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The fleet effect: The economic benefits of adopting a fleet approach to nuclear new build in the UK
November 2012 The fleet effect:
Contents
1. Introduction 4
2. Executive summary 5
3. The energy challenge 7
4. Approach and methodology 12
5. Enhanced certainty 16
6. Reduced cost of UK nuclear new build 19
7. Enhanced local content of UK nuclear new build 21
8. Reduced cost of electricity to consumers 25
9. Longer term benefits of strengthened UK industrial base 28
10. Risks associated with a nuclear fleet and their mitigation 30
11. Conclusions 33
Appendices 34 Appendix A: Model structure, data sources and assumptions 35 Appendix B: Model results and sensitivity analysis 39 Appendix C: Summary of EMR 44 Appendix D: References 45 Appendix E: Acronyms 47
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC Contents The fleet effect:
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 2 The fleet effect:
Acknowledgements
The report was commissioned by Areva, and independently researched and written by PwC, with the participation of the following companies: Nuclear supply chain companies
Areva S.A. Nuclear Engineering Services Limited WS Atkins Plc Rolls Royce Plc BAE Systems Plc Sheffield Forgemasters International Ltd Balfour Beatty Plc Siemens AG Bendalls Engineering Siempelkamp Nukleartechnik GmbH Clyde Union Ltd Sir Robert McAlpine Ltd Costain Group Plc SPX Balcke Duerr GmbH Darchem Engineering Ltd Sulzer Pumps Ltd Delta Controls Ltd Ultra Electronics Limited Doosan Babcock Ltd Wellman Booth Eaton Electric Ltd Wier Group Plc Flowserve Corporation Wyman Gordon Ltd Independent Forgings and Alloys Limited UK nuclear stakeholders National Nuclear Skills Academy Department of Energy and Climate Change (DECC) Department for Business, Innovations and Skills (BIS) Third party reports We reviewed over 50 studies and articles on the nuclear and wider energy sector that addressed issues of relevance to our report including the development of national supply chains, economics of generation, policy drivers, skills requirements and the global nuclear sector. These are listed in Appendix D. Disclaimer This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 3 The fleet effect:
1. Introduction
It is the context of major change within the electricity Our report: sector and Government focus on economic growth provides an overview of the context underpinning that characterises the landscape within which our study; PricewaterhouseCoopers LLP (PwC) has undertaken a study on the benefits to UK industry of adopting a summarises the approach taken to investigating fleet approach to nuclear new build. our hypothesis and the methodology adopted for our model; Our report addresses whether there are advantages to outlines the benefits of a fleet approach to new adopting a fleet approach to a nuclear new build nuclear build; programme through the use of a single technology. It addresses whether these advantages can be considers the impact of a fleet approach on the UK demonstrated through increases in sustainable nuclear supply chain through enhanced certainty; manufacturing and construction jobs, investment in discusses the impact of how a new nuclear fleet facilities and skills development in the nuclear supply can reduce the cost of UK nuclear new build; chain, and in wider economic benefits1. We consider the extent to which it is possible to identify the describes the fleet impact on the local content of additional benefits from a fleet approach due to UK nuclear new build; learning and sharing of best practice, optimising assesses the impact of a new nuclear fleet on the strategic stocks of components, staff utilisation and cost of electricity to consumers; the economics of seeking regulatory approvals. We assess the potential for these benefits to flow through describes the impact of a fleet approach on the UK to a lower cost of electricity for consumers and industrial base; increased export opportunities for the supply chain. discusses the risks associated with a nuclear fleet approach and their mitigation; At the outset, it is important to define what we mean by a fleet approach to nuclear new build. For the summarises the conclusions reached; and purposes of our analysis, we define a fleet approach as provides further details regarding the having two key characteristics: all the nuclear reactors methodology, references and acronyms in the rely on a common reactor technology and all have a appendices. common design of the associated Conventional Island (CI) and the Balance of Plant (BOP). For simplicity, we consider a new nuclear portfolio from a minimum of four reactors up to eight reactors (which operate as four pairs), assumed to be built at regular intervals in the period to 2030. Our definition of the fleet does not assume either a common commercial model/operating consortia structure or a common owner/operator.
1 Throughout the report we do not refer to specific sites for nuclear new build but assume all sites that have been nominated for new nuclear power stations could potentially be utilised up to 2030.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 4 The fleet effect:
2. Executive summary
2.1. Introduction Current investment plans based on the acquisition of nuclear licensed sites suggest that there could be up to PricewaterhouseCoopers LLP (PwC) has undertaken a eight reactors (ignoring differences in capacity across study to assess the potential benefits to the UK technologies) across four sites providing up to economy of adopting a fleet approach to nuclear new 13.2GW of additional capacity by 2030. Adopting a build. For the purposes of this report, a ‘fleet’ is fleet approach to new nuclear build could provide the defined as two or more pairs of reactors which rely on UK with three additional key benefits which would the same reactor technology and common design of not otherwise be realised through nuclear new build. the CI and BOP. We consider fleet sizes of four, six and eight reactors and our data ranges refer to fleet sizes from four to eight reactors. 2.2. Certainty A strong theme throughout the study is the urgent We studied the benefits of a fleet approach to new need for much greater certainty on the make-up of the nuclear build compared to diversified reactor UK’s nuclear programme. Without certainty of timing technologies over the period to 2030 by looking at: and volume, companies are reluctant to invest in the facilities, training and accreditation necessary to the importance of certainty for the UK’s supply participate in new nuclear. Commitment to a fleet is chain and the impact of a fleet effect on it; seen as a key factor underpinning investment decisions and one of the most important levers in the advantages in terms of investment in the UK revitalising and enhancing the UK’s nuclear supply industrial base and the economic benefits to the chain. At present many smaller firms with the UK; and capability to deliver in the nuclear supply chain are the benefits that a fleet effect can deliver to opting to apply their capabilities to other sectors such electricity users through reduced costs. as oil and gas, where the barriers to entry are lower and the certainty of orders is greater. This leakage of We examined implications for the supply chain of a top end skills and experience, starting from a fleet approach, pre-requisites for investment relatively low base given the period since the UK’s last decisions and impacts on companies further down the nuclear build project, is damaging the UK’s industrial supply chain. We interviewed 26 companies from base. The impact of certainty is quantified within the across the nuclear supply chain as well as key nuclear economic model that underpins this report. stakeholders and used the outcomes in developing an economic model to quantify the benefits. Our model considered direct, indirect and induced effects of a 2.3. Strengthened industrial fleet approach and expressed them in terms of their base impact on both jobs and GDP. We developed a range of scenarios to assess the robustness of our analysis, The lack of recent experience of large scale new based on the key drivers of cost, timescales, UK nuclear build in the UK suggests that UK based contribution and certainty. suppliers would provide only a limited share of the engineering and manufacturing inputs required for a Our report does not consider the technical capabilities single pair of reactors since the expertise and the of different reactor types, but focuses on generic relationships would be largely with non-UK supply reactors that would be built in pairs on a single site. chain companies. With a fleet approach, however, the We assume that these generic reactors would meet the scope for increasing the UK content becomes easier to requirements of the Generic Design Assessment identify and more commercially viable. In addition, if (GDA) process. We do not address cost differentials UK content were to be used as a lever in commercial between generic reactor types but assume that costs negotiations through implementation of an industrial remain constant for a non-fleet approach so that we strategy that imposed localisation targets, there could focus on the incremental benefits of a fleet approach. be a significant increase in the proportion of supply chain contracts awarded to UK companies.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 5 The fleet effect:
2.4. Reduced consumer costs of The reduction in costs would feed through to a potential reduction in the price of electricity charged electricity to domestic and industrial users of up to 2.6% by A fleet approach to new nuclear build has the 2030 and an overall lifetime cost reduction in the cost potential to reduce significantly the cost of designing of generating electricity from the new nuclear fleet of and building nuclear generation capacity. This would 10.3%, thereby reducing the costs for business and be achieved through the economies of scale achieved consumers. Consumers’ disposable income would be by having common components and through increased directly through lower electricity bills. significant reductions in design and licensing effort, Lower costs for businesses would contribute to lower construction risk and contingency. The effect of such product prices which would improve international a reduction in costs would be to reduce the costs of competitiveness. This could be equivalent to about electricity to business and consumers. Consumers’ 44,000 man years of employment in sectors of the disposable income would be increased directly economy outside electricity generation over the EMR through lower electricity bills. Business users would CfD durations or 1,700 extra jobs. We estimate this benefit from lower electricity costs, which would be would be equivalent to a boost to UK GDP of about translated into lower product prices, improving £6bn expressed as a present value using 2012 prices. international competitiveness. The incremental benefits of a fleet effect for nuclear new build are largest with construction of the second 2.5. Key findings pair of reactors. Ending up with two or three isolated A fleet approach to new nuclear build could deliver up pairs of reactors of different technologies across the to £17 billion of additional contribution to UK would not maximise the industrial benefits of the GDP (equivalent to about 1% of UK GDP in 2011), as programme and lead to the highest costs. A strategic, shown in Figure 1, based upon the following: programmatic approach to nuclear new build can support the development of a sustainable nuclear The overall development of a fleet of four pairs of supply chain and deliver the most cost effective source new nuclear reactors in the UK could result in a of low carbon base load generation of electricity significant additional direct boost to the UK available. manufacturing sector, increasing GDP by approximately £4.6bn expressed as a present Figure 1: Benefits of a fleet effect value in 2012 prices. This would be equivalent to
an additional 68,000 man years of employment 194,000 11,100 17 D over the design and build period up to 2030, f Reduced d C
1,700 o r i cost of r
e 44,000 e equating to over 4,200 extra jobs over the build v electricity p 6 period. O
Indirect The indirect and induced effects could lead to a and 5,200 induced 82,000 further 82,000 man years of employment or 5,200 impacts 6.5
o 0 t
3 p extra jobs over the same period, equivalent to an 0 2 addition to UK GDP of £6.5bn expressed as a U Direct 68,000 4,200 present value in 2012 prices as compared to the impacts 4.6 effects from diversified reactor technologies.
Man years Jobs GDP (£bn) The lifetime costs of nuclear electricity generation from a fleet of four pairs of reactors could be reduced by 10.3% compared to a non-fleet The risks associated with a fleet approach, and their approach. The impact of the cost reduction would mitigations, are addressed in Section 10. We have not be manifested in two ways; considered the potential ongoing savings once the CfDs have expired, or the potential for further first through a reduction in the costs of investment in new nuclear post 2030 to capitalise on Electricity Market Reform (EMR) support to the cost benefits in preference to other technologies. Government, achieved through lower strike Both of these areas could provide further upsides. prices for the Contracts for Difference (CfDs) for the second , third and fourth pairs of In addition, our conclusions on the economic impacts reactors and of a fleet approach could be applied to other low- secondly, through a reduction in the wholesale carbon technologies. electricity price.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 6 The fleet effect:
3. The energy challenge
Over £250bn2 investment required in energy infrastructure. Centred on ensuring safe low carbon and secure supply of energy. Nuclear key to the energy mix for UK. Uncertainties surrounding EMR have led to delays in nuclear build.
nuclear energy will be determined by market 3.1. The energy landscape mechanisms, the Government’s EMR package will The UK Government has set out ambitious plans to deliver some incentives. The EMR proposals3 seek to meet its decarbonisation targets, with current policy facilitate investment in low carbon electricity built upon three key pillars: generation through the agreement of CfDs. These will guarantee a price for electricity over an initial period reduction of CO2 and GHG emissions; of time thus creating stable financial incentives for investment in all forms of low carbon electricity ensuring safe low carbon sources of energy; and generation, including nuclear. ensuring secure energy supplies within our own borders. Our report looks at whether the benefits of moving from first of a kind (FOAK) in the UK Significant investments of around £250bn are to nth of a kind (NOAK) for nuclear plant differ required in energy sector infrastructure to deliver a depending on whether a fleet of the same low-carbon economy, particularly with the need to reactor technology or diversified reactor replace a quarter of the UK’s existing power stations technologies are adopted. We seek to identify by 2020 and to extend the transmission network to the extent to which benefits accrue to UK accommodate a wider range of low-carbon nuclear supply chain companies and the generation. The scale of investment required offers overall benefit to UK consumers. opportunities for the development of new skills and facilities in the UK workforce and an expansion of Current uncertainties around the details of the EMR sustainable jobs in the manufacturing and mechanisms have led to delays in the sanctioning of construction sectors to meet the forecast demand in new projects and nuclear plant are no exception. the sector over the next 20 years. Added to this, the Uncertainty feeds through to the supply chain and the current economic and financial pressures have led to UK manufacturing sector is feeling the impact. It a Government emphasis on enablers of growth to recognises that there are opportunities to participate support employment. The low carbon agenda in new nuclear build but is seeking signals that there provides the potential for real benefits for the UK in is a tangible pipeline of projects to justify investments terms of both jobs and GDP. in facilities and training. There remains an understandable concern based on the history of Since privatisation in the 1990s, investment in new nuclear electricity generation in the UK that the new electricity generation has been undertaken by private nuclear programme could result in the development companies, based on their assessment of market risks of only a single station. Our report seeks to identify and returns. As the low carbon focus has intensified, the signals that would provide comfort to different concerns about the risk/return balance for electricity sections of the UK supply chain, the timescales in generation assets with high capital costs and which they would be required and the resulting scale significant construction risks has increased, resulting of investments that would arise. in a reluctance for companies to invest without some revenue certainty. Whilst the current coalition The Government’s economic policy objective is to government has stated that the UK’s future supply of achieve strong, sustainable and balanced growth. As
2 DECC ‘Planning our electric future: a white paper for secure, affordable and low carbon electricity (cm8009)’, July 2011. 3 DECC ‘Draft Energy Bill CM 8362’ May 2012.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 7 The fleet effect: part of the Growth Review launched in November 3.2. Future energy needs 20104, it aims to make the UK an attractive place to start or grow a business, to encourage investment and Over the next decade, a quarter of the UK’s electricity to create a flexible, appropriately skilled workforce as generating capacity is expected to close, with all but referenced in the Industrial Strategy in September one of the existing nuclear plants scheduled to reach 20115. The investment requirements in the electricity the end of their operating life by 2025. The challenge of industry means that electricity generation is a key replacing this infrastructure is increased further by the sector for achieving such growth. need to reduce CO2 emissions, implement safe low carbon sources of energy and maintain secure energy There is a wide range of nuclear sector expertise in the supplies within our own borders. This is set against the UK currently, but much of it is focused on other parts potential doubling of demand for energy as the of the nuclear value chain (outside of new nuclear transport and heating sectors become increasingly build), including existing nuclear generation, dependent on electricity. decommissioning and defence. Those companies that have experience in supplying parts and services for Compliance with the EU Large Combustion Plant and new nuclear in other countries have already made Industrial Emissions Directives means that the investments in quality assurance, qualification majority of the new plant to be developed over the requirements and skills training. They see the UK period to 2030 will be nuclear or wind, with newer low nuclear new build programme as a major opportunity. carbon technologies gradually increasing in importance as their technology challenges are overcome (and their Our report seeks to identify the signals that would costs fall). The role of combined cycle gas turbines encourage overseas companies to invest in the UK, the (CCGTs), the new electricity generation of choice to lessons learnt from those UK companies with new date, will increasingly move to that of fast response nuclear build experience and the support and plant to balance input from wind and other incentives that the UK supply chain is seeking to intermittent generation. Investing in diversified expand its capabilities and skill base in a timely sources of energy is key to preserving and enhancing manner to benefit from new nuclear build the UK’s security of supply, but must comply with the opportunities. Government’s low carbon commitments and affordability objectives. The success of the nuclear new build programme in the UK will be dependent, in part, on its ability to Within this policy context, new nuclear plant is demonstrate a broader range of economic benefits assumed to be the primary low carbon baseload plant, than a contribution to low carbon electricity playing a crucial role in the UK’s ability to maintain its generation and security of supply. The nuclear security of supply. Current investment plans industry, has, and always will, present a nuclear based on the acquisition of nuclear licensed hurdle to potential suppliers and investors in terms of sites suggest that there could be up to eight investment in capability and resources. reactors (ignoring differences in capacity across technologies) across four sites providing Over time the barriers to entry can be reduced as the up to some 13.2GW of additional capacity by level of experience of developing nuclear new build in 2030 (as shown in Figure 2).We assume that any the UK improves, which should lead to increased nuclear development on the fifth acquired site or the inward investment and the realisation of greater three additional nominated sites would not commence economies of scale and scope for companies within until after 2030 and so have not included any potential the supply chain. Increased scope and volume of benefits within our analysis. services should in turn lead to increases in the performance of regional economies, both through National Grid currently projects peak electricity indirect and induced benefits. demand to rise from around 57GW in 2020 to around 60GW by 2030 at a relatively stable rate under its ‘Gone Green’ scenario6. The contribution of nuclear electricity generation to meeting this demand falls to a low of around 7% in 2020 under DECCs central scenario and as new nuclear electricity generation is commissioned rises to around 23% by 2030 as compared with around 18% today as shown in Figure 3.
4 The path to strong, sustainable and balanced growth, BIS, November 2010 5 BIS ‘Industrial Strategy: UK Sector Analysis’, 2012 6 National Grid ‘UK future energy scenarios’ November 2011.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 8 The fleet effect:
Figure 2: Expected nuclear electricity generation capacity (2012 – 2030)7
14,000
12,000
) 10,000 W M (
8,000 y t i c
a 6,000 p a
C 4,000
2,000
-
Existing nuclear capacity New nuclear capacity
Figure 3 : Expected nuclear power generation (2012 – 2030)8
600 25% P e r c e n
500 t 20% a g e
n u )
400 c h l e W
15% a r T (
g t 300 e u n p e t r u
10% a t O i
200 o n
5% 100
0 0%
Nuclear output Total output Percentage nuclear
7 Source: 2011 ‘national electricity transmission system seven year statement’ national grid; PwC analysis. 8 Source: DECC ‘total electricity generation by source’ (spreadsheet) November 2011.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 9 The fleet effect:
The contribution of new nuclear power to the UK’s NAMTEC’s 2009 report notes that the civil nuclear security of supply underpins the importance of timely sector contributes around £3.3bn to UK GDP11. investment decisions, both for developers and the supply chain. The earliest timescale for the commercial Figure 4: 2009 employment within the UK operation of new nuclear is assumed to be 2018 under civilian nuclear sector DECC’s 2011 indicative timeline9, but many commentators assume commercial operation dates of around 2020. Direct supply chain 20,000 The uncertainty over timing of investment decisions by developers feeds through into uncertainty for the supply chain and uncertainty over commercial Decommissioning 12,000 operation dates. New nuclear is assumed to provide an increasing contribution to meeting demand throughout Fuel processing 4,500 the 2020’s which means that a continuous programme of new build is required, with a corresponding Generation 7,500 requirement for resources to design and construct the Direct jobs in the nuclear industry plant. The nuclear supply chain covers two categories of 3.3. The UK supply chain companies – those that supply goods and services that The last nuclear plant developed in the UK was are central to the nuclear reactor and those that Sizewell B, which was commissioned in 1995 and is supply non-nuclear specific goods and services. The due to operate until 2035. Since then, UK nuclear requirements on the first category are higher than skills have been concentrated in supporting those in the second, where the nuclear emphasis is operations and maintenance of the Magnox and more about quality control and documentation. We British Energy (now EDF) nuclear fleet, waste and have spoken with companies in both categories in decommissioning at Sellafield and other sites and the developing our analysis, recognising that the potential military nuclear sector. for increased UK input varies between the two.
The challenges faced due to an ageing workforce, a In addition to the number of skilled people required, need to encourage graduates and craftsmen to enter the nuclear sector has specific safety and quality the nuclear industry, and the realisation that the skills assurance standards that impose an additional barrier to support a new nuclear build programme in the UK to entry. There is a time lag and associated cost for a were insufficient and have led to a range of company to train people to the required standards Government, regional and company-led initiatives. that must be recouped through future sales. The However, the nuclear sector faces competition for classification of SQEP (suitably qualified and skilled engineering and construction resources from experienced personnel) is not standardised, which has other infrastructure projects and safety critical sectors led to a need for supply chain companies to undergo including oil & gas and aerospace, highlighting the specific accreditation programmes for technology need to expand both the number of workers and the providers or Tier 1 suppliers (such as reactor vendors training facilities to support skills transfer. or integrators). This is adding to costs and potentially reducing the attractiveness of the sector as an Cogent’s 2009 report states that the civil nuclear expansion focus. industry in the UK currently provides employment for 44,000 people10 as shown in There are initiatives already in place to support skills Figure 4. Of these, around 24,000 are employed enhancement, such as the Nuclear Passport, the directly by nuclear operators across electricity Nuclear Advanced Manufacturing Research Centre generation, decommissioning and fuel processing and (NAMRC) and Fit for Nuclear, which are seen as a the remaining 20,000 in the nuclear supply chain. welcome addition by many supply chain companies, providing clarity on requirements and giving support and guidance on qualification requirements. The question is the extent to which the supply
9 DECC ‘indicative timeline for new nuclear’ October 2011. 10 Cogent ‘Power People, the Civil Nuclear Workforce 2009-2025% 11 NAMTEC ‘The Supply Chain for a UK Nuclear New Build September 2009. Programme’, updated February 2009.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 10 The fleet effect:
chain is prepared to participate in such schemes without certainty on the timing and the future of the new nuclear programme and the risk that their own role might be limited to support on a single plant.
Some UK companies have entered into joint ventures (JVs) with companies already in the new nuclear supply chain such as Atkins’ JV with Assystem known as n.triple.a which aims to provide global opportunities but also to support activities in the two companies’ home markets.
Where UK companies are a subsidiary of an international company with an established track record in new nuclear supply chains (e.g. Clyde Union, Doosan Babcock) they have more ready access to skilled resources, established contacts and processes for accreditation. Other categories within the supply chain are those with relevant nuclear experience but who have not yet participated in nuclear new build and those who operate in safety critical industries but without nuclear experience. Both of these could, if appropriate incentives and support were to be made available, seize this opportunity to support the growth of the UK nuclear new build sector.
The challenge for all UK companies to capture the opportunities from a new nuclear build programme in the UK is to determine the addressable part of the market, the investments required in qualification and accreditation (and their associated timescales) and the costs of bidding for and delivering the work. They then need to develop business cases to invest and secure acceptable volumes of work over predictable timescales. We discussed with our interviewees the signals that would encourage them to commit to such investment programmes, and the impact of differences between a fleet and a non-fleet approach.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 11 The fleet effect:
4. Approach and methodology
Comprehensive literature review of material relating to nuclear reactor construction. Developed a set of hypotheses about the expected impacts of a fleet approach. Undertook a series of interviews with companies in, or potentially part of, the nuclear supply chain. Created an economic model to assess the potential impact on GDP and jobs from a fleet approach to nuclear new build. Model designed to estimate the direct, indirect and induced benefits of a fleet approach.
4.1. Introduction 4.2. Approach to assessment In this section, we describe how we have assessed the Our approach to assessing the economic benefits of expected benefits of a fleet approach to nuclear new adopting a fleet approach to nuclear new build in the build as compared with a non-fleet approach. We also UK has been based on four key elements: provide a brief overview of the methodology we have used to estimate the expected benefits of a fleet We reviewed earlier third party reports which approach: further details of the model can be found in analysed diverse aspects of the potential impact of Appendix A. a nuclear new build programme within the UK as well as the lessons from international experience We consider a new nuclear portfolio of up to of the construction and operation of nuclear plant. eight reactors (which operate as four pairs). These reports cover the nuclear supply chain, skills The interval between reactor builds is as requirements, drivers of risk, reward and shown in Figure 5, over a 16 year period. This investment decisions and the downstream and assumption is derived from expected construction upstream impact of nuclear generation. A list of intervals between the first and second reactors on a the key reports reviewed can be found at Appendix single site, a rhythm of site development activity that D. would support continuity of employment, and the Based on our review of existing reports and our entry into commercial operation of sufficient nuclear knowledge of the UK nuclear sector, we developed capacity to meet forecast contributions to security of an initial set of hypotheses about the expected supply by 2030. As already stated in Chapter 1, we impacts of a fleet approach to the delivery of new have not considered site specific new build. nuclear power compared to a non-fleet approach. These hypotheses effectively provided a framework for the model we developed to assess the expected benefits of a fleet approach to a nuclear new build Figure 5: Illustration of a fleet approach to programme. nuclear new build
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Reactor 1 Reactor 2 Reactor 3 Reactor 4 Reactor 5 Reactor 6 Reactor 7 Reactor 8
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 12 The fleet effect:
We then undertook a series of 26 4.3. Methodology interviews with a sample of organisations12 which are either in existing nuclear supply chains A critical part of our approach was the development or might potentially be part of the UK nuclear and application of an economic model with which to supply chain. Our interviewees included assess the expected incremental benefits of a fleet companies from across different parts of the approach to nuclear new build. This involved three nuclear supply chain, large and small companies, key steps: those with existing nuclear new build experience and those without, UK based companies and those development of a series of logic chains which that are subsidiaries of international companies. describe how the expected incremental impacts of We asked the companies a series of questions a fleet approach to nuclear new build are expected designed to elicit qualitative and quantitative to arise, including the articulation of what is information about: assumed to happen in the absence of a fleet approach (the counterfactual or non-fleet the opportunities presented by nuclear new approach); build in the UK; the implications on their specific business of a identification and collection of the data needed to fleet approach to nuclear new build in the UK; populate the economic model and determination how commitment to a fleet approach to nuclear of the additional assumptions required; and new build would affect their investment construction, testing and running of the economic decisions; and model, including sensitivity testing to understand the impact on their own supply chains of a fleet the significance of the key assumptions and approach in the UK. uncertainties.
In addition, we discussed a similar range of topics An explanation of the steps can be found below. with key stakeholders , namely the Department for Business, Innovation and Skills (BIS), the Department 4.3.1. Development of logic chains of Energy and Climate Change (DECC) and the for benefit categorisation National Nuclear Skills Academy. Our logic chains assumed that a fleet approach to nuclear new build has the potential to deliver Using results from the preceding elements, we incremental economic benefits for the UK through developed an economic model to assess the four key mechanisms by: potential impact on GDP and jobs from a fleet approach to nuclear build compared to a reducing the cost of designing, building and non-fleet approach for the UK. The model was operating (including decommissioning) up to four designed to estimate the direct, indirect and nuclear plant comprising eight reactors of the induced benefits of a fleet approach, where: same technology and design; direct benefits are the employment and Gross increasing the share of UK content in the UK’s Value Added (GVA13) generated by expenditure nuclear new build programme; on suppliers of the nuclear island, civil works, conventional island and balance of plant; reducing the average cost of electricity to indirect benefits are the employment and GVA consumers in the UK; and generated by greater supply chain spending as a developing UK capability so it can be exploited in result of the first round of expenditure; and the longer term in the nuclear supply chain, both induced benefits are the employment and GVA within the UK and globally. This capability could generated by greater employee wages, which then be additionally deployed in other sectors with results from the increased revenue of suppliers high quality and safety requirements. and their supply chains. Figure 6 shows schematically the key expected benefits of a fleet approach in chronological order based upon when they would be expected to arise.
12 See acknowledgements for list of companies and stakeholders interviewed. 13 GVA is the difference between revenue and intermediate consumption, and a contributor to GDP.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 13 The fleet effect:
Figure 6: Expected benefits of a fleet approach
Design and build Legacy • Greater certainty • Lower electricity prices for • Economies of customers • Strengthened UK scale industrial base • Local (UK) • Increased exports Investment Operation decisions
An integral part of assessing the potential incremental Our analysis of reductions in electricity prices starts benefits of a fleet approach was to define the from assumptions on the CfD strike price achieved for counterfactual – an alternative view of what would each pair of nuclear reactors. These are sourced from happen without a fleet approach. Our counterfactual publicly available sources and do not represent PwC’s assumed that the same volume of additional nuclear view on appropriate or achievable strike prices for capacity would be provided in the UK as part of the nuclear plant. Any cost savings are assumed to apply nuclear new build programme but reactor technology to CfDs for subsequent pairs of reactors – i.e. the were not common and the design of the CI and BOP second, third and fourth pairs only. were not the same. Otherwise, under the counterfactual, we assumed that the features of each 4.3.3. Sensitivity analysis plant were the same. We undertook a range of sensitivity analyses on the We combined the underlying logic model with the following parameters: available data to construct, run and test our economic reduction in the design and build cost of a reactor; model to estimate the scale of the potential benefits of a fleet approach to new nuclear build. Details of the increase in the proportion of design and build model structure can be found in Appendix A. content achieved by UK companies; and reductions in the cost of electricity. 4.3.2. Data sources and assumptions Through these, we aimed to assess the robustness of Each of the logic chains required different data and, our hypotheses. Details are found in Appendix B. where reliable data were not available, assumptions were made in order to estimate the scale of the Our sensitivity assessment associated with the potential benefit. The key data sources and cost of electricity for consumers uses a range assumptions used for each element of our model are of CfD strike prices from £75/MWh to described in Appendix A and summarised in Table 1 £135/MWh (2012 prices) taken from public below. sources. The lower end of the range is a round figure Table 1: Key data sources and assumptions based on the £74.10/MWh proposed by PB Power in their 2011 report for DECC14. The upper range is a Category of assumptions Sources round figure that is lower than the £140/MWh quoted Expenditure groupings within Supply chain interviews, as an offshore wind price cap by Vincent de Rivaz, the design and build phase of a third party reports, Chief Executive Officer, EDF in his August 2012 nuclear reactor PwC analysis interview with the Daily Telegraph15. Timescales Supply chain interviews Economic assumptions PwC assumptions, Government statistics Financial assumptions PwC assumptions Electricity pricing assumptions DECC, National Grid, third (cost for consumers) party reports 14 Parsons Brinckerhoff “Electricity Generation Cost Model” 2011 15 Daily Telegraph ‘http://www.telegraph.co.uk/finance/newsbysector/energy/9471 193/EDF-Energy-puts-price-cap-on-Hinkley-Point-nuclear- plant.html’
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 14 The fleet effect:
4.4. Overview of results Table 2: Summary of expected benefits and risks of new nuclear build In Chapters 5-10 we analyse the expected potential benefits of a nuclear new build programme focusing, Chapter Benefit Estimated fleet benefits in particular, on the incremental benefits that a fleet 5 Enhanced Quantified through measures approach to nuclear new build could be expected to certainty below bring (compared with the alternative of a non-fleet approach – where the volume, technology/design and 6 Reduced cost Up to 18% reduction for a fourth of design and pair of reactors timing of the programme is not known with build certainty). 7 Enhanced Up to £11bn of additional GVA and local content an additional 150,000 man years We also consider the potential risks associated with of employment each category of benefit, reviewing the evidence in relation to each category of expected benefit in turn 8 Reduced cost Wholesale electricity prices down of electricity by up to 2.6% by 2030, resulting in and following a broadly common structure for each up to £6bn of additional GVA and category: 44,000 additional man years of employment We describe (qualitatively) the mechanisms 9 Strengthened Not directly quantified through which the UK is expected to derive UK economic benefits from a fleet approach industrial drawing on our interviews with key stakeholders, base especially those potentially involved in the delivery 10 Key risks and Qualitative mitigation measures of the programme, and our review of recent uncertainties identified relevant studies. We present the results of our economic modelling of each benefit. This includes an overview of the key steps in our analysis as well as a summary of the sensitivity of our results to the key assumptions we made. We summarise our assessment of the key risks and uncertainties associated with each benefit.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 15 The fleet effect:
5. Enhanced certainty
Nuclear supply chains need enhanced certainty about the make-up of the UK’s nuclear new build programme. At present only Hinkley C is seen as secure. Commitment to a fleet provides confidence and clarity on timescales and work volumes. A fleet approach can reduce actual and perceived risk in programme.
The over-riding feedback from our discussions with realisation of economies of scale and increased UK the supply chain is the need for enhanced certainty industrial capability. about the direction, timing and scale of the UK new nuclear build programme. The level of nuclear build 5.1. Certainty through skills and experience within the UK is at a relatively low base given the period since the development of commitment Sizewell C and the limited involvement of UK We identified a number of themes relating to companies in other global nuclear new build commitment to new nuclear industrial strategies to initiatives. A programme of UK nuclear new provide certainty to the supply chain on the role it build is not seen as a reality at present: could play. although Hinkley Point C is seen as probable, other reactors are viewed as no more than likely at the The lack of clarity over the structure of the moment. programme, delays in the programme itself and uncertainty over the technologies to be adopted Figure 7: The components of certainty are resulting in parts of the supply chain: delaying investment decisions to enhance skill levels or improve facilities; opting to apply their capabilities to other Commitment to sectors such as the wider power and utilities The nuclear new build programme market, or oil and gas, where the barriers to entry are lower, investment decisions are lower Timescales to support continuity of workload risk and the certainty of orders is greater; and Volumes that support investment focusing nuclear skills abroad on other new nuclear programmes such as in Asia, Central results in Europe and the Middle East.
The commercial supply chain strategies for Tier 1 and 2 supply chain companies reflect the Confidence and uncertainty in the new build programme. certainty Commitment would enable the firming up of commercial strategies and provide clarity for the supply chain on steps required to support delivery. Whilst it can be argued that achieving certainty is Orders for four or more reactors of a single technology agnostic, there are strong arguments that technology would be a ‘game changer’ for point to a fleet approach enhancing certainty. A fleet many supply chain companies we based on common technology and design can reduce interviewed. It would justify investments in both actual and perceived risks, unlocking the innovation through automation or expansion of potential for supply chain investments through work along the value chain into fabrication and improving the risk/reward balance and enabling the design, improving quality and cost-effectiveness.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 16 The fleet effect:
Our interviewees told us that the reduction in Continuity through the use of a consistent construction risk resulting from the design and supply chain would be a major certainty of a fleet programme would lead contributor in maximising process to cost and timescale reductions through effectiveness. more efficient use of capacity, reduced training Confidence in the continuity of the nuclear requirements and better implementation of new build fleet programme will enable the lessons learned. supply chain to invest in capability building The supply chain recognises that accreditation – through additional recruitment of apprentices, requirements for nuclear new build (‘N’ Stamp or development of career plans for ongoing skills RCC-M) are onerous and time-consuming. A fleet training over time, recruitment of skilled engineers approach would provide companies with a and graduate trainees – to support their ability to greater degree of certainty that they would earn the required levels of return on their achieve acceptable returns on their investment. investments. Greater maturity of the design and mutual Commitment to contracts for multiple understanding of the costs of delivery reactors would enable supply chain would reduce the risks of delay and companies to demonstrate secure revenues improve the certainty of outcome, thereby to underpin financing support for investment reducing overall construction risk. The in facilities. benefits of learning from previous experience, increasing expertise and familiarity with the For supply chain companies active in a range of required processes would result in cost and industries, commitment to multiple reactors schedule savings in design, construction and would allow businesses to invest to meet contingency requirements. known demand and take investment risks in other sectors. As the technology develops a track record with the regulator, licensing risks will be Moving from memoranda of understanding to firm reduced. contract placement depends on investors taking Final Investment Decisions (FIDs), which in turn Development of a fleet would lead to an need successful CfD negotiations that gives owners increased level of trust and understanding a known commercial basis for their investment, across the supply chain from Tier 1 to Tier 4 as based on the expected cost of building and the level of maturity and expertise in the nuclear operating proposed plant and clarity to the supply new build sector expands. chain. 5.3. Certainty through volume 5.2. Certainty through For many companies in the supply chain, the business continuity case for investment in new nuclear build is dependent on the volume of services or components required Discussions with the supply chain identified clear over time, such that investment is sustainable: messages on the need for a sustained programme of work to support supply chain investment in facilities, Certainty in volumes provides confidence accreditation and people: to smaller supply chain companies that the costs and timescales of achieving nuclear quality Continuity of work is more readily accreditations is a worthwhile investment. achievable with one technology provider able to coordinate the placing of orders in Some specialist supply chain companies are the and across the supply chain. If intervals only, or one of a few remaining, manufacturers of between reactor builds are too long, the supply their product in the UK. Certainty through chain will have underutilised manpower and runs volume will support their continued the risk of losing specialist skills, but if intervals operations. are too short, manpower capacity requirements Commitment to volumes means that the additional will increase significantly, providing challenges for costs associated with nuclear quality requirements the supply chain and suggesting that the balance of can be recovered over a larger number of products requirements might be met from the overseas or longer timescale, leading to lower unit costs supply chain. A consensus appears to be building and increased competitiveness of UK supply around an interval of around 18 months between chain companies. reactor builds.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 17 The fleet effect:
Commitment to multiple reactors and an associated timing provides the supply chain with certainty over future orders and sufficient security and confidence to put in place the multi-year training programmes required to deliver the necessary numbers of apprentices and design engineers and to develop career progression plans to provide opportunities over the duration of the new nuclear build programme. Increased volumes of standard components would enable minimal retooling, common quality assurance regimes, increased innovation and boosts R&D to provide more efficient, lower cost, higher quality solutions. Once operational, additional volumes would be required to support O&M services. The quantification of the impact of certainty is discussed in Chapters 6-9, through the impact on reduced costs, increased jobs and impact on GDP.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 18 The fleet effect:
6. Reduced cost of UK nuclear new build
Reduction in total design and build costs of approximately 11% between first and second pairs of reactors. Further 4% saving between second and third pairs of reactors. Overall saving of 18% between first and fourth pairs of reactors. Total saving for design and build of a fleet of eight reactors of 10% against the counterfactual.
plant, split across the nuclear island, nuclear island 6.1. Nature of benefits civil works, balance of plant and conventional island. The construction of a fleet of nuclear reactors generates cost efficiencies through a variety of 6.2. Scale of benefits sources, which differ according to the type of supplier and their position in the value chain. Supply chain The quantification of these savings is displayed in interviews identified the economies of scale Figure 8, with a reduction in total design and build generated by a volume of reactors with costs of approximately 11% between the first and identical technology and design as the most second pairs of reactors. There is an incremental common driver of cost savings. saving of approximately 4% between the second and third pairs of reactors, which is repeated between the The improved certainty associated with a fleet third and fourth pairs of reactors. Hence, the design approach was identified as an important contributor and build cost of the fourth pair of reactors is to lower financing costs, supporting early investment approximately 18% less than that of the first in supply chain capability. The continuity of orders pair, under a fleet approach of building four resulting from certainty was also expected to be pairs of reactors. The total design and build cost significant, allowing the supply chain to optimise their for the eight reactors under a fleet approach results in use of resources. We include the cost savings from a 10% saving against a non-fleet approach. In 2011 16 certainty in the benefits discussed below. Parsons Brinckerhoff’s study for DECC estimated a saving of 15% for the total capital costs of a nuclear The specific sources of cost savings identified by power station with multiple reactors, as construction stakeholder interviews as the most significant: moves from FOAK to NOAK in the UK, which is comparable to the savings in Figure 8. volume discounts through bulk purchasing; Figure 8: Expected cost savings during design absorbing one-off fixed costs – such as those and build phase with a fleet approach associated with design, set-up, procurement and 100% accreditation; s n o
i 80% t c u
learning effects, leading to new or improved d e r
60% t production techniques; s o c
e
g 40% a t
reduced financing costs; and n e c
r 20% e improved resource planning. P 0% Reactors 1 & 2 Reactors 3 & 4 Reactors 5 & 6 Reactors 7 & 8 Our analysis has assessed the potential scale of these Nuclearisland - non civil works Nuclearisland civil works cost savings (compared to a non-fleet approach) for Conventionalisland Balance of plant each key element of spend: in total, we have considered around 20 separate elements of spend 16 associated with the design and build of new nuclear Parsons Brinckerhoff ‘Electricity generation costs’ 2011
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 19 The fleet effect:
6.3. Sensitivity analysis Two key sensitivities were identified for design and build cost savings based on the responses provided in our supply chain interviews. The first is the level of cost savings considered achievable with a fleet approach, where we considered the quantitative impacts of conservative and optimistic scenarios to compare with our base case saving of 18%:
a conservative view on design and build cost savings led to a saving of 9% for the fourth pair of reactors when compared with the first; and an optimistic view on design and build cost savings led to a saving of 28% for the fourth pair of reactors when compared with the first. The second is the timing of the new build programme, which we dealt with qualitatively due to the difficulty of quantifying its impact. Stakeholder interviews revealed that for many companies in the supply chain, the cost saving from a fleet approach was sensitive to the phasing of reactors. A significant proportion of savings could be lost if the gap between the construction of reactors was noticeably increased or decreased. A phasing of around 18 months appeared to suit the majority of companies.
Further details are contained in Appendix B.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 20 The fleet effect:
7. Enhanced local content of UK nuclear new build
Increased UK content in the nuclear supply chain could provide an additional £5bn in direct GDP and an additional £6bn in indirect and induced GDP. The UK nuclear supply chain could be boosted by up to 4,200 additional direct jobs during design and build and a further 5,200 additional indirect/induced jobs. A fleet approach strengthens the incentives for the supply chain to invest in nuclear new build capability (facilities, accreditation and training). The potential volume of work will lower barriers of entry for UK nuclear new build supply chain. A fleet approach increases the likelihood of additional inward investment from non-UK companies.
defined in ONS input/output tables and PwC analysis. 7.1. Nature of benefits Combining these impacts with the direct impact gives Construction of a fleet of nuclear reactors as part of the total change in GDP and jobs resulting from the UK nuclear new build programme is also expected increased UK content. to enable increased UK industrial and manufacturing content in the nuclear new build programme Delivery of a fleet of new nuclear reactors could (compared with what it might otherwise be) for two significantly strengthen the UK’s industrial base, reasons: specifically the capacity and skills to supply components to new nuclear plants. This would have it would encourage more existing UK based increased value at present as this capability is suppliers to invest in developing their capability to currently at risk from a lack of certainty. There could meet the needs of the operators; and also be additional benefits from the creation of nuclear know-how that could be applied across the it could incentivise more international (non-UK wider UK generation sector. based) suppliers to invest in new or additional capacity in the UK (facilities and jobs) so that they While a proportion of the UK’s nuclear new build could compete more effectively to supply the UK programme must by definition be localised (e.g. civil nuclear new build programme. works for construction, operation and maintenance), Both of these effects have the potential to increase UK the lack of recent UK experience in new nuclear based suppliers’ share of spend on the nuclear new suggests that domestic suppliers may provide only a build programme. This, in turn, could be expected to limited share of the design and build value. However, enhance the direct contribution of new nuclear build the certainty and volume brought about by a fleet to the UK economy. This can be measured as approach has the potential to affect the behaviour of additional GVA and as an increase in employment. the new nuclear supply chain, increasing the scope for UK content. These impacts vary across the different There would also be knock-on effects of any increase categories of expenditure in the design and build in UK output as the direct value added flowed through phase and so the scale of the addressable market for the economy. There would be indirect impacts on the companies in the UK nuclear supply chain differs, economy through the spending of UK suppliers on with each category considered separately: their own supply chains and induced impacts on the economy through the spending of the suppliers’ For UK suppliers, the enhanced certainty employees (and the employees in the supply chains). associated with a fleet strengthens the incentives The indirect and induced impacts have been to invest in nuclear new build capability, as a estimated using GVA and employment multipliers as return on their investment is more likely. This may
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 21 The fleet effect:
take the form of investment in specific capital fleet approach is adopted. However, without positive equipment, recruitment of apprentices and action to utilise UK capacity, there is a risk that the nuclear-qualified staff, or training programmes to level of UK content will remain relatively small given meet nuclear standards. The capability of UK the maturity of existing global supply chains and suppliers would also improve over the fleet build modern logistics. The benefits of a fleet approach programme as they benefit from experience and is likely to be maximised when supported by a learning effects in delivering the same reactor clear industrial strategy that supports UK technology. content, which would allow the proportion of work undertaken in the UK to increase In addition, the potential volume associated with a significantly. fleet of nuclear reactors lowers the barriers to entry into the UK nuclear new build supply chain. The entry barriers to the nuclear industry are 7.2. Scale of benefits particularly high, consisting of sunk costs such as In the context of utilising a fleet approach to drive accreditation, quality control procedures and domestic content, Figure 9 demonstrates there is tendering. The timescale required to achieve scope to almost double the UK’s involvement in the accreditation coupled with uncertainty over order nuclear new build programme, when compared to the volumes, technology differences and delivery non-fleet approach. In the absence of a fleet approach timings made smaller companies in our interview the value of UK content is estimated to remain below programme reluctant to commit to the costs of 50%, with over half of the available work undertaken investment. Commitment to a fleet approach and by companies outside the UK. Our analysis of the the greater opportunity for repeat contracts would results of our interview programme concludes that the allow the potential for costs to be recovered over a scope for UK content under a fleet approach increases greater number of units or timescales. as the size of the fleet increases, with the greatest For non-UK suppliers, greater volume and localisation potential for a fleet of eight reactors 20 certainty of reactors with identical technology estimated at approximately 85% . would increase the viability of transferring manufacturing operations into the UK, with Figure 9: Potential for UK content evolution additional confidence being provided by a clear with and without a fleet
industrial strategy. Our interviewees made clear 100% that, with a global supply chain, the business case 90% for investment must be strong. The increased 80% 70% t n
quantity of orders from a fleet approach would e t 60% n o
c 50% make it more cost-effective to make inward K U
40%
investment. Such investments have already been % seen in the UK offshore wind sector such as 30% 20% 17 Samsung’s deal with David Brown Gear Systems , 10% Gamesa’s investment in an R&D facility in 0% Strathclyde18 and Siemens’ £80m investment in a Fleet of 2 Fleet of 4 Fleet of 6 Fleet of 8 UK content - non-fleet approach UK content - fleet approach wind turbine factory in Hull19. Prime contractors are expected to employ global Economic benefits are generated for the UK in terms supply chains, using the optimum combination of of GVA and employment, shown in Figure 10, cost and quality criteria. The increased capability increasing with the size of a fleet. There would be: of the UK supply chain described above increases the likelihood that prime contractors would elect direct economic impacts for the nuclear supply to use UK content. chain as they generated greater profits, wage bills These reasons show the scope for increasing the UK and employment; industrial and manufacturing contribution to nuclear indirect impacts when those businesses increased new build becomes more commercially viable when a their own supply chain spending; and induced impacts when the employees of all of these businesses spent their increased wages in the 17 http://www.ft.com/cms/s/0/da0bf1b6-4c15-11e1-98dd- economy. 00144feabdc0.html#axzz28w21HjpO. 18 http://www.guardian.co.uk/environment/2012/mar/23/gamesa- offshore-windfarm. 19 http://www.bbc.co.uk/news/uk-england-humber-17993593. 20 See Appendix B for details.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 22 The fleet effect:
For a fleet of eight reactors, approximately £4.6bn of Figure 11: Additional direct, indirect and direct additional GVA could be generated from the induced employment generated by a fleet increase in UK content, with additional indirect and approach induced impacts of £3.5bn and £3.0bn respectively. 160,000 This total additional GVA of more than £11bn 140,000
translates into approximately 150,000 man ) s r 120,000 a
years of employment (or around 9,400 jobs), e y
n 100,000 which consists of: a m (
t 80,000 n e
a direct impact of 68,000 man years (equivalent to m y 60,000 o l
4,200 jobs); p
m 40,000 E an indirect impact of 45,000 man years 20,000
(equivalent to 2,800 jobs); and 0 Fleet of 4 Fleet of 6 Fleet of 8 an induced impact of 38,000 man years Direct man years Indirect man years Induced man years (equivalent to 2,400 jobs). The impacts on the UK supply chain are the net result Figure 12 below shows how the magnitude of of the: economic impact for a fleet of eight reactors varies over the lifetime of the nuclear new build programme, reduction in the total value of work available to UK which has been assumed to be completed by 2030. companies due to the reduced design and build costs of a fleet; and The fleet benefit of UK content follows the time profile of construction activity, reaching its peak in increase in the total share of design and build work 2022 when the design and build of six reactors is due to the fleet effect encouraging inward underway simultaneously, and tailing down as the investment and increased competitiveness of UK construction of each reactor is completed. The peak companies. economic impact will arise in 2022 when we estimate Figure 10 and Figure 11 take into account the trade- that 14,900 people will be employed to meet the offs between the two effects, and demonstrate the demand for UK support to the new nuclear economic impacts of increased UK content assuming programme. This will generate additional GVA of that the projected cost savings in Chapter 6 are £1.6bn in 2022. achieved. Figure 12: Additional employment and GVA Figure 10: Additional direct, indirect and impacts over time (fleet of eight reactors) induced GVA generated by a fleet approach
£12 ) n b £ £10 V P N ( £8 A V G
l
a £6 n o i t i
d £4 d A £2
£0 Fleetof 4 Fleet of 6 Fleet of 8
DirectGVA (£bn) IndirectGVA (£bn) InducedGVA (£bn)
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 23 The fleet effect:
7.3. Sensitivity analysis Three sensitivities were quantitatively tested in our sensitivity analysis against our base case estimate of £11.1bn of additional GVA and an additional 150,000 man years of employment (9,400 jobs) for a fleet of eight reactors:
A conservative scenario on the level of cost reduction possible over the design and build of a fleet produces an estimate of an additional £5.8bn of GVA and an additional employment estimate of 57,000 man years or 4,000 jobs. A more optimistic scenario on the level of cost reduction possible over the design and build of a fleet produces an estimate of an additional £11.4bn of GVA and an additional employment estimate of 153,000 man years or 10,000 jobs. A scenario assuming output per worker ratios based on UK nuclear literature (representing an industry with lower labour-intensity) does not impact the GVA estimates but provides an additional employment estimate of 98,000 man years or 6,000 jobs. A scenario assuming output per worker ratios based on ONS input-output tables (representing higher labour intensity) provides a total additional employment estimate of 388,000 man years respectively or 24,000 jobs. A scenario assuming economic multipliers based on UK nuclear literature representing an under- developed nuclear supply chain provides an estimate of £7.4bn of additional GVA and 162,000 additional man years of employment (10,000 jobs). A scenario assuming economic multipliers based on the 2011 PwC study of the nuclear industry in France21 representing a well-developed nuclear supply chain provides an estimate of £13.2bn of additional GVA and 209,000 additional man years of employment (13,000 jobs). Full details and figures on our sensitivity analysis are to be found in Appendix B.
21 PricewaterhouseCoopers ‘The Socio-Economic Impact of the Nuclear Power Industry in France’ 2011.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 24 The fleet effect:
8. Reduced cost of electricity to consumers
Analysis concludes that the lifetime costs22 of nuclear electricity generation from a fleet could be reduced by 10.3% for a fleet of eight reactors. Domestic customers will benefit as well as commercial and industrial users, potentially leading to reduction in electricity prices of 2.6% in 2030. Benefits equivalent to £6bn GDP boost and 44,000 man years of employment or 1,700 jobs.
Companies active in export markets would also 8.1. Nature of benefits potentially benefit from an increase in Our research and analysis indicates that a fleet international competitiveness, leading to increased approach to nuclear new build has the potential to sales and increased GDP. reduce significantly the cost of designing and building nuclear generation capacity. This would be achieved 8.2. Scale of benefits through the economies of scale achieved by having Overall, we estimate that the lifetime costs of common components and through significant nuclear electricity generation from a fleet of reductions in design effort, construction risk and eight reactors could be reduced by 10.3% contingency, as described in Chapter 6. through improvements in planning, regulation, efficiency and regulatory approvals. Any reduction in the expected cost of developing, operating and decommissioning a Our analysis suggests that the reduction in fleet of nuclear reactors could be anticipated costs would feed through to a potential to feed through to lower electricity prices, reduction in the price of electricity charged to through a reduction in the wholesale price of domestic, commercial and industrial users of electricity and/or a reduction in the EMR up to 2.6% by 2030. support costs23. These lower prices would benefit domestic and non-domestic customers, including Consumers’ disposable income would be increased energy intensive businesses: directly through lower electricity bills. Commercial and industrial users would benefit Domestic customers would benefit from reduced from lower costs of businesses, which would electricity costs leading to greater disposable translate into lower product prices, improving income, which would benefit the UK economy international competitiveness. This could lead to through increased spending. This benefit can be increased exports, reduced imports and higher estimated through increased GDP. levels of investment. Commercial and industrial consumers would gain Taken together, these effects are estimated to increase from lower electricity costs and hence improved UK GDP by about £700m (undiscounted) in 2030, competitiveness leading to increased productivity. when all the new nuclear capacity is assumed to be This benefit can also be estimated through operating. This is equivalent to about 2,400 increased GDP. additional man years of employment in sectors of the economy outside electricity generation. We estimate that this is equivalent to an additional boost to UK GDP of about £6bn expressed as a present 22 Lifetime costs take account of costs incurred over the operational value using 2012 prices. and decommissioning period, recovered over the duration of the EMR CfD. The reduced costs of delivering nuclear power due to 23 EMR support costs is the term used by DECC in its document a fleet approach are estimated to reduce the consumer “Estimation of households’ demand for gas and electricity” to represent the costs associated with CfDs under the EMR. price of electricity by up to 2.6% at the peak of its impact around 2030, for a fleet of eight reactors as
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 25 The fleet effect:
shown in Figure 13. We limited our analysis to Figure 14: Reduction in electricity prices by addressing the benefits to be gained during the initial scenario for a fleet of eight reactors, 2020- CfD period for each reactor, so our charts show a 2055 diminishing impact over time. In practice, we would 5.0% ) % (
expect that there would be price benefits in the post- e
c 4.0% i r
CfD period and additional benefits from the p
y t
i 3.0% c
development of further nuclear plants post-2030. i r t c e
l 2.0% e
n i
Figure 13: Reduction in electricity prices by n 1.0% o i t c
fleet size in base case scenario, 2020-2055 u
d 0.0% e R 3.0% ) % (
e 2.5% Lower scenario Central scenario Upper scenario c i r p
2.0% y t i c i r
t 1.5% c The fall in electricity prices due to a fleet of nuclear e l e 1.0% n i reactors feeds through to increased GDP and
n o
i 0.5% t employment through the mechanism described in c u d e 0.0% Appendix A. R
Fleet of 4 Fleet of 6 Fleet of 8 In our base case scenario, the fall in energy prices based on a fleet of four reactors translates into an We assessed the sensitivity of the electricity price increase in £1.7bn of GDP and 12,000 additional impact through developing scenarios that considered man years of employment or 500 jobs. alternative CfD strike prices, pass-through of cost The economic impacts accumulate for additional savings, operational savings and the duration of CfDs. pairs of reactors as the cost savings build up, These are described in Table A4 in Appendix A and leading to increases of £5.9bn in GDP and 44,000 represent: man years of employment or 1,700 jobs for a fleet of eight reactors in our base case scenario. illustrative scenarios designed to illustrate lower and higher impacts; Under our lower scenario, the economic impact for a fleet of eight reactors is estimated to provide an a lower scenario based on a £75/MWh CfD strike additional £1.8bn of GDP and 12,000 man years of price, risk allocation agreements that limit the additional employment or 500 jobs. pass-through of design and build cost savings, no operational savings (perhaps due to indexation Under our upper scenario the economic impact for offsetting efficiency savings) and a 15 year CfD; a fleet of eight reactors is estimated to provide an additional £10.9bn of GDP and 86,000 man years an upper scenario based on a £135/MWh CfD of employment or 3,300 jobs. strike price, full pass-through of design and build cost savings and operational cost savings and a 25 The sensitivities are shown in Figure 15 and Figure 16 year CfD; and and described more fully in Appendix B. a base case scenario based on £105/MWh CfD (the Figure 15: Impact on GDP from reduced cost arithmetical average), risk allocation agreements of electricity that limit the pass-through of design and build cost savings, operational savings and a 20 year £12.0 CfD. £10.0 ) n
b £8.0 £
The reductions in electricity price over the three V
P £6.0 N scenarios are shown for a fleet of eight reactors in (
P Figure 14. D £4.0 G
£2.0
£0.0 Fleet of 4 Fleet of 6 Fleet of 8
Lower scenario Central scenario Upper scenario
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 26 The fleet effect:
Figure 16: Impact on employment from latter half of the 2020’s24, the impact of a new reduced cost of electricity nuclear fleet on electricity prices would lead to in an increase in GDP of £5.6bn and an additional 100,000 90,000 ) 41,000 man years of employment or 1,600 jobs. s r
a 80,000 e y
70,000
n In a scenario where wholesale electricity prices a 60,000 m (
t 50,000 remain constant after 2030, the impact of a new n e 40,000 m
y nuclear fleet on electricity prices would result in an
o 30,000 l p increase in GDP of£6.4bn and an additional
m 20,000 E 10,000 49,000 man years of employment or 1,900 0 Fleet of 4 Fleet of 6 Fleet of 8 additional jobs. Lower scenario Central scenario Upper scenario Further details are contained in Appendix B. The time profile of economic impacts has been constrained to the period covered by the EMR CfDs so largely follows that of the fall in electricity prices in Figure 13. In our base case scenario, the impact on GDP and employment spans 26 years from 2023 until 2049, with an average 1,700 additional jobs as shown in Figure 17.
Figure 17: Employment impact of reduced cost of electricity over time
4,500 ) s r 4,000 a e y
3,500 n
a 3,000 m
l 2,500 a u
n 2,000 n a
( 1,500
t n
e 1,000 m
y 500 o l
p 0 m E
Lower scenario Central scenario Upper scenario
8.3. Sensitivity analysis Three additional sensitivities are quantitatively tested against our base case assumptions for a fleet of eight reactors with respect to the impact on the cost of electricity. Compared to our base case results for a fleet of eight reactors - an additional £6bn of GDP and 44,000 additional man years of employment or 1,700 jobs:
Conservative views on the level of cost reduction achievable produce additional GDP contributions of £3bn, and an additional 26,000 man years of employment or 1,000 additional jobs. optimistic views on the level of cost reduction achievable produce additional GDP contributions of £8bn and an additional 59,000 man years of employment or 2,300 jobs. In a scenario where total electricity generation produced after 2030 continues to increase according to the rate of increase forecast for the
24 DECC “Fossil fuel wholesale and retail prices: Annex F” 2011
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 27 The fleet effect:
9. Longer term benefits of strengthened UK industrial base
Further increased opportunities for UK firms in ongoing support for nuclear operations. Globally 160 reactors on order or planned with another 320 proposed by 2030 increasing overseas opportunities. Potential for significant increase in annual nuclear exports.
The World Nuclear Association’s October 2012 9.1. Nature of benefits forecast25 indicates that there are 160 reactors on We have demonstrated the potential for a fleet order or planned with a capacity of some 177GWe26 approach to nuclear new build to enhance the skills, and a further 323 proposed across 48 countries technical know-how and capacity of the UK supply worldwide with expected commercial operation by chain. In addition, a fleet approach could allow the 2030, within which 19 are non-nuclear countries UK economy to realise additional benefits: contemplating nuclear development.
Within the nuclear industry, benefits would The level of experience of each country’s accrue through the potential to export more manufacturing sector of operating in safety critical products and services in the global market, which environments varies significantly, as does the is predicted to grow significantly over the period to maturity and capability of their regulatory sectors. 2030. This suggests that there are significant opportunities for companies in the UK nuclear supply chain to There may be further benefits within the UK capture a share of this market, both from a nuclear sector if UK based firms became more manufacturing and a nuclear regulation perspective. involved in the operation, maintenance and The requirement for nuclear supply chain support in decommissioning activities for the existing export markets will be based on the contracting fleet of power stations and enduring roles as new strategy of the technology provider and associated reactors enter their operational phase. consortium, highlighting the importance for UK There may also be benefits for companies in the companies to invest in the development of strong nuclear sector through the application of their relationships. enhanced capability to other industries. For example, if UK nuclear new build supply chain companies also provide non-nuclear products, improvements in skill levels, technology and facilities are also likely to increase the productivity of their non-nuclear production. We would expect the benefits to flow down through the supply chain as the experience of Tier 1 and Tier 2 suppliers is passed on to Tier 3 and 4 suppliers. The economic impacts of these potential benefits can also be estimated in terms of increased GDP and employment, although these are general in nature.
25 http://www.world-nuclear.org/info/reactors.html. 26 http://www.world-nuclear.org/info/inf17.html.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 28 The fleet effect:
9.2. Scale of benefits The development of a strong, competitive industrial base in the UK is a prerequisite for gaining future export orders, as is a track record of delivery that underpins strong relationships with global technology providers, their potential consortium partners and major international Tier 1 players. The certainty and rhythm associated with a fleet approach provides the opportunity for UK firms to develop in this way. The potential prise can be estimated by considering the addressable market, recognising that national governments may have localisation requirements that limit the size of the addressable market and competition will be among the global supply chain. An indication of the scale of the addressable market and potential for the UK supply chain is provided by:
Rolls Royce27 analysis that the global civil nuclear market is currently worth £30bn per annum and that it is expected to rise to around £50bn per annum in 15 years, with over 70% relating to building and support of new nuclear facilities; and IPRR28 analysis that, given the current growth rates for global nuclear power predicted by the IAEA and the UK’s current market share, there is the potential for the UK nuclear supply chain to increase the value of exports from £700m to between £1.1bn and £1.6bn by 2030. Adding a fleet effect to the current forecasts would enhance the potential market share for UK firms offering further growth over and above the 140% figure suggested above.
27 http://www.rolls- royce.com/middle_east/en/markets_products/nuclear.jsp. 28 IPPR Trading Ltd “Benefits from Infrastructure Investment: A case study in Nuclear Energy” 2012.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 29 The fleet effect:
10.Risks associated with a nuclear fleet and their mitigation
Risks could be mitigated most effectively through the development of a fleet approach to new nuclear.
We reviewed the risks associated with a fleet approach depend on commodity price levels, the make-up of and the actions available to mitigate such risks. the UK generation portfolio during the period of the delay and any adjustments to the planned fleet We identified three such risks that are directly build programme following the resolution of the applicable to a fleet approach, each of which could failure. impact the build programme and hence the overall We believe the robustness of the GDA and cost and commercial operation date of individual reactor design authority in the UK is a reactors. This in turn has an impact on the mitigation for this risk. It not only requires contribution of nuclear power to the consumer significant details from reactor manufacturers to gain electricity cost, ongoing nuclear operations, the cost initial approval but is also intended to provide of electricity to consumers and the subsequent level of ongoing protection through taking account of lessons EMR support required. learnt and requiring modifications. 10.1. Fleet failure risk 10.1.2. During operation 10.1.1. During construction A failure with safety or operational A systematic design issue identified during a significance in a single operating reactor fleet construction programme could result in could result in the whole fleet being shut down delays to all reactors, both those at varying stages for a period of time whilst the issue is mitigated, as of construction and those still in the planning stage. has been seen in the past, both in the UK and The extent of any delay would depend on the overseas. The duration of the closure and the number perceived severity of the risk and the time required to of reactors impacted would depend on a number of develop solutions and obtain approval to proceed factors. These include the perceived severity of the from regulatory and design authority bodies. risk, the investigation required to establish the cause of the failure and to develop a solution, the phasing of The implications for the supply chain could be: the remedial installation programme and achieving the regulatory approvals to recommence operations: an unexpected hiatus in workload of uncertain duration, leading to the need to find, and The implications for the supply chain would be less conclude, other contracts on which to deploy than during construction as the main impact nuclear-qualified staff; would be on those companies providing O&M a risk to cash flows and financial metrics for a support. Potentially, some companies might period of time; benefit from additional investigative work or a knock-on impact on local economies served redesign/manufacturing work as the fault is by the supply chain; and resolved. potential redesigns of sub-components. The implications for consumers would be seen The implications for consumers would be seen through changes in the cost of electricity although through a delay in electricity prices reflecting the the impact would depend on the proportion of impact of a fleet approach to nuclear, but the scale electricity being provided by new nuclear of the impact is complex to predict as it would generation, the relative prices of other fuels,
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 30 The fleet effect:
demand levels, the duration of the shutdown, the approaches to contracting to reduce working capital cost of Government support under the EMR, the requirements for smaller companies in the supply ability for electricity suppliers to change tariffs to chain. Other mitigants include strategic alliances reflect changes in the wholesale cost of electricity between larger and smaller companies in the supply and the ability of industrial and commercial chain that enable the alliance to benefit from a consumers to pass through price increases in their stronger overall balance sheet in bidding for and own product prices. implementing nuclear new build projects. Fleet failures are often related to the length of operation and solutions can be implemented through 10.3. Regulatory capacity and an aggressive, but planned, update programme. The complexity impact the robust reactor design authority also provides mitigation during operations. Its intent is to build programme enable practical lessons to be learnt and operational Although regulatory risk is common to many large data to be used to predict remedies for failures and to build programmes, particularly in sectors with minimise the duration of the shutdown and impact on stringent safety and quality requirements, there are the economy. For any reactor design that has additional risks specific to the nuclear new build been implemented in other countries, the UK programme. We have identified three such risks new nuclear fleet will not be FOAK technology impacting the supply chain: and can take advantage of fleet learning that has been identified elsewhere, thereby benefiting from the The UK has limited availability of scarce resources economies of implementing a standardised and tested such as site inspectors and other regulatory and solution. licensing specialists, which could lead to delays in approvals and hence commissioning dates. 10.2. Risk of insufficient EU or UK requirements to amend environmental financial capacity in the or safety standards would require additional skilled regulatory resources to implement and nuclear supply chain monitor the change process, which could have There is a risk that there is insufficient financial implications for construction planning and capacity in the nuclear supply chain to meet commissioning timescales. contractual obligations for multiple builds. Nuclear new build consortia and their approach to contracting raises risks associated with licensing The certainty associated with a fleet approach reduces complexity, with implications for construction the risk that key companies within the UK supply timescales. chain might decide to focus on other sectors rather than nuclear, since volume and rhythm certainty Although these risks appear diverse, there are offsets the cost of participation and initial investment common mitigants: requirements. Assuming that the supply chain wishes to make these investments, the resultant risk is that Confirmation of a fleet approach supports companies are unable to acquire financing to support investment in skills development and the necessary investment in facilities or recruitment recruitment, particularly in the areas of process to deliver the scope of nuclear new build contracts in controls, compliance and quality control. This the proposed timescales. leads to more automation of processes and systems and the introduction of lean processes to The certainty of contracts for a fleet and the simplify operations. The upskilling of wider associated volumes and clarity over manufacturing staff and internal QA professionals construction rhythm would be expected to should lead to improved operational quality with a provide mitigation and comfort to financiers commensurate reduction in the time and scope that the supply chain would meet its financial demands on external inspectors and regulators. commitments. The sequencing of reactor builds would provide additional comfort over A fleet approach leads to a greater depth of continuity of revenues and so be expected to regulatory interface. reduce the risk premium associated with investment A fleet approach supports the setting up of loans. common contracting interfaces for each reactor, reducing the level of controllable risks, whilst Other risk mitigants that could be implemented recognising that site specific risks (common to any include regional development loans and innovative
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 31 The fleet effect:
large construction project) remain to be mitigated Figure 18: Mitigants of fleet failure risk on a case by case basis. 10.4. Risk that non-UK suppliers More nuclear NOAK benefit from a fleet specialists technology approach at the expense of the UK supply chain The industry recognises that the UK supply chain Common Benefit of does not currently have sufficient resources or contracting reactor operational interfaces experience experience to take a lead role in new nuclear build. Fleet Many companies have made, or are planning to make, failure risk investments to gain the relevant experience, such as partnering with overseas firms with new nuclear Benefit of experience, increasing the scale of production, Robust design reactor expanding the range of products offered or seeking authority construction quality approvals. The risk is that Tier 2 companies or experience Localisation lower do not increase their scope of work for strategy to subsequent reactors in a fleet, thereby reducing the enhance skills return on their investments and the contribution towards GDP.
Our interviews with the supply chain suggest the key mitigant is dependent on investors’ contracting strategies for the fleet. A contracting strategy that supports localisation would encourage more UK supply chain companies to invest for accreditation to participate in the new build programme and encourage the investments needed to increase scope and role as the programme progresses. Companies would also be encouraged to demonstrate their ability to compete with their non-UK competitors and provide cost-effective solutions to investors and Tier 1 suppliers. 10.5. Summary of fleet risks The complexity associated with the development and operation of a nuclear power plant means that site- specific risks will always remain. We contend that the risks can be mitigated most effectively through the development of a fleet approach to new nuclear, such that maximum comfort can be taken from the robust design regulatory authority, learning from previous experience and the increased level of specialists with nuclear expertise operating in the sector as shown in Figure 18.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 32 The fleet effect:
11. Conclusions
Our conclusions on the benefits to the UK economy of £3.0bn in additional induced benefits. a fleet approach to new nuclear build in terms of additional contribution to GDP and additional jobs In addition, a further £6bn of GDP value could arise are that a fleet approach to new nuclear: from the impact of reduced electricity costs over the period to 2050 covered by CfDs. Enhances certainty for the nuclear supply chain: Provides opportunities for significant cost savings in the period to 2030: much of the UK nuclear supply chain needs certainty to justify investments in facilities, cost reductions could lead to savings of up to training and development, skills enhancement, 18% between the first and fourth pairs of job expansion or accreditation activities; and reactors; the non-UK nuclear supply chain needs cost reductions could reduce the cost of the certainty to justify inward investment in the UK total fleet build programme by up to 10%; and/or partnering with UK firms. the cost of electricity could be reduced by up to 2.6% in 2030 through reductions in the Supports the delivery of certainty through Levelised Cost of Electricity (LCOE) for new enabling: nuclear, leading to reductions in the cost of EMR support for Government; and clarity over policies associated with new the overall cost of new nuclear electricity over nuclear development, timescales and the fleet CfD period could be reduced by 10.3%. contracting processes; continuity of business through a clear rhythm There could be further cost savings through the of nuclear reactor builds allowing effective use development of additional nuclear plant post-2030 of resources; (in preference to other technologies) and from volume of orders through investments in reductions in the cost of electricity after the CfD relationships, facilities and training; and periods. reduction in actual and perceived risks associated with a fleet. Provides the potential for enhanced industrial benefits over the long term: This could result in the UK content of nuclear new opportunity to increase nuclear-related exports build increasing to up to 85%. by significantly more than 140% by 2030; and Provides the potential for an additional enables the UK supply chain to apply its 150,000 man years of UK employment learning to other safety-intensive, highly (over 9,000 jobs) over the period to 2030: regulated industry sectors such as other renewable generation, oil and gas or chemicals. 68,000 man years of additional direct employment (over 4,000 jobs); 45,000 man years of additional indirect employment (nearly 3,000 jobs); and 38,000 man years of additional induced employment (over 2,000 jobs).
In addition, a further 44,000 man years of employment (1,700 jobs) from reduced electricity costs could arise over the period to 2050 covered by CfDs. Could provide £11bn of additional GDP value for the UK in 2012 NPV terms over the design and build period to 2030: £4.6bn in additional direct benefits; £3.5bn in additional indirect benefits; and
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 33 The fleet effect:
Appendices
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 34 The fleet effect:
Appendix A: Model structure, data sources and assumptions
The operational phase of each reactor lasts for 60 A. 1. Introduction years, and the decommissioning phase lasts for 20 This appendix provides additional details on the years. approach we took to developing and structuring our Construction of each subsequent plant commences economic model, identifying data sources and 18 months after the start of the construction of the collecting data and the broader economic second reactor of the previous plant. For the first assumptions made to develop appropriate scenarios plant, construction of the second reactor will for analysis. commence 18 months after the start of construction of the first reactor, and for later plant A. 2. Reducing design, build and this gap reduces to 12 months. This is to provide a operating costs of nuclear plant steady rhythm of construction for a programme of nuclear plant, which recognises industry norms for A.2.1. Model structure reactors on a single site and typical phasing to The first stage in our assessment of the change in support continuity. design and build costs from a fleet approach involved The construction programme commences at the a bottom-up analysis of the expected cost of the first beginning of 2013 and will be completed in 2029. pair of nuclear reactors. Their costs were broken down into approximately 20 categories of expenditure A. 3. Increasing UK content in the grouped under four main headings: UK new nuclear build programme nuclear island (excluding civil works); A.3.1. Model structure nuclear island civil works; Our assessment of the proportion of the UK new nuclear build programme which could potentially be conventional island; and sourced from UK based suppliers with a fleet balance of plant. approach is based on evidence collected during our programme of interviews with the supply chain and We estimated the cost saving from a fleet approach industry experts. It reflects views about supply chain for each category of expenditure based on evidence capability rather than a definite commitment on the collected from our programme of interviews with part of those funding and delivering the nuclear supply chain industry experts. We checked for programme to buy from UK based companies. Using consistency with publicly available information this information, we estimate the likely value of the wherever possible. The expected percentage cost purchases from the UK based supply chain for each saving for each category of expenditure was category of expenditure. multiplied by the corresponding baseline cost estimate to determine the total cost saving by We estimated the value added directly associated with category. To obtain present value estimates of the this spend by multiplying it by the appropriate ratio of expected cost savings, we applied discount rates based value added to output (turnover) derived from official on the phasing of reactors. statistics29. The relevant ratio was obtained by matching each category of spend to industry sectors A.2.2. Data sources and assumptions defined within the UK Standard Industrial Our key assumptions for the modelling approach Classification. We estimated direct employment using above are as follows: a ratio of output per man-year of employment, obtained from the financial accounts of a Each reactor takes seven years to build from start to finish (i.e. from FID to start of commercial operation), with two years of studies and five years of construction. 29 Input-Output Analytical Tables, ONS.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 35 The fleet effect: representative sample of businesses in the nuclear A. 4. Reduced costs of electricity for new build supply chain. consumers We used standard Type 1 and Type 2 multipliers A.4.1. Model structure derived from UK input-output tables30 to estimate the indirect and induced impacts of the UK content We estimated the impact on overall electricity prices expressed both as GVA and man years of to consumers using the expected lifetime cost savings employment. This gave an estimate of the of a fleet approach to nuclear new build where the employment and GVA generated in the UK economy lifetime includes operations and decommissioning. as a result of supply chain expenditure and employee We estimated the expected cost savings during the spending. The direct, indirect and induced impacts for design and build phase as described in Appendix A.2, each spend category were summed to estimate the while for the expected cost savings during the total economic impact of the UK content associated operations, maintenance and decommissioning with a fleet approach to the new nuclear build phases we used published estimates by Parsons 33 programme, in terms of GVA and employment. We Brinckerhoff . After accounting for the proportion of applied a discount rate to the GVA figure to obtain a lifetime cost savings expected to be passed through net present value estimate. the value chain to consumers, we estimated the impact on consumer electricity prices on an annual Our assessment of the potential UK content of a new basis, using the assumption that all cost savings nuclear build programme without a fleet approach would be recovered over the duration of the CfD. uses exactly the same steps starting from the expected spend on the new nuclear programme without a fleet We estimated the impact on consumer electricity approach (i.e. using the counterfactual). prices through two channels; a reduction in the CfD strike prices for each nuclear plant after the first (i.e. a By taking the difference between the with and without fleet effect has no impact on the CfD strike price for fleet estimates of GVA and man years of employment Hinkley Point) and a reduction in the wholesale we determined the incremental effect of the fleet electricity price. We multiplied the percentage lifetime approach. cost saving passed through by the counterfactual strike price (i.e., the assumed strike price in the absence of a fleet approach) to obtain the reduction in A.3.2. Model structure strike price for each CfD. For the reduction in Table A3 below lists the assumptions used in our wholesale electricity prices, we calculated the resource modelling of UK content and their source: cost saving per MWh of total electricity production. The two sources of price reductions were added to Table A3: Data sources used in UK content find the total reduction in consumer electricity prices. estimations The reduction in consumer electricity prices impacts Assumption Data source the economy through a number of mechanisms, Economic ONS input-output tables31 displayed in Figure 19 below. Firstly, households multipliers benefit from increased disposable income due to lower electricity bills, which increases consumption Output per Financial data from a sample of nuclear new worker ratio build businesses and therefore generates GDP and employment. Secondly, businesses also benefit from lower Discount rate HM Treasury discount rates32 electricity bills in the form of reduced operating costs. There are two economic impacts of lower business costs – an increase in business competitiveness which leads to greater exports and increased GDP and employment, and a reduction in product prices which further increases household disposable income and consumption, and hence GDP and employment. These various economic impacts were estimated simultaneously using Cambridge Econometrics’ MDM
30 Input-Output Analytical Tables, ONS. 31 Input-Output Analytical Tables, ONS. 32 The Green Book – Appraisal and Evaluation in Central Government, HM Treasury, July 2011 33 Electricity Generation Cost Model, Parsons Brinckerhoff, 2011.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 36 The fleet effect:
energy-environment-economy model34, producing range of impacts and do not represent PwC’s views on estimates of the change in GDP and employment from the likely level of cost savings to be passed on to reduced electricity prices on an annual basis. consumers or make any assumptions about commercial behaviours of companies. The lower Figure 19: Economic impacts of reduced costs bound assumes that consumers and producers share of electricity for consumers the benefit of reduced costs equally, the upper bound assumes that all of the cost savings accrue to consumers, while our base case scenario assumes a Reduced costs of midpoint between the two. electricity for consumers
Reduced operating Reduced product Increased household For operations, maintenance and decommissioning costs of businesses prices disposable income cost savings, our lower scenario assumes that there is no saving (e.g. all savings are offset by wage or Increased business Increased consumption competitiveness commodity inflation), our upper scenario assumes that savings are equal to the design and build savings, Increased business while the base scenario uses the savings identified by exports Parsons Brinckerhoff38 in their 2011 paper on the costs of electricity generation. Over an eight reactor Increased GDP and employment fleet, the upper and central scenarios produce similar savings but differ for smaller size fleets.
A.4.2. Data sources and assumptions We assume that the lower tenor of the CfD for nuclear To take account of data uncertainty, we applied three plant is at the level indicated by DECC in their 2012 sensitivities on the impact of reduced costs of report39 and that the upper duration is 25 years, electricity. The assumptions underpinning each of assuming that a longer tenor will be required for these scenarios are displayed in Table A4 below. nuclear than for other low-carbon generation. The base scenario assumes a mid-point of 20 years The sensitivities are for illustrative purposes only, recognising that DECC have left the tenor for nuclear designed to show a range of impacts from a fleet effect and CCS plant CfDs as a detail to be finalised. and do not represent PwC’s views on the appropriateness or achievability of any particular Table A4: Lower, central and upper scenarios strike price for new nuclear plant. for reduced cost of electricity estimations
Lower Base Upper Our scenarios regarding the strike price use the scenario scenario scenario Parsons Brinckerhoff35 estimate of the FOAK levelised cost of nuclear power as a lower bound, and a figure Strike price £75/MWh £105/MWh £135/MWh slightly below the strike price for offshore wind in the Pass-through of 50% 75% 100% 2012 PwC study36 as an upper bound (based on cost savings Vincent de Rivaz’s interview with the Daily Telegraph Operations, No cost Savings in Equal to cost in August 201237). Our base scenario uses a value maintenance and savings Parsons savings in slightly above the mid-point of the range to reflect the decommissioning (0% over Brinckerhoff design and cost savings paper build phase UK FOAK status. build programme) (10% over (10% over build build For the pass-through of cost savings, we allocate programme) programme) savings to consumers and producers based on Duration of CfD 15 years 20 years 25 years assumptions on risk allocation, the impact on required returns and risk appetite. As with the strike price, the values used are designed to illustrate a
34 Multisectoral Dynamic Model, Energy-Environment-Economy, Cambridge Econometrics. 35 Electricity Generation Cost Model, Parsons Brinckerhoff, 2011. 36 Offshore Wind Cost Reduction Pathways Study – Finance Work Stream, PwC. 38 Electricity Generation Cost Model, Parsons Brinckerhoff, 2011. 37http://www.telegraph.co.uk/finance/newsbysector/energy/94711 39 Electricity Market Reform Policy Overview, Annex B – Feed-in 93/EDF-Energy-puts-price-cap-on-Hinkley-Point-nuclear- Tariff with Contracts for Difference: Draft Operational plant.html. Framework, DECC, 2012.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 37 The fleet effect:
The other important data used in the base case modelling of reduced electricity costs and their sources are listed in Table A5 below:
Table A5: Data sources
Data Source
Forecast consumption of electricity by user DECC Updated Energy and Emissions Projections, Annex C, October 2011 Electricity generation, 2012 – 2030 DECC Updated Energy and Emissions Projections, Annex E, October 2011 Electricity generation, post 2030 Assumed to stay constant at the 2030 level of generation Wholesale electricity prices, 2012 – 2030 DECC Updated Energy and Emissions Projections, Annex F, October 2011 Wholesale electricity prices, post 2030 Assumed to increase linearly at the annual rate of increase between 2025-2030 Inflation rate UK GDP deflator, National Income, Expenditure and Output, 2012, ONS Household elasticity of demand for electricity Estimation of Households’ Demand for Gas and Electricity, Oxford Economics, December 2008 Household energy bill and usage Estimated Impact of Energy and Climate Change Policies on Bills, DECC, November 2011 Projection of UK households UK household projections, ONS housing statistics, 2010
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 38 The fleet effect:
Appendix B: Model results and sensitivity analysis
of reactors, while the conservative and optimistic B. 1. Introduction savings were 9% and 28% respectively. This appendix provides greater detail on the results of our analysis, and describes the sensitivity analysis Figure 21: Impact of conservative and undertaken on each of the main benefit areas optimistic interview data on design and build considered. savings
120% 2
B. 2. Reduced costs of UK nuclear 100% &
1
s r o t new build c a 80% e r
f o
s t
Figure 20 below shows the relative contribution of s o
c 60%
n g i each design and build category savings to the total s e d
& 40%
savings for design and build on the fourth pair of d l i u b
f o reactors compared to the first pair. The Nuclear 20% Island makes the largest contribution to total savings % 0% at almost 50%, with the Conventional Island next at FleetReactors1& of 2 2 ReactorsFleet of 3 4& 4 ReactorsFleet of 5 &6 6 FleetReactors of 78 & 8 over 25%. The categories with the smallest Conservative Base case Optimistic contributions to total savings, Nuclear Island Civil Works and Balance of Plant, are those with the B. 3. Enhanced local content of UK smallest proportion of total expenditure. nuclear new build Figure 20: Contribution of categories to total B.3.1. Scale of benefits design and build savings The impact of a fleet approach on UK content varies 60% considerably depending on the design and build ) % ( category considered. Figure 22 below shows the 50% g n i v
a contribution of each of the four categories to the total s
t 40% s o
c employment generated by greater UK content, for a
l a t
o 30% t
fleet of eight reactors: o t
n o i 20% t u b i r
t The Nuclear Island makes the largest contribution
n 10% o C to total employment at over 90%. 0% Nuclear Island Nuclear Island Civil Conventional Island Balance of Plant The Conventional Island also makes a positive Works contribution of greater than 10%. Supply chain companies interviewed had differing The Balance of Plant and Nuclear Island Civil views on the magnitude of cost savings achievable Works make a small negative contribution to UK from a fleet approach, dependent on the products and content because the increase in UK content from a services provided and the design and build categories fleet approach is outweighed by the reduction in they were targeting. Our sensitivity analysis cost. Despite capturing a greater proportion of the considered scenarios which weighted the results total work, the amount of work available has fallen across the categories of spend in different due to learning and efficiencies. proportions, to consider conservative and optimistic Although this effect occurs for each category, it is savings and assess the robustness of our results amplified for Civil Works and Balance of Plant against the base case scenario. The results remain because the level of UK content is already consistent with a significant level of cost saving comparatively high in a non-fleet approach. throughout, shown in Figure 21. The base case scenario produces a saving of 18% on the fourth pair
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 39 The fleet effect:
Figure 22: Contribution of category to The IPRR scenario provides an estimate of 98,000 employment impact man years for a fleet of eight reactors, while the ONS input/output tables’ scenario provides an equivalent 100% estimate of 388,000 man years, as shown in Figure t n
e 80%
m 24. y o l p 60% m e
l a t Figure 24: Impact of output per worker ratio o
t 40%
o t
n on total employment o i
t 20% u b i r
t 500,000 ) n s
o 0% r a C
Nuclear Island Nuclear Island Civil Conventional Island Balance of Plant e
y 400,000
Works n
-20% a m
( 300,000
t n e 200,000 m y o
B.3.2. Sensitivity analysis l p 100,000 m e
l a
The same approach was adopted for sensitivity t 0 o analysis to assess employment generation from T Fleetof 4 Fleetof 6 Fleetof 8 enhanced UK content. For a fleet of eight reactors, Proxies from literature Company data ONS I-O tables this yields total employment estimates of 57,000 and 153,000 man years of employment for conservative The choice of economic multipliers is a key sensitivity and optimistic interview data respectively, compared for the UK content results because it provides to 150,000 man years in the base case, as shown in estimates of the indirect and induced impacts for GVA Figure 23. and employment. In the base case, multipliers are derived from the ONS input-output table, after Figure 23: Impact of conservative and matching the categories of expenditure to appropriate optimistic interview data on total UK Standard Industrial Classification sectors. Two employment alternative sources of multipliers have been tested – those stated in the literature for the UK nuclear
) 180,000 s r
a 160,000 e industry and those used in the 2011 PwC study of the y 140,000 n a French nuclear industry42. Again, the nuclear industry m 120,000 (
t
n 100,000
e is less well established in the UK than in France and
m 80,000 y o l 60,000 so the scenario using French data gives a picture of p
m 40,000 e
l what could be achievable with a strong, well a
t 20,000 o T 0 developed nuclear sector. As Figure 25 and Figure 26 Fleetof 4 Fleet of 6 Fleetof 8 show, the GVA results are more sensitive to the choice Conservative Base case Optimistic of multipliers than the employment results. For a fleet of eight reactors, total GVA varies between £7.4bn The assumption for output per worker is a key and £13.2bn depending on the choice of multipliers, sensitivity because it drives the conversion of GVA while employment varies between 150,000 and into employment, and hence impacts employment 209,000 man years. estimates significantly. In the base case, output per worker is derived from the company accounts of a Figure 25: Impact of economic multipliers on sample of suppliers in the nuclear supply chain, total GVA providing a total employment estimate of approximately 150,000 man years for a fleet of eight £14
) £12 n b
reactors. The two sensitivities considered are a proxy £
£10 V for output per worker from figures in the 2012 IPPR P
N £8 (
40 A £6 report , and output per worker in the sector-specific V G
41 l £4 a
ONS input-output tables . The IPPR data provides t o lower values than the ONS input/output tables as the T £2 £0 UK nuclear supply chain sector is not currently as Fleet of 4 Fleet of 6 Fleet of 8 intensive as other sectors. The range gives a view on Proxies from literature ONS I-O tables PwC France the potential level of uplift that could be achievable.
40 Benefits from Infrastructure Investment: A Case Study in Nuclear Energy, IPPR Trading Ltd, 2012. 42 The Socio-Economic Impact of the Nuclear Power Industry in 41 Input-Output Analytical Tables, ONS. France, PwC, 2011.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 40 The fleet effect:
Figure 26: Impact of economic multipliers on B.4.2. Sensitivity analysis on base case total employment The first sensitivity we considered is the level of 250,000 )
s achievable cost savings, based on findings from our r a
e 200,000 y interview data. It has an impact on the results, but n a
m 150,000 (
there are still significant economic benefits from t n e 100,000
m lower cost of electricity, shown in Figure 29 below. y o l p 50,000 For a fleet of eight reactors, the conservative and m e
l
a 0 t optimistic approaches produce 26,000 and 59,000 o T Fleet of 4 Fleet of 6 Fleet of 8 man years of employment respectively, compared to Proxies from literature ONS I-O tables PwCFrance 44,000 man years in the base case.
B. 4. Reduced cost of electricity Figure 29: Effect of conservative and optimistic interview data on employment B.4.1. Scale of benefits 70,000
60,000 Figure 27 and Figure 28 below show how the ) s r a economic benefits of lower electricity prices are e 50,000 y
n distributed across the sectors of the economy. The a m 40,000 (
t n sector which experiences the greatest economic e 30,000 m y o benefit is financial and business services, receiving l 20,000 p m more than 50% of total employment and more than E 10,000
30% of total GDP generated by lower electricity 0 prices. The other sectors which are impacted Fleet of 4 Fleet of 6 Fleet of 8 significantly are manufacturing and construction, Conservative Base case Optimistic which benefit from over 25% of total GVA and over 20% of total employment respectively. There is only a moderate impact on the results from taking an alternative assumption around total Figure 27: Employment impacts of reduced electricity generation in the long-term as shown in electricity prices by industry Figure 30. In the base case it is assumed that after 2030, the latest date of forecast electricity generation from DECC, the level of electricity generated remains Fin. & business serv. Construction Other services Inform. & commun. at a constant level. A sensitivity that generation Government serv. Agriculture etc increases linearly at the same rate of annual increase Transport & storage Accom. & food serv. as between 2025-30 results in slightly lower results Mining & quarrying Manufacturing for additional GDP and employment. The reduction Distribution reaches its maximum level (a difference of £76m (undiscounted) and approximately 260 man years from the base case) in 2042. The fall in economic impacts arises in this case because new nuclear Figure 28: GVA impacts of reduced electricity becomes a lower proportion of total electricity prices by industry generation over time, and thus has a smaller impact on overall electricity prices (assuming no other cost
Fin. & business serv. Construction efficiencies are achieved). Other services Inform. & commun. Government serv. Agriculture etc Figure 30: Impact of long-term electricity Transport & storage Accom. & food serv. generation on employment, 2020-2050 Mining & quarrying Manufacturing Distribution Elect., gas, water etc 3,000 ) s r
a 2,500 e y
n a 2,000 m
l a u n
n 1,500 a (
t n e 1,000 m y o l p 500 m E
0 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050
Flat electricity generation post-2030 Increasing electricity generation post-2030
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 41 The fleet effect:
The impact of varying assumptions on electricity Figure 32: EMR support cost savings from a prices has a larger impact than varying the level of fleet approach generation capacity. In the base case, it is assumed £18 that after 2030, the latest date of forecast electricity £16 ) n
b £14 prices from DECC, that prices increase linearly at the £
V £12 P same annual rate as between 2025 and 2030. This N ( £10
g n causes an increase in GDP and employment impacts i £8 v a s
£6 which reaches a peak of £120m (undiscounted) and R
M £4 E 410 man years in 2042. There is an increase in £2 economic impact because when prices do not rise £0 Fleet of 4 Fleet of 6 Fleet of 8 after 2030, the resource cost saving becomes a larger Lower scenario Central scenario Upper scenario proportion of electricity prices. Figure 33: Impact of conservative and Figure 31: Impact of long-term electricity optimistic interview data on EMR support prices on employment, 2020-2050 cost savings 3,000 ) s r
a £12
e 2,500 y
n a £10 ) m 2,000 n l b a £ u
n £8 V
n 1,500 P a ( N
( t
n g e 1,000 £6 n i m v y a o l s
500 p £4 R m M E 0 E £2 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046 2048 2050 Increasing wholesale prices post-2030 Flat wholesale prices post-2030 £0 Fleet of 4 Fleet of 6 Fleet of 8 Our analysis of the economic impacts of reduced costs Conservative Base case Optimistic of electricity assumes that benefits accrue only to consumers and producers of electricity. However, B. 6. Reduced costs of electricity for there will be a benefit to public finances through lower EMR support costs, which results from a households reduction in strike price (i.e. the funds provided when In our analysis of reduced costs of electricity, the wholesale prices are less than the CfD strike price). economic benefits through lower energy prices for The fall in the strike price for each pair of reactors is both households and businesses are taken into estimated by combining the percentage reduction in account. This is a complementary analysis focusing the lifetime cost with an assumed percentage pass- specifically on the benefits through lower prices for through of cost savings. The difference between the households, which constitute approximately 30% of strike price and the wholesale price (i.e. the EMR total energy consumption in the UK43. support cost) is calculated for each year, with and without the cost savings, to find the total saved cost to To find the saving in electricity prices faced by government. households, we converted the reduction in lifetime costs into an annual cost saving per MWh of output, In the base scenario, the fleet approach generates a using total fleet generation. After accounting for the saved cost to government of £8.1bn for a fleet of eight pass-through of saved costs, we calculated the impact reactors, while the lower and upper scenarios provide on overall electricity prices using the ratio of new estimates of £2.0bn and £16.5bn respectively, as nuclear electricity generation to total electricity shown in Figure 32. Incorporating the results from generation. our interviews on potential cost savings for design and build have a significant impact on the magnitude We estimated the saved cost to households using of EMR support cost savings. The conservative and DECC data on household energy usage44 and publicly optimistic approaches produce estimates of £4.8bn available figures on the household price elasticity of and £10.7bn respectively for eight reactors, compared to an estimate of £8.1bn for the base case, as shown in Figure 33.
43 DECC updated energy and emissions projections Annex C, October 2011 44 Estimated impacts of energy and climate change policies on energy prices and bills, DECC, November 2011.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 42 The fleet effect:
demand for electricity45. We estimated the effect of Figure 36: Effect of conservative and these savings on final consumption, allowing for optimistic interview data on household leakage on imports, taxes and savings. Using ONS savings employment impact data from input-output tables on household demand 25,000 46 )
for each sector , we derived the direct impact on each s r
a 20,000 e y sector’s employment and output, and applied n a 15,000 m (
multipliers to obtain the indirect and induced t n
e 10,000
impacts. m y o l p 5,000 m Figure 34: Annual household saving from E 0 reduced electricity prices, 2020-2055 Fleetof 4 Fleetof 6 Fleet of 8
£90 Conserative Base case Optimistic £80 )
m £70 £
l a
u £60 n n a
( £50
g n i £40 v a s
d £30 l o h
e £20 s u
o £10 H £0
Lower scenario Central scenario Upper scenario
The annual saving to households from lower electricity prices reaches a maximum of £72m (undiscounted) as shown in Figure 34 above, for a fleet of eight reactors in the base scenario. These savings translate into a total increase in £1bn of NPV GDP and 14,500 man years of employment, as shown in Figure 35 below. Applying our conservative and optimistic cost reduction sensitivities to the base case for a fleet of eight reactors gives additional employment man year impacts of 8,300 and 20,100 for the conservative and optimistic approaches respectively, as compared to 14,500 for the base case, as shown in Figure 36.
Figure 35: Impact of household savings on employment
25,000 )
s 20,000 r a e y
n
a 15,000 m (
t n
e 10,000 m y o l p 5,000 m E
0 Fleetof 4 Fleetof 6 Fleet of 8
Lower scenario Central scenario Upper scenario
45 Estimation of Households’ Demand for Gas and Electricity, Oxford Economics, December 2008. 46 Input-Output Analytical Tables, ONS
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 43 The fleet effect:
Appendix C: Summary of EMR
The Draft Energy Bill 201047 and its supporting programme or benefiting from European funding documentation provide the latest guidance on the details for commercial scale CCS. of the Electricity Market Reform proposals, which were Capacity Payment Mechanism (CPM): The initially consulted on in December 201048. EMR CPM is intended to insure against loss of security comprises a range of policy options that provides the of supply and will be implemented through a most radical changes to the Great Britain power sector capacity auction operated by National Grid open to since privatisation and envisions four stages that new and existing generation, storage and demand- progress from incentives to support low-carbon projects side response. It will reward capacity for to a longer-term vision of low-carbon generation availability and contribution to security of supply, competing fairly on price. The Bill, once introduced into with penalties for non-availability. The timing of Parliament, is expected to achieve Royal Assent in 2013 the first capacity auction is to be determined by to support low-carbon projects from 2014. EMR Ministers based on advice on the security of supply comprises four main policy instruments: outlook. The consultation on the full CPM design Feed in Tariffs with Contracts for is planned for 2013. Difference (FiT CfDs or CfDs): Long term The CfD mechanism is the most important policy contracts will be offered to new low carbon instrument from the point of view of new nuclear generators to provide a degree of revenue capacity. There remain a number of details outstanding certainty. These will be structured as CfDs to which are likely to impact the decision making process increase revenue stability, with the aim of lowering of low-carbon developers. In particular: the cost of capital and thus cost to the consumer. DECC has indicated its intention to set up a Further details on the institutional framework are market for CfDs from 2014 and proposes to expected in autumn 2012. Government is to retain consult on CfD strike prices in 2013 prior to control of policy and implementation decisions, publishing a set of strike prices within its 2014-18 the System Operator to provide analysis to inform Delivery Plan. The current proposal is for National Government decisions, administer the CfD and Grid to administer the mechanism and be the capacity markets and report on delivery, and delivery body on behalf of the Government, with Ofgem to regulate the System Operator and suppliers acting as counterparties to CfDs under oversee its performance. Secondary legislation is statutory contracts. planned in 2013-14. Carbon Price Support (CPS): The carbon price The draft CfD Operational Framework is still to be floor was legislated for through the Finance Act confirmed and will be implemented through 2011 and placed a levy on input fuels such as coal secondary legislation and changes to codes and and natural gas. The CPS will be introduced at licences. £4.94/tCO2 in 2013 with a target price of The tenor for nuclear CfDs and the sources for £30/tCO2 in 2020, and £70/tCO2 in 2030. This determining baseload reference prices are still to rapid increase will put pressure on the economic be clarified. viability of older and less efficient thermal power plant, but will increase returns that can be earned The legal framework and payment model outlined by more efficient plant and low carbon plant. in the draft Bill have been met with concerns by the industry. Final decisions on counterparty, Emissions Performance Standard (EPS): framework and payment model are expected in The EPS sets a maximum level of emissions of autumn 2012. 450gCO2/kWh for new fossil fuel power plants until 2045, with exemptions for fossil fuel plant DECC has recognised that some developers’ forming part of the UK’s CCS commercialisation timetables will require them to achieve FID prior to 2014, including EDF’s Hinkley Point C nuclear project, and has put in place measures to enable the Secretary of State to issue investment instruments 47 Draft Energy Bill’ Secretary of State for Energy and Climate Change, May 2012. (similar to CfDs) in advance of the implementation of 48 Electricity Market Reform Consultation Document’ DECC, CfDs for such projects through the FID enabling December 2010 process.
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 44 The fleet effect:
Appendix D: References
The table below contains a list of the third party reports used as references and the source documents for specific data used in our modelling. Title Author Year Planning our electric future: a white paper for secure, affordable and low carbon DECC 2011 electricity Draft Energy Bill CM 8362 Secretary of State for 2012 Energy and Climate Change The path to strong, sustainable and balanced growth BIS 2010 Industrial Strategy: UK Sector Analysis BIS 2012 National Electricity Transmission System Seven Year Statement National Grid 2011 UK Future Energy Scenarios National Grid 2011 Total electricity generation by source (spreadsheet) DECC 2011 Indicative timeline for new nuclear DECC 2011 Power People, the Civil Nuclear Workforce 2009-2025 Cogent 2009 The Supply Chain for a UK Nuclear New Build Programme NAMTEC 2009 Electricity Market Reform Consultation Document DECC 2010 Input-Output Analytical Tables ONS 2005 Electricity Generation Cost Model Parsons Brinckerhoff 2011 http://www.telegraph.co.uk/finance/newsbysector/energy/9471193/EDF-Energy- Daily Telegraph 2012 puts-price-cap-on-Hinkley-Point-nuclear-plant.html www.ft.com/cms/s/0/da0bf1b6-4c15-11e1-98dd- Financial Times 2012 00144feabdc0.html#axzz28w21HjpO www.guardian.co.uk/environment/2012/mar/23/gamesa-offshore-windfarm Guardian 2012 www.bbc.co.uk/news/uk-england-humber-1799359 BBC 2012 www.world-nuclear.org/info/reactors.html World Nuclear Association 2012 www.world-nuclear.org/info/inf17.html World Nuclear Association 2012 The Green Book – Appraisal and Evaluation in Central Government, HM Treasury, 2011 Multisectoral Dynamic Model, Energy-Environment-Economy Cambridge Econometrics 2012 Updated Energy and Emissions Projections, Annex C DECC 2011 Updated Energy and Emissions Projections, Annex E DECC 2011 Updated Energy and Emissions Projections, Annex F DECC 2011 UK GDP deflator, National Income, Expenditure and Output ONS 2012 Estimation of Households’ Demand for Gas and Electricity Oxford Economics 2008 Estimated Impact of Energy and Climate Change Policies on Bills DECC 2011 UK household projections, ONS housing statistics ONS 2010 Offshore Wind Cost Reduction Pathways Study – Finance Work Stream PwC 2012 Electricity Market Reform Policy Overview, Annex B – Feed-in Tariff with Contracts DECC 2012 for Difference: Draft Operational Framework Benefits from Infrastructure Investment: A Case Study in Nuclear Energy IPPR Trading Ltd 2012 The Socio-Economic Impact of the Nuclear Power Industry in France PwC France 2011
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 45 The fleet effect:
The table below contains a list of the third party reports we reviewed as part of our analysis and literature review:
Title Author Year
Nuclear new build Unveiled Arthur D Little 2010 Next generation: skills for new build nuclear Cogent 2010 Scottish energy ready reckoner Cogent SI 2010 Northern Way nuclear supply chain development study report Dalton Nuclear Institute, 2011 Manchester Business School & NAMRC Supply chain reaction: localisation issues for nuclear new build Deloitte 2012 UK energy sector indicators 2010 DECC 2010 Onshore wind: direct and wider economic impacts DECC 2012 Socio-economic impacts of a nuclear power station on the local community EDF 2011 Putting into perspective the supply of and demand for nuclear experts by 2020 within EHRO-N 2012 the EU-27 nuclear energy sector The socio-economic impacts of Dounreay decommissioning Grangeston 2012 Human Resources for Nuclear Power Expansion International Atomic 2010 Energy Agency An assessment of the costs of the French nuclear PWR program 1970–2000 International Institute for 2009 Applied Systems Analysis Britain's Nuclear Future IoD 2012 Scottish offshore wind: creating an industry IPA Energy and Water 2010 Economics
Contribution of nuclear power to the national economic development in Korea Korea Atomic Energy 2009 Research Institute Costs of low-carbon generation technologies Mott MacDonald 2011
The nuclear energy landscape in Great Britain National Audit Office 2012
Nuclear Lessons Learned Royal Academy of 2010 Engineering The future of Nuclear Energy in the UK University of Birmingham, 2012 Birmingham Policy Commission
The implications of recent UK energy policy for the consumer: A report for the University of Cambridge 2012 Consumers’ Association www.unep.org/yearbook/2012/pdfs/UYB 2012 Ch 3.pdf United Nations 2012
Electricity Generation Costs Parsons Brinkerhoff 2011
Indicative timeline for new nuclear DECC 2011
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 46 Appendix E: Acronyms
BIS Department for Business, Innovation and Skills IEA International Energy Agency BOP Balance of Plant JV Joint Venture CCGT Combined-cycle gas turbine LUEC Levelised Unit Electricity Cost CfD Contract for Difference MWh Megawatt hour CI Conventional Island NAMTEC National Metals Technology Centre CCS Carbon Capture and Storage NAMRC Nuclear Advanced Manufacturing Research CO2 Carbon dioxide Centre CPM Capacity Payment Mechanism NI Nuclear Island CPS Carbon Price Support NOAK nth of a Kind Project (where n is a number larger than one, indicating that cost benefits can be achieved) DECC Department of Energy and Climate Change N Stamp Nuclear component certification program from American Society of Mechanical Engineers EDF Électricité de France O&M Operations and Maintenance EMR Electricity Market Reform OEMs Original Equipment Manufacturers EPC Engineering, Procurement and Construction PwC PricewaterhouseCoopers LLP EPS Emissions Performance Standard PWR Pressurised Water Reactor EU European Union QA Quality Assurance FID Final Investment Decision RCC-M Règles de conception et de construction des matériels mécaniques des îlots nucléaires PWR FiT Feed-in Tariff SQEP Suitably Qualified and Experienced Personnel FOAK First of a Kind Project TI Turbine Island gCO2/k grams of Carbon Dioxide per kilowatt hour Tier 1-4 Industry recognised categories of supply chain Wh companies, indicating the role they play in the construction process GHG Greenhouse gases TWh Terawatt hours GDP Gross Domestic Product Type 1 Economic multiplier driving indirect impacts GVA Gross Value Added Type 2 Economic multiplier driving indirect and induced impacts GW Gigawatt
The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 47 Contacts
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The economic benefits of adopting a fleet approach to nuclear new build in the UK PwC 48
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