UK nuclear needs high CO2 price, market reform

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UK Carbon Price Floor aims to shift investment toward nuclear power and renewables by raising the cost of fossil fuel generation, aligning emissions policy with market reform, capacity payments, and long-term price signals.

What This Means

An emissions levy setting a floor CO2 price to favor nuclear and renewables, cut gas and coal use, de-risk investment.

Raises fossil generation costs to incentivize low-carbon build
Helps de-risk capital-intensive nuclear projects
Works with capacity payments to ensure reliability
Gas and coal plants face tighter margins and volatility
Market reform needed beyond carbon floor for 2050 goals

Britain will need to slap stiff penalties on climate-warming plants or radically change the way the power market works if it is to get new nuclear plants to cut carbon emissions and keep the lights on.

Britain's new coalition government of pro-nuclear Conservatives and nuclear-skeptic Liberal Democrats plans to set a minimum charge for emitting carbon dioxide, a carbon price floor that should make nuclear and renewable energy more attractive to developers by increasing the costs of fossil fuel-fired power plants.

Britain's main political parties say new nuclear plants will get no additional subsidy and the utilities hoping to build them have said they do not need any.

But low gas prices, tight credit and uncertainty over long-term power prices will likely put off nuclear investors, and a low carbon price will not help unless it is much higher than current levels — potentially killing off gas plants — or the market is redesigned.

"If you want to pursue an ambitious, low-carbon strategy, you need the market structures to deliver it and what we have at the moment will not do the job," said Jim Skea, director of the UK Energy Research Center UKRC at Imperial College in London.

"The economics of nuclear power is going to be the crunch issue. A carbon price floor is one way of de-risking nuclear power, which in a liberalized market is one of the riskier forms of investment that you can make at the moment."

Skea, a founder of Britain's Committee on Climate Change, said the carbon price needed to support the multi-billion pound projects would vary significantly. It has been trading in a tight range around 15 euros.

French nuclear giant EDF may push on with its plan to build Britain's first new nuclear plant by the end of 2017 at a lower carbon price than other utilities, because it has a new reactor to show off to potential buyers and is backed by the French state.

Analysts doubt the government will set the carbon levy high enough to cut sufficiently the risks for most nuclear new build in a market where wholesale power prices are driven by variable fossil fuel costs. These costs make up most of the operating expenses of gas and coal plants, which can be shut down when profit margins get too tight.

Nuclear stations need to recoup construction and decommissioning costs over decades and their operating costs are fairly stable, meaning a drop in coal and gas prices could mean they have to sell output at a loss.

Prices will become more volatile as Britain builds more wind turbines in the North Sea, which under the current market system could drive power prices down sharply during windy periods, and spiking during calm spells.

"It's very unlikely the carbon floor would be set high enough... for most people it wouldn't be enough because it doesn't reduce your overall risk sufficiently," Peter Atherton, head European utilities analyst at Citigroup, said.

Britain's target of reducing its overall carbon emissions to 80 percent below 1990 levels by 2050 demands a near carbon-free electricity generation sector, a shift that comes as Britain ponders its nuclear future amid market reform, which regulator Ofgem said in February was unlikely to be delivered by Britain's present market.

"The current market is about people making commercial decisions based upon returns and risk and that will not deliver you a completely uneconomical set of power stations — offshore wind, nuclear etc," Atherton said, adding Britain was unlikely to meet its long-term carbon targets without new nuclear plants.

All of it will be paid for by the customer, who will foot another bill for gas plants that will probably be needed to back up wind farms during calm periods.

But those plants will probably not get built either unless the market, which pays generators only for the energy they produce, shifts to one that incentivizes keeping spare capacity on standby as well as rewarding nuclear generators for producing around-the-clock electricity.

Britain's biggest business leaders, including manufacturers and other industry groups, have called for less wind and more nuclear and cleaner coal plants to secure an affordable and diverse energy supply. Analysts say the government must act quickly to plug a looming generation gap.

"The lack of urgency that we are seeing... adds to the feeling of an impending power crunch across the system," Ian Parrett of energy consultants Inenco said.