate, Chinese funding may no longer be an option. With the French government becoming increasingly irritated with EDF over its hefty financial losses – going so far as to fine it £4.5m for misleading investors over the cost of Hinkley Point C – that option also looks like it may have run out of road.
“Given the balance of cost and risk, a renewables-based system looks a safer bet at present than constructing multiple new nuclear power plants,” the National Infrastructure Assessment (NIC), a government advisory body, said in its most recent report on the sector.