I recently Tweeted about the need for our Coalition government to stop dithering, and get on with building new nuclear power infrastructure. Someone Tweeted in reply “Yes, but who pays for it?”. I replied “Good question, but impossible to answer in a Tweet”. So let me try, if not to answer the question, at least to discuss it, here. The truth is, of course, that in the end the electricity consumer pays for it. But that leaves the question of how we structure the investment.
Tories (some of them) say they believe in free markets, and a small state, and limited government. UKIP really does believe in these things. And we hate nationalisation with a passion. All my life (or ever since I became aware of politics) I have argued for private enterprise and against state intervention.
So it’s caused me considerable distress to come up with a situation that challenges my settled view on this point.
The Coalition has decided that nuclear is an essential part of the UK energy mix. This is a widely-held view, and I agree with it. So the government has invited relevant companies to bid for new nuclear capacity, starting with Hinckley Point. Several companies looked at the prospect. Hitachi got cold feet. A couple of Chinese companies expressed interest, then withdrew. German nuclear companies E.On and RWE pulled out, after Merkel’s decision on nuclear power in their home market changed the shape of their balance sheets.
Centrica pulled out of a proposed joint deal with the French company EDF in February. EFD is still — just about — in talks with the British government, but has made it clear that its interest is lukewarm, and that it will back off unless offered eye-watering terms.
So how do we engage with the free market, in an open and competitive bidding process, when we have exhausted all the possible bidders, and the last remaining one seems to be exploiting what appears to be a monopoly supplier position? And why are they so reluctant anyway?
On the second question, I think a key issue is regulatory uncertainty. We have the extreme response of Angela Merkel to the Fukushima incident. Running scared of green opinion at home, she rashly decided to close the German nuclear fleet — a decision which she and the German people will come to regret. As a consequence, Germany is now building or refurbishing 25 coal-fired power stations, setting at defiance the EU’s posturing on CO2 emissions. Who will invest £14 billion with a sixty-year time-horizon, when they may be closed down on a whim?
Less radical but equally worrying is the constant regulatory chopping and changing, the interference of politicians in market pricing. The EU introduced its wretchedly convoluted Emissions Trading Scheme, which by itself added great uncertainty to pricing in the energy market. Then, concerned that their new scheme was failing to deliver, they tried (so far without success, but they’ll try again) to tamper with it in a process called “backloading“.
Meantime in the UK, George Osborne has responded to the low ETS emissions price by arbitrarily and unilaterally introducing a “Carbon Floor Price” over and above the ETS structure, thereby shooting himself (and British industry) in the foot. Admittedly the carbon floor price might arguably support low-emission nuclear, but Osborne’s action perfectly illustrates the huge level of regulatory uncertainly.
So how do we respond to what appears to be a market failure in this case? What if the choice in the end is between a nationalised nuclear industry, and no nuclear industry at all? I consulted an extremely sound free market thinker in the USA for advice. Several questions were suggested, and I’ve tried to think them through.
1. Is there a reasonable alternative to this form of energy? There must be other energy technologies in the mix, but there is a strong consensus (shared by UKIP) that we need a significant proportion of nuclear.
2. Can another provider be found internationally and brought it to compete against EDF? The government has done its best, and it seems the answer may be “NO”.
3. If EDF thinks that the government may go it alone, will they come to the table on more reasonable terms? Again, we have to wait and see, but it looks increasingly doubtful.
Since these alternatives seem to be blocked, it may be time to bite the bullet and think the unthinkable. Perhaps in order to ensure Britain’s energy supply for the next generation, we have to contemplate the possibility of a state-owned industry.