The case for an independent review of UK energy policy?

The FT reports that Hitachi’s withdrawal would mark the collapse of the strategy adopted in 2013.

Written on January 13, 2019 4:30 pm by Nick Butler for

Nick Butler states that “Who could blame the board of the Japanese company Hitachi if its members decide at their meeting this week to scrap plans for a new nuclear power station at Wylfa on the North Wales island of Anglesey?

Hitachi has invested more than £840m in the project over the past six years. The technology has passed all the tests set by the UK’s nuclear regulator. But the company has been unable to get the government to put in place the clear and credible financial structure necessary to underpin the investment. That failure has already led other investors to abandon the new plant planned at Moorside in Cumbria. 

Talk of scrapping the Wylfa project could be a bargaining tactic on the part of Hitachi but the reality is probably much simpler. Hitachi’s doubts have been well signalled during the past few months and the company’s purchase of ABB’s power grid business at the end of last year gives it a range of investment choices. Given Whitehall’s chronic indecision, the company is ready to use its capital elsewhere. 

Hitachi’s withdrawal would mark the collapse of the energy policy adopted in 2013 by the UK’s coalition government. Facing what were believed to be ever-rising energy prices and the need to reduce carbon emissions, the policy plumped for new nuclear, promising that 35 gigawatts of new capacity would be on stream by the mid 2030s — more than replacing the first generation of nuclear plants, which would by then have reached the end of their useful lives. Because the price of gas seemed doomed to keep rising, new nuclear would come to look highly competitive over time as well as reducing dependence on imports. 

The assumptions which underpinned the coalition government’s energy policy now look laughably wrong

Since then much has changed, and the assumptions which underpinned the old policy now look laughably wrong. The costs of all forms of energy (apart from nuclear) have fallen dramatically and there is no shortage of supply.

Electricity demand is down thanks to efficiency gains and new technology. The contract for the first new nuclear station being built at Hinkley Point in Somerset, which enjoys a guaranteed index-linked price for 35 years from the moment the plant is commissioned, looks exorbitant. The indexation dates from 2013. If the plant comes on stream in 2027 as promised, power from Hinkley will cost well over £100 per megawatt-hour. At the same time the cost of renewables has fallen radically, to the point where subsidies are largely unnecessary. As the latest capacity auctions demonstrate, it is beginning to be possible to rely on some measure of storage to manage the peaks and troughs of demand. 

The demise of Wylfa forces the need for a comprehensive review of energy policy. Since the UK government is too busy preparing for Brexit to focus seriously on any other issue, the review should be conducted independently.

The questions are simple: how much energy is likely to be needed? What are the most cost effective ways of reducing emissions? What alternative competitive sources of supply are now available, and what research priorities can improve efficiency and advance the next generation of supplies? Then, crucially, what incentives or guarantees are necessary to secure the required investment? 

The review should be transparent with the assumptions made open to analysis and challenge, and the UK should learn from the experience of other countries worldwide. 

The energy sector in the UK and internationally is a prime example of a mixed economy. Most activity is privately financed but takes place within a framework of public policy, and this has to offer investors a clear prospect of a fair return. Energy is complicated by the multiple policy objectives — starting with the imperative of maintaining secure supplies, and the desire to reduce greenhouse gas emissions. Those complexities cannot be wished away. But without a credible financial framework in place, private capital will simply not be available. 

Because of the timescales involved, the scrapping of Wylfa will not cause the lights to go out. The power from a new plant would not have come on stream until 2030 at the earliest.

There is time put in place alternatives — including perhaps the concept of combining supplies of wind and gas to deliver what the industry calls firm power, together with a new focus on the development of larger scale, grid level storage. Advances in energy technology offer more possibilities each year. But, like Wylfa, those options will never be taken up unless the old outdated policy is scrapped and a more realistic approach put in place.”