Monday 19 October 2009

The Nuclear Subsidy-Wallahs Are Back

The Grauniad reports today that, despite protestations to the contrary over several years, our beloved government is planning to subsidise new nuclear power stations – by a levy on us all to ensure the price of CO2 doesn’t fall below € 30.

This is not actually new: I can tell you that DTI / BERR / DECC / XYZ have been contemplating not only a nuclear levy but also a ‘diversity’ levy (to make electricity suppliers buy their power from a wide range of different sources) and a ‘capacity’ levy (to make them buy large amounts several years in advance). We already have a renewables levy, of course,

Putting aside for a moment the prospect we’ve noted before, that such levies may count as government spending (and thus be quite awkward for several years to come), you really have to marvel at the reasoning.

> nuclear power ‘needs’ a CO2 price of greater € 30 to be ‘economic’
> today’s prices (spot and forward) are a lot less – around half that - and thanks to (a) plenty of measures taken to cut emissions (!!), and (b) the recession, they are set to stay that way for quite a while
> so nukes ‘need’ a minimum price to be guaranteed by the government, thank you very much

This syllogism only works, of course, if we ‘need’ 'em in the first place !

Here’s the answer. There is no natural market in clean energy, so the EU has created one using cap-and-trade on CO2 emissions – and in mechanistic terms it works very well, too. Let’s assume it continues in being (indeed, probably to be joined by a US one in due course).

IF the caps have been set at the correct level to meet emissions targets - and, with a couple of exceptions (Poland, this means you) they have, and IF the resultant CO2 price is less than the level required to justify nuclear power at the moment, THEN it means we don’t need nukes to get our emissions down – at the moment. We only need whatever can be justified by reference to the forward price of CO2.

Ah, the nukes say (well,
aarrgghh!, actually), but that ignores the long lead-time for nukes to be built, there isn’t a CO2 forward curve out 8-10 years. So we ‘need’ the government to guarantee one for us.

No, matey, you ‘need’ the government - well, us actually - to make an heroic, costly and entirely speculative shot in the dark, to cater for the highly probable contingency that we solve our problems before 2018 or whenever it is you think you might be ready, using much cheaper means.

I can confidently predict that this will be by a combination of gas and coal. And if this means we need to find a
modus vivendi with the Russians, well, that’s what we’ll do.



Anonymous said...

In the book of government's most costly failures Nuclear Power ranked no1.
The author guessed as there were no accurate figures and a lot of hidden costs never ever revealed.
Is this new move going to allow them to beat that record?

James Higham said...


Nick Drew said...

Hope so !

Old BE said...

Have to agree with your main point which is that the carbon market should surely be managed only to ensure the proposed desired outcome which is carbon dioxide cuts. It is up to the market how those carbon cuts are effected in the most economically efficient way.

If the market is fixed, who are the losers?

Mark Wadsworth said...

Top stuff, but I don't agree with this cap'n'trade nonsense.

Sure, fossil fuels are finite (even though we've no idea how much is down there) so the emphasis should be on charging as much as possible for drilling licences and/or imports thereof*. Which will hopefully encourage efficient use thereof once it's out of the ground. Efficient use = using as little as possible for a given end.

It doesn't really matter how high the tax is - provided the proceeds are dished out as universal benefits or universal tax cuts. The average guy will be no better or worse off, but there will be a constant pressure to use less of it. The granny shivering in a council flat will be a winner compared to your premier league footballer with a 7 litre sports car and an 18 bedroom mansion.

* There is an interesting trade off here. If the Saudis know that British motorists are prepared to pay £1 a litre and it costs 20p to extract and supply a litre from desert sands all the way to your local petrol station, why on earth don't they slap an 80p tax on a litre of oil export themselves?

Nick Drew said...

BE you are of course spot on

Mark - we've no idea how much - absolutely right, most areas of the world (outside USA & Europe) have only been scratched at - and it's a lot more than most people think, esp gas

do you really mean a UK tax on UK drilling licences ? nothing will make the North Sea shut down quicker

Don't you mean a tax on the delivered product - i.e. 'duty' ?

I shall post shortly on what the Saudis do, there are some truly dysfunctional dynamics at work here

Anonymous said...

What I do not understand is why you lot seem to accept that capping carbon emissions is actually needed.

CO2 has NO correlation with global temperature.

Have any of you actually read the fucking crap that the UN is passing?....That will be signed into law in December?
Have any of you any notion of the additional overheads, via taxation, and other schemes, not to mention interminable bureaucracies
that will be built around this nonsense, aimed at global control by an unelected parasitical UN?

The entire justification is based on lies, and non-science, ultimately designed as a charge on every energy transaction, globally, and shifting power away from elected officials. And you swallow it like sheep!


Ask the wrong question, get the wrong answere.

Nick, I am surprised at you. With your knowledge you should have changed pulpit long ago.

Yeees, I know we are where we are, but that doesn't mean you have to roll-over, - - animal farm, and all that!

Nick Drew said...

@9:15 - this isn't one that can be calmly debated so I shan't try


just as a matter of interest, why do you suppose those ultra hard-headed realists the Chinese broadly accept this 'non-science' ?

oh, don't tell me, I can guess, it's because they want to see the West tie itself in knots ...

Old BE said...

Spot on = agreeing with ND - easy! ND for PM!

[off topic, but your blog roll link to my place was out of date when I last checked, is there any chance of an update?]

Letters From A Tory said...

Perhaps we can burn crooked MPs at the stake to produce energy? Given the current number in Parliament, I reckon they could keep the national grid going for a few years.

Anonymous said...

Or you could read this for the "Legal Version" of aforementioned crap

Anonymous too said...

why do you suppose those ultra hard-headed realists the Chinese broadly accept this 'non-science' ?Do they? They are building lots and lots of coal-fired power stations. They've very recently started to make positive noises; maybe they are looking forward to financial transfers from the developed world, as the Maldives and Tuvalu are?

Old BE said...

As my hero Ed Miliband points out, China produces half the CO2 per capita that the UK does at the moment.

Anonymous said...

You just proved my point!

Mark Wadsworth said...

Nick, for clarity:

North Sea oil gas and UK coal has a market value of £x and extraction/delivery costs of £y. These energy companies plan years ahead and it's up to them to set the price via government-run auction (like the 3G).

Obviously, a lot of licences are already in place and have a long time to run, so this all has to be medium/long term, but the chances are the winning company will bid slightly less than £x minus £y.

And if they overbid (as happened with 3G), then so what? That's sunk costs - once you've paid for something, just because it turns out to be less valuable than you thought, it doesn't discourage you from making the best of a bad job.

There is a subtle difference between taxing at point of extraction/import (like drilling licences) and taxing at point of sale to end-user (like 'duty'). The former is usually much better than the latter as it is simpler.

As we import most oil and gas, what I am really talking about is import duties (i.e. not much different to what we've got), there are plenty of other taxes we can scrap (like VAT on fuel, the road fund licence etc) to even all this out.

rwendland said...

"eight new reactors – costing more than €20bn" (= €2.5bn each) - Ho, Ho, Ho!

Over in Yankland they plan on paying $14 billion (plus $3 billion for transmission upgrades) for two AP1000s, which have 66% of the power output of the French EPR. So ~$8bn each for much less power.

What is the €/$ exchange rate in Nuclearville fantasy land?

First Of A Kind doesn't have that enormous a premium! Those "more than" words have more than the usual significance!

Nick Drew said...

OK, Mark I'm with you & obviously the sunk-costs point is right

there are in fact already up-front exploration licence fees of various sorts in the North Sea and, like 3G, the applicants bid in the various licensing rounds that are run

but it's fairly academic now since the North Sea is deep into its decline phase, so as you say, imports are the relevant point of application for your approach

usually much better than the latter as it is simpler

but consider this: in a hairy region like the North Sea the average lead-time between getting an exploration licence and going into production is more than a decade, often much more. Plenty of licences turn out to be dry. Anything a company is willing to offer upfront for the licence is as heavily influenced by the possibility of complete failure as it is by oil-price forecasts fortwenty years hence (which for a long time would have been gross under-estimates of the out-turn prices, BTW)

in other words, a government wishing to maximise revenue will raise far more by a royalty or a windfall tax etc on actual production, than solely via license fees

(this may not be the case in easy-to-find oil areas like some parts of onshore USA were - once upon a time ...)

I could suggest ways to overcome some of these problems ... but simple ? no !