Can a shift in UK policy help make the ESG case for nuclear?

The UK government in December released a long-awaited ‘energy white paper’ in which it revealed how it will try to meet its ‘net zero’ carbon emissions target by 2050, as it attempts to play its part in tackling climate change.¹

According to the paper, electricity will have an increasingly important role. Whitehall predicts electricity output will need to double from current levels by 2050, due to the electrification of cars and vans and as electricity increasingly replaces gas for heating. In turn, that will require a four-fold increase in clean electricity generation.

Even if the bulk of this is likely to be provided by renewables, the Climate Change Committee (CCC), an independent body that advises the government, expects 20 per cent of electricity will need to come from non-intermittent sources.² Although gas-fired generation with carbon capture is one option, it believes nuclear power has an important role to play.

The problem is that while the UK’s 15 nuclear reactors currently generate around 18 per cent of its electricity, almost half are expected to be retired by 2025 and most of the rest by the early 2030s.³ Although the government could opt to extend the life of some, maintaining nuclear generation at current levels – never mind increasing it – will require a new fleet of plants.

The CCC’s central scenario assumes nuclear plants will produce ten gigawatts (GW) of electricity in 2035, 80 per cent of which will have to come from reactors yet to be built. That is likely to prove costly, even if the alternative – gas-fired generation with carbon capture – is not cheap either.

Blurred vision

Although Whitehall says it sees a “key role” for nuclear in delivering deep decarbonisation of the electricity system, a concrete plan of action has not yet materialised to support this vision.

According to the white paper, it aims to bring at least one large-scale nuclear project to the point of final investment decision by the end of this parliament, “subject to clear value for money and all relevant approvals”. It will remain open to further projects later “if the nuclear industry demonstrates that it is able to reduce costs and deliver to time and budget”.

It will also provide up to £385 million in an ‘Advanced Nuclear Fund’ for the next generation of nuclear technology, aiming by the early 2030s to develop a small modular reactor design and to build an advanced modular reactor demonstrator.

Its apparent caution is understandable when one considers the National Infrastructure Commission, a body designed to provide impartial advice to the government, said in March 2020 that a “renewables based system looks like a safer bet at present” as it could be “substantially cheaper” than constructing multiple new nuclear plants.⁴

According to the latest estimates, the eventual cost of the 3.2 GW Hinkley Point C power station, currently being constructed by France’s EDF alongside Chinese state-backed group CGN, will be £23 billion.⁵ With cost overruns having put pressure on its balance sheet, EDF wants the UK government to adopt a different model to finance its second proposed 3.2 GW UK plant, at Sizewell in Suffolk.

The government in December said it will enter formal negotiations with EDF over how to finance the £20 billion project.⁶ Whitehall could choose to pay for new nuclear power plants itself, by borrowing money. But with debt already sky high and other big infrastructure projects underway, such as its proposed high-speed rail project HS2, there is an increasing likelihood it will seek private capital to fund its nuclear ambitions.

One option that has been widely touted, and which the government has for the past two years said it is exploring, is the Regulated Asset Base model used to finance the £4.9 billion Thames Tideway Tunnel. That successfully attracted private capital by offering investors returns before the project’s completion. However, the government appears to have made little progress in advancing discussions over financing Sizewell in this way amid concerns it could place consumers at risk of higher electricity bills.

Complexity and controversy

In any case, discussions about the financing model are arguably putting the cart before the horse. Private investors firstly need to hear Whitehall clearly set out its long-term commitment to nuclear energy. If nuclear is genuinely seen as a serious option in helping the UK achieve net zero by 2050, providing clarity to all interested parties should be done as a matter of urgency. There is little time to lose given the time it takes to build just one nuclear power plant, never mind a fleet of them.

Focusing solely on the method of financing any nuclear construction programme is unlikely to be sufficient to draw in private capital. Crucially, private investors need to be able to make a robust environmental, social and governance (ESG) case for nuclear before they even consider the investment case. When comparing different types of energy supply, nuclear is unique in terms of the size of its potential impact on society, both negative and positive, and its complex and often controversial history.

The government has a vital role to play in this process, to ensure the necessary data can be analysed to support a decision to invest. Without this, investors will struggle to accurately assess the investment rationale.

State support

In particular, investors would like to know whether the government classifies nuclear as an environmentally sustainable activity, with a conclusive view on how ‘green’ an energy source it is.

Investors and the public need to hear a convincing argument on nuclear’s role in helping the UK reach its climate objectives, where it sits within the overall energy mix, and to outline a clearly defined strategy; for example how many reactors it wants to build and by when. The government then needs to try to provide a stable investment backdrop by building a degree of political consensus among the mainstream parties.

One of the central issues to the argument is that of nuclear waste and the long-term issues of waste storage. Even if the government were to envisage nuclear playing an important part in getting to net zero, it will struggle to attract private investment unless it puts forward a convincing long-term plan for dealing with this issue. Since one of the main purposes of conducting ESG analysis is to ensure long-term negative impacts on society are avoided or at the very least minimised, many investors will shy away from nuclear if the government has no plan to deal with material that stays radioactive for thousands of years.

Waste, cost and safety

While there is a long-term goal to develop a geological disposal facility, no clear strategy has emerged. For now, waste is still being held above ground; around 80 per cent of it at a temporary storage facility at Sellafield, with the remainder at other plants. The government needs to outline how it intends to safely dispose of spent fuel rods and when.

Cost and safety are two other important issues. Since nuclear power plants cost a lot of money to build and decommission, the government will almost certainly have to offer some form of financial support. Investors will need to know the likely impact on household energy bills.

As for safety, nuclear is a unique technology, where an accident in one part of the world can lead to questions in another. So investors will want to know in some detail how the government has assessed the safety of the proposed technology and operators; what safeguards it intends to put in place in the event of an unforeseen disaster such as a terrorist attack; and the extent to which it has factored in physical risks associated with climate change.

Investors will then also need to conduct more specific ESG analysis of individual projects. For instance, what plans are in place to evacuate a particular site; what are the likely impacts on the local community in terms of jobs from construction, and on the local environment in terms of biodiversity and water usage?

One way of accelerating the process would be to set up a tri-partite working group, involving the Department for Business, Energy and Industrial Strategy, financial institutions and developers such as EDF. The aim would be to draft a detailed ESG statement, based on data.

Ultimately, if the government decides it wants to use private capital to build new nuclear plants, it firstly needs to help create the ESG case. Unless investors are satisfied of that, private capital is unlikely to be forthcoming in sufficient quantity. There is little time to lose.