Picking winners and nuclear power

Faced with ambitious climate change targets, the government has decided that nuclear power will play a leading role in supplying the UK’s future electricity needs. Ten new plants will be built in the next decade or so, which should provide about a quarter of total supply.

The nuclear option appears to be far more sensible than an equivalent expansion of wind power. Indeed, the unreliability of wind energy means that it must be backed up with conventional capacity, while its dispersed geographical distribution imposes additional costs on the network infrastructure.

Yet nuclear has its own problems. If the new plants are built on schedule and on budget then the impact on electricity prices is likely to be relatively small. Historical experience, however, does not support such optimism.  

Britain’s previous nuclear programmes were economically disastrous. They were plagued by delays, cost overruns, and design flaws. In today’s prices development losses amounted to at least £20 billion, while decommissioning may end up costing another £75 billion.

It is quite plausible that the latest plans will face similar problems. If capital costs rise significantly there will be upward pressure on bills. As a result of political obstacles to new fossil-fuel plants, there is also a severe danger that electricity prices will be pushed higher still by an artificial shortage of capacity if there are delays to the nuclear plant coming onstream.

Then there is the risk borne by the taxpayer if nuclear consortia run into financial difficulties. Given the centrality of the programme to environmental policy, the government will be obliged to ensure construction is completed at almost any cost. And, of course, the difficult-to-price long-term burdens of decommissioning and waste-storage will be loaded on to the taxpayer or electricity consumer.

If the government is determined to reduce carbon emissions then it would surely be more cost effective to set a general framework within which energy companies would be free to choose the most efficient methods of generation. The well-known economic calculation problems facing central planners and the powerful role of special interest groups mean that policies based on micro-management and picking winners are almost always unsuccessful.

If tax payers and consumers are both to get free electricity, then who should pay? Should the development, decommissioning and waste storage costs not legitimately be factored into pricing these investments at the start, be they carbon capture and storage of coal fired or nuclear waste?Electricity and other utility provision has been given over to the free market since privatisation in the 1980’s/1990’s. With the commercial freedom to innovate, invest and access market capital, what has stopped electricity companies from choosing the right technologies and taking the initiative and investing?Would it be too trite and overly simplistic to blame government and regulation?

Jonathan – I think you are quite right to blame government and regulation. In the early-to-mid 1990s there was significant private sector investment in new capacity (e.g. the ‘dash to gas’). However, in the last ten years or so the political risks facing investors have multiplied as the government has taken a more pro-active approach to directing energy and environmental policy.

Correct. Let nukes stand and fall on their own commercial merits. Subsidies No Thanks!

Richard – What about the NIMBYs though? The reason that the plans for the Kingsnorth coal power station have been halted coincided with the environmental protests. Your earlier point emphasizes support for that technology to meet growing demand.The Conservative Party Plans to abolish the new planning commission improve matters in getting vital national infrastructure built, to avoid the power supply shock, handing power back to Ministers. Will that mean more or less government intervention?

There is a contradiction in thinking over planning at present. There is the desire to get large national projects built quickly, but the recognition that local communities should be involved in decisions over housebuilding and local infrastructure. But from one point of view all projects are local. It will be interesting to see how the Conservatives tackle this.

Jonathan – I agree with Peter that there is a contradiction in thinking over planning. The preferences of NIMBYs and infrastructure entrepreneurs could be reconciled through a system of private planning, which could develop if existing controls were lifted.

Tim Leunig has done some interesting work on local incentives and the planning system which are pertinent to local housebuilding. The problem is how this might work for larger scale projects where the pay-off are less clear cut.

Tim Leunig’s work on planning is brilliant (and his famous Policy Exchange report, Cities Unlimited, is excellent). Although Tim’s planning proposals are objectionable on strict libertarian grounds, because of their violation of landowners’ property rights, they would almost certainly be a big improvement on the current system.

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