Picking winners and nuclear power

Faced with ambitious climate change targets, the government has decided that nuclear power will play a leading role in supplying the UK’s future electricity needs. Ten new plants will be built in the next decade or so, which should provide about a quarter of total supply.

The nuclear option appears to be far more sensible than an equivalent expansion of wind power. Indeed, the unreliability of wind energy means that it must be backed up with conventional capacity, while its dispersed geographical distribution imposes additional costs on the network infrastructure.

Yet nuclear has its own problems. If the new plants are built on schedule and on budget then the impact on electricity prices is likely to be relatively small. Historical experience, however, does not support such optimism.  

Britain’s previous nuclear programmes were economically disastrous. They were plagued by delays, cost overruns, and design flaws. In today’s prices development losses amounted to at least £20 billion, while decommissioning may end up costing another £75 billion.

It is quite plausible that the latest plans will face similar problems. If capital costs rise significantly there will be upward pressure on bills. As a result of political obstacles to new fossil-fuel plants, there is also a severe danger that electricity prices will be pushed higher still by an artificial shortage of capacity if there are delays to the nuclear plant coming onstream.

Then there is the risk borne by the taxpayer if nuclear consortia run into financial difficulties. Given the centrality of the programme to environmental policy, the government will be obliged to ensure construction is completed at almost any cost. And, of course, the difficult-to-price long-term burdens of decommissioning and waste-storage will be loaded on to the taxpayer or electricity consumer.

If the government is determined to reduce carbon emissions then it would surely be more cost effective to set a general framework within which energy companies would be free to choose the most efficient methods of generation. The well-known economic calculation problems facing central planners and the powerful role of special interest groups mean that policies based on micro-management and picking winners are almost always unsuccessful.

1 December 2009, IEA Blog

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