On the 18 May 2022, the UK Prime Minister Boris Johnson responded to a question from the leader of the opposition on the cost-of-living crisis facing the county. He said: “What we want to see is investment in the long-term energy provision of our country; Labour has signally failed to do this, cancelling our nuclear power investment. The people suffering from high energy prices in this country today have previous Labour governments to blame for that mistake.”
Johnson’s government is in the midst of trying to launch a new wave of nuclear power plant construction in the UK and seems keen to draw a distinction between its action and the Labour Party’s inaction while in government.
It is true that during the 13 years Labour was most recently in power, between 1997 and 2010, construction did not begin on any new nuclear power reactors. Yet Johnson’s Conservative Party has been in power ever since, and those 12 years have seen no new nuclear power stations completed either.
The only nuclear reactor currently under construction is Hinkley Point C, but given the lengthy delays, controversially high costs and public opposition that has dogged the project, it would take dizzying levels of spin to convince people that delivering it was a triumph for the Conservatives.
Developing new nuclear power stations is technically very difficult, takes a long time, is hugely expensive and politically controversial. No new nuclear power stations have been completed in the UK since Sizewell B in 1995 and the country’s nuclear fleet is now in desperate need of replacement, a failure of successive governments since the 1970s.
The number of nuclear power stations that have been decommissioned far outnumbers those that remain operational.
The current government now wants to radically change the pace of development and build eight new nuclear reactors, but will it learn from the various mistakes of the past few decades?
According to the World Nuclear Association, British scientists were preeminent in the development of nuclear energy during the 1940s, and in 1946, the post-war Labour administration of Clement Attlee established the Atomic Energy Research Establishment, which went on to build the country’s first nuclear reactor.
The Conservatives returned to power in 1951, and under Winston Churchill announced a civil nuclear power programme in 1953. The following year the Atomic Energy Authority Act 1954 created the Atomic Energy Authority, responsible for the UK’s nuclear energy programme.
The world’s first commercial nuclear power station at Calder Hall was opened in 1956, under Churchill’s Conservative successor Anthony Eden. It was the first of eight small prototype Magnox units at Calder Hill and Chapelcross in Scotland.
The design life of the original Magnox units was 20 years, but most ran for twice that period, according to the World Nuclear Association. The Suez Crisis of 1956 had increased concerns over the supply of imported fossil fuels and prompted the UK to seek greater energy security by building out nuclear power generation.
Under both Conservative and Labour administrations, the UK became a leader in nuclear power development, commencing operations on 26 Magnox reactors between 1956 and 1971.
It was in the last few months of the Alec-Douglas-Home Conservative government in 1964 that a white paper on a new phase of nuclear development was published. This led to the deployment of new advanced gas-cooled reactor (AGR) technology across a fleet of new power stations. The technology had been developed by the state-owned Central Electricity Generating Board (CEGB).
All of the nuclear power plants built in the UK between 1976 and 1989 used the AGR design. The only other completed nuclear power project in the country is Sizewell B, which began operating in 1995 and uses the US-developed pressurised water reactor technology.
All throughout this period there was political consensus in the UK on the need to build nuclear power stations to improve energy security. Although Conservative administrations have approved more nuclear power plants to date, those approved by both political parties equates to a similar amount of added generation capacity.
Privatisation and the impact of Chernobyl
The CEGB was a vertically integrated power utility, overseeing generation, transmission and distribution of all power in England and Wales. By the 1990s, the Conservative government’s zeal for privatisation had transferred to the energy sector, and the CEGB was split into four separate companies.
In 1990, the nuclear power stations of England and Wales were moved into a new publicly owned entity, Nuclear Electric, until a route into the private sector for the assets could be determined. Similarly, operational nuclear reactors in Scotland were transferred into Scottish Nuclear.
These two entities were combined in 1995, and then the following year the assets were split between the old Magnox reactors to be housed in new entity Magnox Electric, while the more modern reactors formed a new private company called British Energy.
“The CEGB was a guiding mind that might not have been as efficient as it could have been, but breaking it apart was a bad idea,” says Tim Stone, chair of the Nuclear Industry Association.
Nuclear power stations have big fixed costs, so profits are usually modest, with few opportunities to create efficiencies and increase profitability. According to Stone “these assets were always challenging to privatise in an era where we had liberalised gas and electricity markets – never really privatisable in the first place”.
All the while nuclear power assets were being privatised, there was no new development of nuclear power stations undertaken. The disaster at the Chernobyl nuclear power station in what is now Ukraine in 1986 had terrified the world, after an explosion led to a massive radiation leak.
“The decision not to proceed with nuclear power generation was a cross-party decision in the 1990s”, says Andy Renton, a principal at Castletown Law who has worked in the nuclear energy sector since 1992. “Politically, no one would go anywhere near nuclear in the early 1990s because of Chernobyl. No politician wanted to be associated with it because public perception was it is very dangerous and is going to kill us and our children.”
The collapse of British Energy and sale of Westinghouse
A new reactor at the Hinkley Point site, Hinkley Point C, was originally given planning permission in 1990, yet a government review conducted in 1994 and published in 1995 advised that neither it nor Sizewell C should proceed. That review also advised that as much of the UK nuclear industry as possible should be privatised.
British Energy was privatised in 1996 and by 1998 had become the country’s largest power generator. With no new nuclear power plants to be developed in the UK, it began to acquire businesses both domestically and overseas, buying power stations in the US and Canada in the late 1990s.
However, according to the World Nuclear Association, “high payments to shareholder rather than adequate investment” in its plants sowed the seeds of future trouble for British Energy, resulting in “several unplanned outages”.
Huge investment in new gas-fired power stations following privatisation of the sector, a period that became known as the 'dash for gas', led to a sharp drop in wholesale prices in the UK. With their high fixed costs, nuclear power stations were particularly vulnerable to this change in market prices and by 2002 British Energy was unable to meet its liabilities. After a government bailout and years of restructuring, the assets of British Energy were eventually sold to France's EDF.
By stepping away from state ownership, the government’s plans for privatisation had led to all of the modern nuclear power stations in the country being in the hands of a company owned by the French state.
Alan Johnson, the then Trade and Industry Secretary, said: “Westinghouse is currently putting four nuclear reactors in China. It is a very high-risk strategy. We don’t think the taxpayer should be taking that risk. For those reasons, I think it is not the job of government to keep hold of Westinghouse. It is better for the UK to be getting a good price.”
Johnson also said that if the UK did build new nuclear, ownership of Westinghouse would have created competition issues.
Fast-forward almost 20 years, and Westinghouse is now rumoured to be in discussions with the UK government to be a technology vendor for one of the planned new nuclear reactors.
The sell-off of Westinghouse and British Energy were part of a wider privatisation of British industry at the time. Depending on a person's political ideology, they could argue that these moves were prudent financially, but if they were intended to lead to more investment in the UK nuclear sector, they seem to have backfired.
Hinkley Point C and Sizewell B were British Energy projects that did not progress because the UK government would not support them. The government is now trying to get them both built but is beholden to the priorities of EDF.
2006–10: Nuclear power resurrected in the last days of Labour
Those involved in discussions at the time said that the politics around nuclear energy started to change during the final few years the Labour Party was in power. Finding a way to build new nuclear power stations was again seen as a necessity.
Some have claimed the government’s U-turn on nuclear power was due to a concerted PR campaign by the nuclear lobby between 2003 and 2006. Others say the decisions was prompted by a desire to reduce the country’s long-term reliance on imported gas, a recognition that much of the existing nuclear fleet was ageing fast and that several utilities had expressed an interest in building new nuclear plants in the UK.
Many of the nuclear power plants operational at the time were reaching the end of their lives. Of the original Magnox reactors, four were scheduled for decommissioning in 2006 alone and as many as ten had been shut down over the previous three years. The last new reactor built in the country was still Sizewell B back in 1995, and even the AGR reactors were now reaching the end of their lives.
A government review of the UK energy sector in 2006 recommended that new nuclear power stations form part of the country’s future energy mix, and that the proposal, development, construction and operation of new nuclear power stations should be led by the private sector.
Following publication of the review, the generic design assessment (GDA) was introduced for new nuclear from 2007. This three-step, four-year assessment process was intended to identify potential design or technical concerns before construction licences or permits were applied for.
Then the Planning Act 2008 established the concept of nationally significant infrastructure projects, which are projects that are awarded development consent orders to reduce the consents required for building them.
Sizewell B was cited as an example of a nationally significant project that under the old regime required approval under several different pieces of legislation. Under the new streamlined process, the secretary of state could unilaterally approve any major infrastructure project that had been recommended for fast-tracking by The Planning Inspectorate.
“It was what we called 'facilitative actions',” says Stone of the Nuclear Industry Association. “Effectively readying the cricket pitch, so industry could play the game and compete. The aim was 16 gigawatts (GW) by 2025 and it was doable at the time. There were six big energy companies with big balance sheets interested – but then that all disappeared.”
The global financial crisis of 2008 saw interest from utilities evaporate as they struggled financially. It also led to a change in government. Gordon Brown, who had succeeded Tony Blair as prime minister in 2007, lost the 2010 general election and was replaced by David Cameron, who headed up a Conservative-led and Liberal Democrat-supported coalition.
In the early years of the coalition, three developer consortia had rekindled their interest in building new nuclear reactors in the UK – the RWE npower and E.ON joint venture Horizon Energy, which had development rights for sites in Wylfa and Olbury-on-Severn; the GDF Suez, Iberdrola and SSE joint venture NuGen, which had proposed the Moorside project near Sellafield; and EDF at Hinkley Point.
The challenge for the new coalition government was how to fund new power projects, not just for nuclear but for a wave of offshore wind farms that would eventually transform the UK energy market.
CfDs and the Hinkley Point C deal
The funding mechanism introduced by the coalition government, contracts-for-difference (CfD), guaranteed power generators a floor price, determined by open auction. In the case of offshore wind, as the technology became more established and development costs came down, developers were able to bid lower and lower ‘strike prices’, which would cover those costs and deliver a profit.
The CfD was intended to eliminate technology risk while providing long-term revenue stability. Renton says that increasing demand for power generation drove the adoption of the CfD.
“The government was in a hole,” he adds. “There was a lack of power availability and industry was crying out for new generation, and I think that drove it to this solution.”
As outlined in the government’s electricity market reforms (EMR) from 2013, CfD was intended to be largely standardised across technologies, to simplify procurement processes and to make it easier to compare the costs of different technologies. There was also a long-term goal to eventually conduct technology-neutral auctions, driving down costs for all technologies by making them compete against each other.
Some sources who were close to the coalition’s deliberations over electricity market reforms say that it was the Liberal Democrats who insisted on the same funding mechanism for all technologies, as they did not want it to seem that nuclear was getting preferential treatment at the expense of renewable technologies.
CfDs have worked wonderfully for offshore wind, leading to a boom in investment and development, while the costs for generating electricity using the technology have plummeted.
Its application for nuclear power has been much less successful, being used for just one project, Hinkley Point C, and attracting significant criticism.
The first problem with the CfD for Hinkley Point C is that the strike price has aged badly. When the initial price of £89.50 per megawatt hour (MWh) was agreed with EDF in 2012, it was cheaper than the equivalent for new offshore wind. Seven years later the third CfD round for offshore wind cleared at roughly £40/MWh, and yet Hinkley Point C is still several years from being completed.
As the price paid for generated electricity is fixed under a CfD (though rises in line with inflation) all cost overruns are carried by the private sector, meaning the cost of capital is very high. There can be no open auction as there is for offshore wind, as there were only a handful of developers and each is tied to a specific site. Instead of an auction, the strike price was negotiated directly with EDF.
Under the CfD, the developer does not make a return on investment until the plant is operating. Given the long construction times for new nuclear, that requires the developer to invest and borrow billions of pounds up front before it gets anything back.
EDF had the balance sheet to make this kind of investment and pushed forward quickly with its project. The other developers were not as advanced with agreeing their GDA, and the government prioritised negotiations with EDF. Negotiations with NuGen and Horizon were further complicated by political pressure for any subsequent CfDs to come in at a lower strike price than Hinkley Point C.
Although Hinkley did progress it was further mired in controversy by the involvement of Chinese company CNG as an investor, which became increasingly problematic politically as fears of Chinese foreign direct investment steadily grew over the following decade.
The government was stuck with one expensive nuclear power project that was unpopular at a time when nuclear power more broadly was particularly unpopular. As construction of Hinkley Point C progressed, no real progress was made on any other new reactors for the best part of a decade.
“I sympathise with the use of the CfD because the investment industry couldn’t get its head around the complexities of nuclear power enough to conduct proper analysis, and there wasn’t appetite to invest pension fund money and investor money in something seen as being politically unacceptable,” says Renton. “The government struggled to get money into [these projects].”
The government bets big on the RAB model
In the decade since the Hinkley Point C CfD was agreed, no other nuclear power project has been approved by government, but now the administration, led by Johnson, believes it may have found a funding mechanism that can unlock investment.
The regulated asset base model for nuclear is intended to attract long-term owners of nuclear power plants. Since the financial crisis, technology vendors have shown less and less interest in holding power plant assets long-term, not just for nuclear power but in renewables too, with most offshore wind farms being sold to financial investors that are now very happy to hold these assets once they have become de-risked post-construction.
The government wants to achieve the same for nuclear, but the huge upfront costs involved are a barrier to construction, with only a small pool of developers with limited balance sheets able to build nuclear power stations. The RAB model could solve this problem by providing a revenue stream during construction, meaning financial investors could fund the construction phase.
The next nuclear power station likely to be developed in the UK is Sizewell C, which is another EDF project.
Renton says that under the Hinkley Point C model “60% of the cost of a nuclear power station is funding. That may not be the case for Sizewell C under the RAB model as the developers are not taking the construction risk and that is passed through to the end users.”
As part of the UK’s energy security strategy published in 2022, the government has now set up Great British Nuclear, a new body responsible for bringing new projects forward, and a £120m Future Nuclear Enabling Fund. It aims to build eight new reactors.
“I think Great British Nuclear, as a government-owned entity charged with the responsibility of delivering nuclear power generation, is a great idea,” says Renton. “As long as it is done on a ministerial directive basis with government taking a step back. The problem with nuclear to date is that it has been so political and interfered with.”
By using the RAB model, the government is in some ways nationalising the construction of nuclear power stations. Taxpayers will pay upfront for the next generation of facilities, which begs the question whether the privatisation and break up of the sector wasn’t just a colossal waste of time.
Lessons learnt from history of UK nuclear power
Since the premiership of Margaret Thatcher in the 1980s, the energy strategy of UK government, no matter who has been in power, has been led by a total conviction in the efficiency of the markets – that if the right regulation and legislation is implemented, private companies will deliver what is needed to keep the lights on.
Stone argues that for nuclear power this has led to inertia, as the UK has lacked the long-term industrial strategy and system thinking required to properly support the construction of new nuclear.
“As a government you have to make sure the assets are commissioned, maintained and operated, and with modern designs, 60 to 100 years later that they are decommissioned," he says. "Government doesn’t necessarily have to do it, but it has an inescapable obligation to make sure it gets done.
“We have a bureaucratic system that has let down the entire energy sector,” Stone adds. “Today we have 190GW equivalent of total primary energy in the system. It all has to be replaced. In the entire electricity sector, there is nothing currently operating apart from Sizewell B that will be there in 2050. Yet too few people in successive governments have worried about the sheer scale – and now pace – of this challenge.”
The dream of the EMR set out by the coalition government was to create a level playing field for investors and developers, and the market would take care of itself. This central philosophy, linked to technology-neutral CfD auctions that included nuclear, was a pipe dream that led to nuclear power development in the country grinding to a halt.
With big national infrastructure, government always owns failure, but this is even more true of nuclear power. As much as power generation is outsourced to the private sector, if there is a major power shortage in the future, it is the government that will be held accountable.
Johnson’s administration seems to genuinely want to back nuclear power development and has set ambitious targets for delivery, but the government will face very similar challenges to its predecessors.
Firstly, there is a very small pool of companies available to build these reactors. EDF can’t keep investing a couple of billion pounds for new projects, particularly when it has an ageing and failing nuclear fleet in its home market of France to manage. In previous decades the UK may have turned to Chinese and Russian companies that had experience of building nuclear reactors, but they are off-limits now politically.
Technology risk still remains high, given that the technology for Sizewell C has only been used once before, and that was for Hinkley Point C, which remains unfinished. The government is also keen on small modular reactors, but this technology is completely unproven and many years away from commercialisation.
Financial investors may be tempted in by the RAB model, but this still remains an unknown, largely dependent on whether they can become comfortable with the taxonomy of nuclear as a green source of power, while the political cost of asking bill payers to pay upfront for new nuclear is still to be seen.
It is very difficult not to argue that all of these challenges, technological and financial, would not be reduced if the UK government still owned companies that were specialists in nuclear power. If Boris Johnson wants to blame anyone for the failure to attract long-term investment into the UK’s nuclear power sector, the governments of Margaret Thatcher and their commitment to privatisation seem a better scapegoat.
Editor’s note: This article first appeared on our sister site Investment Monitor.