1. The UK Government is faced with the challenge of minimising the cost of 20GW of new electricity supply by 2030 while also ensuring it complies with increasingly stringent emission targets.
Failures by successive UK Governments, stuck in the short-termism of modern politics, has resulted in UK energy policy being notably absent. Indicative of this is the decision of Theresa May’s new post-Brexit Conservative Government to delay the progress of Hinkley Point C despite EDF approving its construction. Another major example is the cancellation of Carbon Capture and Storage funding worth £1 billion. The only major area of Government support that remains is for offshore wind.
Time is now however, running out. By 2030, the UK must build almost 20GW of new electricity generation capacity to supply the nation and keep the lights on. This is equivalent to replacing 30% of power plants in existence today.
Historic margins of excess supply over demand have narrowed considerably in the past two decades, resulting in the current electricity supply squeeze the UK is experiencing today (Figure 1). Major closures of nuclear and coal capacity during the mid-2020s will create deeper gaps in supply that will need to be filled with new power plants. Should Hinkley Point go ahead today, the earliest it would be providing electricity is 2025. We are already playing catch up.
Figure 1: UK electricity supply with an estimate of future retirement dates of current plants closure dates, relative to UK electricity demand.
Source: Dukes, National Grid FES, Author assumptions on plant life based on numerous public sources which provide an indicative plant retirement date.
The major constraint on what technology the UK uses to replace aging power plants is its carbon emissions targets. Power station emissions have fallen by 39% from 1990 levels (Figure 2). Yet the UK has a long way to go. 2050 targets require a further 69% reduction in emissions.
Figure 2: UK carbon emissions by sector and future emission targets.
Source: UK Government Greenhouse gas emissions national statistics 1990-2014.
If we assume that the UK continues to adhere to European and International emissions targets, the UK Government must establish a policy framework which incentivises the construction of sufficient generation capacity, using technologies that meet environmental obligations, at the lowest cost. The UK spends £41 billion on electricity every year. This makes electricity spending larger than the cost of other public goods like Defence and Public order and about half the size of spending on Education.
Given the cost, it is sensible for the new UK Government to pause on Hinkley Point. Decisions made by today’s UK Government will determine the cost of electricity for the next 30 years. The current policy levers of CfD subsidies, the Capacity Market and carbon taxation are not incentivising the market to act in the way the UK needs it to. Instead, the Government must develop a new strategy and make consistent decisions that align with this way forward. Given the urgent need for supply, it cannot linger in designing this framework.
2. Assessing the UK’s zero carbon generation technology options by cost
The UK has only four main generation technology options available to its electricity generation mix:
- nuclear;
- carbon capture and storage (CCS) on gas / coal fired plants;
- biomass; and
- offshore wind (plus storage).
To meet the constraints on carbon emissions, the traditional unabated gas and coal plants are not feasible options. To meet security of supply requirements, intermittent generation like wind and solar cannot be the foundation of electricity supply because the UK cannot rely on them being able to generate electricity on a windless and cloudy day. This means that intermittent generation must add storage so they are able to supply the grid even when the weather conditions are unfavourable. Further, the security of supply constraint also limits the role of interconnectors for providing firm supply because the technology allows electricity to flow out of the UK as well as in.
The problem with assessing costs for these four options is that the technologies are new and typically not in commercial use today. The new nuclear technology, EPR, has yet to become operational. Three plants are currently in construction (Olkiluoto in Finland, Flamanville in France and Taishan in China) and all are delayed and significantly in excess of original cost estimates. There are no working Carbon Capture Storage pilots, let alone full scale operations in the UK. Battery storage is very expensive and the “intermittent plus storage” approach is only entering the pilot phase. This cost uncertainty creates significant challenges for decision making.
To get a basic understanding, Parsons Brinkerhoff on behalf of the UK government has estimated costs using best available information. Assessing this data yields some clear insights. First, initial costs of nuclear are significantly higher than alternative technologies. This is a range from £1.3 million/MW to £4.3 million/MW (Figure 3). Translating this into the 18GW of capacity required before 2030, costs would range from £20 billion to £80 billion. However, the story changes when assessing costs on a lifetime view (Figure 4). Nuclear has the lowest total cost of all zero carbon technology plants. The only technology with lower total cost is the traditional unabated CCGT plants which would fail to meet the carbon emission targets.
Figure 3: Initial construction costs for different generation technologies (£ per MW).
Source: DECC (Parsons Brinkerhoff), Electricity Generation Costs, December 2013.
Second, total lifetime plant costs for technologies tend to cluster around £16 million per MW. This corresponds to a 25 year cost to the UK of around £250 billion for the 18GW. There is no technology with costs that are materially lower relative rival technologies others and so there are no clear winners for the government or market to favour.
Last, interest costs form a large portion of total costs for nuclear and wind. For these technologies, no fuel input is required and so the costs are incurred either in construction and ongoing financing costs for the capital borrowed. The long borrowing period and high interest rate of 10% assumed by the Government’s study means that interest costs are up to 3.5 times the initial cost of construction.
Figure 4: Lifetime costs for different generation technologies (25 years, £ per MW).
Source: DECC (Parsons Brinkerhoff), Electricity Generation Costs, December 2013. Author analysis.
Note: The adjustment for intermittency uses average load factors relative to a CCGT plant.
These insights lead to the four following recommendations for the future of UK energy policy:
- The UK Government must act rapidly to develop a clear strategic framework within which to incentivise future generation technology;
- Take tactical steps to reduce the uncertainty on today’s cost estimates. Create a flexible strategy that enables targeted learning through pilot schemes. This keeps options open and minimises sunk capital;
- Take a lifetime approach when assessing costs. For example, nuclear has the highest upfront building costs, but lifetime costs that are slightly lower than other technology options; and
- Consider funding infrastructure projects at the public level, which benefits from significantly lower interest rates and creates large lifetime cost savings. Funding at 3% rather than 10% reduces interest costs for nuclear by over 75% and lifetime costs by 45%.
There is significant value at stake for all UK taxpayers. The UK spends £40 billion a year on electricity and we are stuck with policy decisions made today for the next 30 years. The UK must ensure it makes the right choices using the best information we can obtain.
Energy Envelope 