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Energy Policy

Volume 38, Issue 9, September 2010, Pages 4903-4908
Energy Policy

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Competitive energy markets and nuclear power: Can we have both, do we want either?

https://doi.org/10.1016/j.enpol.2010.04.051Get rights and content

Abstract

In 1987, the UK Conservative Party was re-elected promising to transform the electricity industry into a privatised competitive industry and to promote an expansion of nuclear power. Fulfilling both objectives was not possible. The nuclear plants were withdrawn from the sale and plans to build new plants were abandoned, but privatisation proceeded. In 2007, the Labour government began a new attempt to build nuclear plants to operate in the competitive electricity market, promising that no subsidies would be offered to them. By 2010, the utilities that were planning to build nuclear plants were beginning to suggest that ‘support’ in some form would be needed if they were to build new plants. More surprisingly, the energy regulator, Ofgem, cast doubt on whether a competitive wholesale electricity market would provide security of supply. In 1990, the UK government opted for a competitive electricity market over expanding nuclear power. Now, the option of opting for a competitive electricity market may not exist. However, this might not leave the way open for new nuclear plants. The expected cost of power from new nuclear plants is now so high that no more than one or two heavily subsidised plants will be built.

Introduction

In 1987, the UK Conservative Party was re-elected to government. Their manifesto included promises to transform the electricity industry into a privatised competitive industry and to promote an expansion of nuclear power (Conservative Party, 1987). Many commentators believed that these two objectives were incompatible. In 1989, in order to fulfil the promise to privatise the electricity industry, the government was forced to withdraw the nuclear capacity from the sale and abandon all nuclear expansion plans. This was interpreted by these commentators as confirming the incompatibility of new nuclear build with a competitive electricity industry. Despite this experience, in 2007, the British (then Labour) government launched a new policy to build nuclear power stations that would be built by the private sector and compete without subsidies in the electricity market. However, by the start of 2010, the utilities, which had earlier endorsed the government’s nuclear plans, were becoming nervous and broaching the need for various forms of support if they were to build nuclear plants. Much more surprisingly, in February 2010, the government and the economic regulator, the Office of Gas and Electricity Markets (Ofgem), seemed to signal the likely abandonment of the wholesale electricity market.

From 2000 onwards, worldwide concern about climate change has grown and finding measures that will deal with this issue has come to dominate the energy policy agenda. Many governments have based their energy policies on a combination of revitalising the nuclear power option and introducing competition to energy markets as instruments to meet their energy policy goals. If the UK, the pioneers of competitive energy markets and one of the leading nations trying to revitalise nuclear power1 , were to have to acknowledge that this combination of policies will not work, the basis for many current national energy policies would crumble. This article examines the two attempts, in 1987 and 2007, by the UK to combine expansion of nuclear power and competitive energy markets, explains the failure of the first attempt and comments on the prospects for the second attempt.

Section snippets

Why might liberalisation and nuclear power be incompatible?

It is clear that existing nuclear power plants can be fitted into competitive electricity markets. The fact that construction is complete and a track record of reliability exists significantly reduces the economic risk and if the construction cost is already amortised, the plants may be so profitable that governments will want to recover some of these profits through a windfall tax.2

There are two simple arguments why building new nuclear power plants that

The failure to privatise nuclear power in 1990

Britain had a very unusual stock of nuclear power plants in 1987 (MacKerron, 1996). It had nine nuclear stations of the so-called Magnox design, the first-generation designs, all of which were completed in the period 1963–1971; and seven advanced gas-cooled reactors (AGRs), five of which were ordered in the period 1965–1968 and two in 1979. The only plant of a design widely used outside UK was a 1200 MW pressurised water reactor (PWR) on which construction had then just started (Sizewell B).

The revival of nuclear power’s fortunes

By 1995, when the government’s review of nuclear power policy was actually carried out, Sizewell B was complete so the risk of construction cost escalation no longer existed and early operation suggested it was likely to operate reasonably reliably. The reliability of the AGRs had improved enough that the AGRs and Sizewell B were then able to more than cover their operating costs from the proceeds of sale of their output to the wholesale market. As a result the government proposed the

Progress with introducing competitive energy markets

In 1989, the UK government decided introducing energy markets was a higher priority than reviving nuclear ordering and for at least the first decade, the ‘British Model’ was portrayed worldwide as a successful model that should be emulated. However, since then, the high reputation of the British reforms has become increasingly tarnished.

The ‘British Model’ is based on creation of a wholesale market and retail competition and unbundling networks from competitive generation and retail activities.

Is nuclear power economically feasible in a competitive market?

If the economics of nuclear power were attractive, that is, if over the life of a plant, the impact of the nuclear plant would be to make electricity prices lower than if it had not been built, the fact that it was not financeable in a competitive market would be seen more as a failing of the competitive model than of nuclear power. A competitive market is a means to an end (to affordable reliable power) not an end in itself and if the market is not allowing the cheapest options to be built,

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