Nuclear Privatisation Research Paper 96/3 15 January 1996 The proposed privatisation of the bulk of the nuclear electricity generation industry raises a number of questions, many of which have been the subject of a recent House of Commons Trade and Industry Committee inquiry. Much of the debate which followed the publication, in May 1995, of the Government's white paper (The Prospects for Nuclear Power in the UK, Cm 2860) has focused on safety and regulatory issues as well as the allocation of liabilities. This paper discusses these specific aspects and summarises the arguments for and against privatisation. Grahame Danby Science and Environment Section House of Commons Library Library Research Papers are compiled for the benefit of Members of Parliament and their personal staff. Authors are available to discuss the contents of these papers with Members and their staff but cannot advise members of the general public. CONTENTS Page I The nuclear review 5 A. Terms of reference 5 B. The case for new nuclear stations 7 1. Costs of nuclear power 7 2. Market forces 9 3. Environmental factors 10 4. Fuel diversity 11 5. Industrial base 11 C. Nuclear liabilities 12 1. Privatised company 13 2. Cost of a nuclear accident 14 D. Privatisation proposals 16 1. Principles 16 2. Details 16 3. BNFL 17 4. Alternative structures 18 5. Timing 18 II Prospects for privatisation 19 A. Parliamentary involvement 19 B. Reactions to the proposed privatisation 21 C. Flotation and likely proceeds 23 D. Funding the liabilities 24 E. Office of Electricity Regulation 26 F. Safety 27 III Glossary 29 IV Further reading 30 Research Paper 96/3 5 Research Paper 96/3 I The nuclear review On 9 November 1989, the then Secretary of State for Energy (Mr John Wakeham) announced that the Government would review the prospects for nuclear power in 1994.1 This followed the withdrawal of nuclear power stations from the privatisation of the electricity industry. These included the first generation Magnox stations, the second generation Advanced Gas- cooled Reactors, and the Sizewell B Pressurised Water Reactor which has recently become operational. Significantly, the Government also announced a moratorium on the construction of a family of PWR stations similar to Sizewell B. In March 1990, the nuclear-related assets and liabilities of the CEGB and the SSEB were vested respectively in Nuclear Electric plc and Scottish Nuclear Ltd, both government-owned companies. Five years on, the Government has re-examined the commercial case for new nuclear stations, and considered whether part of the industry is now fit for privatisation. A. Terms of reference The Minister for Industry and Energy (Mr Tim Eggar) announced the terms of reference for the nuclear review in a written answer last May:2 Mr. Yeo : To ask the President of the Board of Trade if he will make a statement on the terms of reference for the nuclear review. Mr. Eggar : I am now in a position to announce the terms of reference, timing and format of the nuclear review. This answer has been agreed with my right hon. Friend the Secretary of State for Scotland, who has responsibility for the nuclear power generating industry in Scotland. The Government believe that the future role of nuclear power in the United Kingdom's electricity supply will depend on it proving itself competitive while maintaining rigorous standards of safety and environmental protection. The coal review established that there is a sound economic basis for continuing to operate existing nuclear stations. The nuclear review will not consider whether Sizewell B should be brought on stream. Sizewell B is on course to start operating this year, subject to the receipt by Nuclear Electric of such consents as are required by law. Decisions on these consents are matters for the appropriate Ministers and authorities and are not matters for the review. The review will, however, take into account the decisions made on Sizewell B, whether the consents are granted or refused. The nuclear review will focus on the future prospects for nuclear power. It will examine the economic and commercial viability of new nuclear stations in the United Kingdom, against the background of the Government's energy policy as set out in the White Paper "The Prospects for Coal", Cm. 2235. 1 HC Deb 9 November 1989 cc 1171-79 2 HC Deb 19 May 1994 cc 543-4W 5 Research Paper 96/3 The Government have asked the nuclear generating industry to make the commercial case for new nuclear generating capacity and to make that case publicly available. Whether any new nuclear station could be built with private sector finance will be a key test of that case. The Government would welcome comments on the industry's case, which will be published shortly. The Government also invite submissions from interested parties on whether new nuclear power stations offer particular diversity, security of supply and environmental benefits or disadvantages. The review will examine possible options for introducing private sector finance into the nuclear industry. As part of this, the Government are prepared to consider without commitment representations on whether privatisation would in principle be feasible, and what a practical timescale might be. The review will address the question of how best to manage the substantial nuclear waste and decommissioning liabilities which are currently the responsibility of the public sector, so as to secure value for money for the taxpayer while ensuring necessary safety and environmental standards are met. The review will also assess the existing arrangements to enable the full costs of nuclear power in the United Kingdom to be met, taking account of the Trade and Industry Committee's recommendations on the fossil fuel levy in its report, "British Energy Policy and the Market for Coal," HC 236. Submissions on these issues should be made in writing both to my Department and the Scottish Office, to be received by 30 September. All substantive submissions received by the Government will be made publicly available. Copies will be placed in the Libraries of this House and of the House of Lords. Commercially confidential information in submissions received by the Government, internal papers and advice and reports internal to Government, and advice from external advisers will not be made publicly available in this way. The review will be undertaken by the Department of Trade and Industry and the Scottish Office Industry Department, in consultation with other Government Departments as appropriate. The Government may appoint consultants to advise it on matters relevant to the review as the need arises. My right hon. Friend the Secretary of State for the Environment is announcing today a separate review of radioactive waste management policy, to be conducted in parallel with the nuclear review. The final conclusions of the Review of Radioactive Waste Management Policy3, referred to in the final paragraph of Mr Eggar's written answer, were published in July 1995 following the issue, for consultation, of preliminary conclusions4 the previous year. Many of the areas covered in this radioactive waste review directly impinge on the commercial prospects of 3 Cm 2919, July 1995 4 Review of Radioactive Waste Management Policy. Preliminary Conclusions Department of the Environment, August 1994 6 Research Paper 96/3 nuclear power, most particularly "back-end" costs such as decommissioning redundant plant and disposing of the radioactive waste produced by nuclear stations. A focus of this library research paper is the Conclusions of the Government's Nuclear Review5 which addressed the points outlined in the above terms of reference. Of particular interest are the proposals for privatising a large part of the nuclear industry, though to put these in their proper context it will be necessary to summarise briefly the other areas covered. Notably, these consist of the case for new nuclear generating capacity and the management of radioactive waste including the arrangements for financing the ultimate decommissioning of nuclear facilities. B. The case for new nuclear stations Under Section 36 of the Electricity Act 1989 (cap 29) the Secretary of State's consent is required before any sizeable6 power station is constructed. The Government believes that "public sector support for new nuclear power stations can only be justified by compelling strategic needs"7, making the prospects for new construction heavily dependent on the willingness of private investors to finance new build. The attractiveness to potential shareholders of the present day industry is likely to be influenced by the strength of the commercial case for new nuclear stations. 1. Costs of nuclear power The cost of nuclear power stations, and the competing alternatives such as coal and gas-fired power stations, is usually expressed in pence per kilowatt-hour (p/kWh). This total unit cost takes into account the capital required to construct the power station and decommission it at the end of its operating life. Recurrent costs, such as fuel, operation and maintenance, are also taken into account. Because nuclear power stations are relatively expensive to build, the total unit cost of the electricity generated is particularly sensitive to a combination of interest rates and the amortisation period, or pay-back time.8 A relatively small rise in interest rates could make a new nuclear power station commercially non-viable. 5 The Prospects for Nuclear Power in the UK Cm 2860, May 1995 6 For the purposes of the Act a "sizeable" power station is one with a capacity in excess of 50 megawatts. The Secretary of State may modify this definition by order. 7 The Prospects for Nuclear Power in the UK Cm 2860 para 4.50 8 Nuclear Power in the UK IEE November 1993 7 Research Paper 96/3 Commercial decisions on whether to build a new nuclear station are based on an estimate of the lifetime levelised cost.