Britain’s flawed energy strategy

What's happened?

Last week Hitachi became the second big Japanese company in months to pull out of building a new UK nuclear power plant because it couldn't make the sums stack up a decision that raises fundamental questions about the direction of the UK's whole energy strategy.

Hitachi pulled out of its £16bn Wylfa project in north Wales, as well as a smaller project at Oldbury in Gloucestershire, because it failed to reach agreement with the government over a guaranteed electricity price and terms for the UK stake in the project. It can't have been an easy decision: cancelling the projects meant Hitachi writing off £2.1bn, having failed to find investors to help fund its share. But the market clearly felt it had made the right call: its shares promptly jumped 13% in a week.

Why is this such a big deal?

It follows the withdrawal of Toshiba from a similar nuclear project at Moorside in Cumbria in November. Between them, the two power stations would have generated 15% of the UK's electricity (and without emitting any carbon dioxide). But their abandonment leaves UK nuclear policy and overall energy strategy in a mess.

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Currently, the UK's nuclear power stations supply about a fifth of electricity supplies, but the existing plants (with the exception of Sizewell B in Suffolk) will all need to be decommissioned over the coming 15 years or so. Since the start of the century, successive governments have spent 13 years devising a new nuclear policy, and they eventually selected six sites for new nuclear power stations. The promise was that 35 gigawatts of new capacity would be onstream by the mid-2030s, more than replacing the decommissioned capacity.

So where are we now?

Of the six sites, three have now been abandoned, and two (Sizewell C in Suffolk and Bradwell in Essex) have yet to get the final go-ahead. Only one, the French and Chinese-backed Hinkley Point C in Somerset, is proceeding but on terms that will force UK consumers to buy some of the most expensive electricity on the planet (an inflation-linked £107 per megawatt-hour in today's money, guaranteed for 35 years).

The core problem is "nuclear power itself", reckons Alistair Osborne in The Times. "Where else do you get such a heady mix of last millennium technology, radioactive upfront costs and a chronic clean-up bill? They're risks no private company can take." It seems increasingly possible that Hinkley, too, will ultimately be "abandoned and we won't build any more giant plants", says Anthony Hilton in the Evening Standard. "But government is still wedded to its policy so it may take a few years, or a general election."

How did we get into this mess?

The basic issue is that the UK's 2013 review of its strategic energy policy has aged badly. Then, it was believed energy costs and demand would rise inexorably, creating a security issue for countries (such as Britain) that are net importers. As a result, the UK government gave the go-ahead for projects delivering super-expensive supplies (such as Hinkley).

In fact, demand is falling thanks to efficiency gains and new technology, and the cost of all forms of energy supply with the glaring exception of nuclear has fallen sharply since 2013. From oil and gas to renewables (wind and solar), technological advances have increased the opportunities for cost-effective exploitation and supply. As business secretary Greg Clark put it last week, "the economics of the energy market have changed significantly in recent years".

What should the UK do?

Review and set a new strategy, including a determination as to whether nuclear remains part of the mix. The government has high hopes for a new financing model known as the "regulated asset base" (RAB), which will involve a regulator setting fixed costs and returns with contractors, thus offering investors an incentive by giving them a return from the start (paid for by consumers and taxpayers).

And it's hard to imagine an energy system without the baseload power (guaranteed continuous supply) provided by nuclear, says Peter Atherton of Cornwall Insight. "There is a school of thought that says baseload is a 20th-century thing. They may be right, but it would be a big call by government to bet baseload won't be a thing by 2025." The future of nuclear may not currently look secure; scrapping it may be even more risky.

So what will happen?

A gradual decline seems likely. The government has already downgraded the amount of new nuclear it expects to be built. Officials now assume 13 gigawatts of new capacity by 2035, which implies three further stations similar in size to the 3.2 gigawatt Hinkley plant. The rise of renewables is encouraging. Renewables account for 33% of UK electricity supplies an all-time high and government advisers project this will rise to 45%-60% by 2030.

But filling the 9.2 gigawatt gap left by the Moorside, Wylfa and Oldbury plants would require 14 gigawatts of (intermittent) wind power. That's equivalent to more than 20 of the biggest offshore windfarms yet built. It's hard to see how renewables alone can fill the gap.

What might fill the gap?

Electricity interconnectors, which physically link national power grids across borders, are becoming increasingly important to the delivery of climate and energy goals, as they can help boost energy security and flexibility in an age of rising renewable energy capacity on the grid.

The technological advances in large-scale batteries are another factor that could make a transition to a renewable-dependent economy work. And any strategic review of nuclear will certainly revisit the viability of small modular reactors a vastly promising nuclear technology developed by Rolls-Royce, which the government has so far refused to back sufficiently with additional funding and support.