The design of European wholesale electricity markets and the emissions trading system (EU ETS) will be improved to help - and no longer hinder - nuclear energy as a low-carbon source of electricity, a European Commission official assured delegates at a nuclear financing conference held in Paris last week. The conference, titled Nuclear energy's role in the 21st century: addressing the challenge of financing, was jointly organised by the OECD Nuclear Energy Agency (NEA) and the International Framework for Nuclear Energy Cooperation.
European power producers argue they have limited incentive to invest in new nuclear capacity amid low wholesale prices, while an oversupplied EU ETS does not encourage a move away from fossil fuels to low-carbon sources of electricity, such as nuclear.
Gerassimos Thomas, the EC's deputy director general for energy, told the conference: "It has always struck me that we have these discussions sector by sector, when I think the challenges are horizontal. There are common issues among power industry sectors, but there is no common forum."
Welcoming Thomas to the podium, NEA director general William D. Magwood, IV, said financing of nuclear power plant projects "can’t be considered in the absence of well-functioning markets".
Thomas said: "We need to find a market way to solve this problem of how to marry by the end of the century renewables with nuclear, the only two low-carbon technologies, when the use of fossil fuels will have disappeared."
He highlighted the EC's latest Nuclear Illustrative Program (PINC), which was published last month and according to which investment of between €350 billion ($399 billion) and €450 billion will be required over the next 35 years to maintain the European Union's nuclear generating capacity at between 95 and 105 GWe. There are currently 129 nuclear power reactors in operation in the EU, with a combined generating capacity of 120 GWe, that together provide 27% of the bloc's electricity. However, the EC forecasts that there will be a decline in EU nuclear capacity up to 2025 due to ageing reactors being retired and some member states ending or reducing their reliance on nuclear energy.
But wholesale electricity prices in the UK hit a five-year low of £36.76 per megawatt hour at the end of 2015, according to data compiled by market information provider ICIS. A mild winter and lower global commodity prices contributed to the bearish market sentiment. EDF Energy, which operates nuclear, gas and coal power stations across the UK, has yet to make a final investment decision on its Hinkley Point C project, at least in part due to low wholesale power prices that are curtailing its income as a power producer. Meanwhile the EU ETS price fell to a 20-month low in January, to less than €6/metric tonne, on low oil prices and the underlying problem in the system - too many allowances.
Thomas referred to the fact a surplus of emission allowances had built up in the EU ETS since 2009 and that the EC is addressing this through short- and long-term measures. The surplus is seen as largely due to the economic crisis - which reduced emissions more than anticipated - and high imports of international credits. This has led to lower carbon prices and thus a weaker incentive to reduce emissions. The surplus build-up was expected to slow from 2014, but not to decline significantly during phase 3 (2013-2020) from a level of around two billion allowances.
The EC's new electricity market design initiative aims to improve the functioning of the internal electricity market in order to allow power to move freely to where and when it is most needed, reap maximum benefits for society from cross-border competition and provide the right signals and incentives to drive the right investments, while fully integrating increasing shares of renewable energy. This should ensure that electricity is only dispatched based on market signals, Thomas said. Market coupling, where it is applied, has resulted in an increasing correlation between wholesale prices, but absolute price levels, even in adjacent markets, differ significantly and price spreads are not narrowing, he said. Further efforts are also needed to ensure sufficient interconnection between the grids and to promote long-term stability for investments in the energy sector as a whole, he said.
Meanwhile, the European Parliament and EU countries are preparing to debate the EC's proposals for reforming the ETS after 2020. The EU took a first step to fix the system last year, creating the Market Stability Reserve to absorb surplus permits. The 2030 targets agreed by the European Council in October 2014 - for an at least 40% reduction in domestic greenhouse gas emissions, an at least 27% renewables share of energy consumption at the EU level and an at least 27% improvement in energy efficiency - reflect a high level of ambition, he said.
"This means that changes to the electricity system in favour of decarbonisation will have to continue and intensify," he said.
The EC is committed to making its proposals on the new electricity market design by the end of this year. "This will be the most important, in my view, of the proposals that we will make when it comes to giving signals to investors in all energy sources. At the moment wholesale prices are extremely low, consumer prices have not followed and we have a number of factors that have not integrated properly in the electricity price. Once you decide how to redesign how electricity is priced, outside investors will be able to decide whether they invest in generation or not," Thomas said.
The EC is still discussing the proposals with stakeholders, he said, and held a public consultation last year. "We are engaged with Member States, we are at the preparatory phase, but it does have some objectives on which we are already focusing. It has to provide a framework where markets will play an even more important role in the future than currently," he said.
"We will make sure that government intervention overall in the energy sector is reduced. We have substantive government intervention in different forms - state aid to the energy sector in Europe has been going up by about €10 billion a year. It’s going to renewables, to coal and it has gone in the past to nuclear, but this is not a sustainable future to have an energy policy where state aid continues to go up and support different models. We have to rely more on market mechanisms," he said.
"It’s a difficult challenge. Those who are very optimistic expect that our proposals will be so good that in the end the market will gradually sort out the problems and the new market design will survive until the end of the century. Those who are less optimistic say the market design will serve the next 20 years, but will then need to be reviewed again because technological and other developments will oblige us to redesign the system. But this is the key to the future of electricity in Europe and the key to the future of nuclear. How the electricity market is organised and how the electricity market is priced will define how financing will come to the nuclear sector," he said.
"We need to promote certain markets in order to allow the integration between variable, intermittent sources and baseload sources. And you also need to devise instruments that will allow the short-term volatility to translate into long-term investment signals. This is happening in other areas of the financial world where we have short-term liquidity and long-term financial signals. So we have to plan how the market will work and borrow instruments from other areas."
One answer to market-related problems lies in what Thomas described as "regional solutions". He explained: "We need to have capacity mechanisms for example that take into account more than one country. We need to have free flow of electricity across borders in order to address security of supply situations. One of the major political difficulties for us would be to make sure that these mechanisms are adopted and we see regional solutions in the electricity market design and in the pricing of electricity."
Discussions on the new market design include an appreciation, he said, of the specific needs of the nuclear power sector. "There are the challenges the nuclear industry faces regarding the significant risks of high upfront capital costs, a long life cycle and safety regulations. So we have specifics in nuclear generation which have to be taken into account by investors and policy makers."
The historic agreement on tackling climate change, agreed at COP21 in Paris at the end of last year, is "a great opportunity for the world to reduce carbon emissions to improve the sustainability of the planet", Thomas said.
"It provides a clear signal to investors that we have to move away from fossil fuels in the long term and to low-carbon resources. This provides a favourable framework for nuclear energy, but there is a division between experts and politicians. The experts are convinced that because of COP21 nuclear energy is going to provide the solution as a complement to renewables. But at the same time everybody in the industry understands and agrees that there has been somehow a failure to get an explicit acknowledgement in COP21 and other policy fora that nuclear is an indispensable part of the solution," he told delegates.
Public opinion "remains divided", he said, “and that's why politicians are not collectively explicit about this".
"So, technically and from the experts' perspective, nuclear is part of the low-carbon future of Europe and the world, but this is not as explicit as one would like to see in order to have the right investment signals and in order to get outside investors to have confidence in this long-term vision. This is something that still hasn’t been addressed."
He added: "We have a lot of good things going for us in the European Union when we talk about an investment framework for nuclear energy."
The first advantage Thomas highlighted was the Energy Union Strategy Framework, which was adopted last year to bring about the transition to a low-carbon, secure and competitive economy. A specific minimum interconnection target has been set for electricity at 10% of the installed electricity production capacity of Member States, which should be achieved by 2020. The necessary measures to achieve this target are set out in the Commission Communication presented with the Framework. The Commission will report this year on the necessary measures to reach a 15% target by 2030.
The Framework "allows each Member State to have their own energy mix provided that they move towards a low-carbon future", he said. "It is true that in the short term it has renewable energy targets. Our long-term policy is technology neutral, but in the short term we do have barriers around specific renewable energy targets. This is 20% by 2020, 27% by 2030 and 40-50% by the middle of the century."
The second advantage is the Commission's endeavour to improve market pricing for emissions in the EU ETS. The system "hasn’t worked very well recently, but we are addressing this in a policy way with commitments and with a reform of the system post-2020," he said.
The combination of a Market Stability Reserve and reform of the EU ETS is going to provide, by the middle of the century, a functioning ETS market and pricing of emissions that are going to be supportive to long-term investments, he said.
Establishing the Reserve as of 2018 aims to address the current surplus of allowances and improve the system's resilience to major shocks by adjusting the supply of allowances to be auctioned. It will operate entirely according to pre-defined rules which would leave no discretion to the Commission or Member States in its implementation.
Thomas also highlighted positive changes to the regulatory environment. The EC "is at the start of a new period that provides some certainty to investors" in nuclear power, he said. Following the Fukushima Daiichi accident in Japan, in March 2011, the EC has adopted new nuclear safety and radioactive waste Directives, for example. "So the framework is new and being implemented now and this provides regulatory stability," he said.
This is important to addressing the financial challenge that the European nuclear industry faces, he said. Meeting budget and schedule targets on nuclear power plant projects "has not been as good as demonstrated at the world level", he said. "If you look at the weighted average cost of capital when you are late in construction by seven to ten years, you have doubled the financing cost."
If developers do not achieve efficiency in moving from first-of-a-kind (FOAK) to end-of-a-kind (NOAK) technology, they face "significant price disadvantages", he said. "Technology has been improving but the cost of FOAK has been going up," he added. A comparison between the previous PINC, published in 2007, and the latest version indicate a 50% increase in the cost of FOAK, he said. "The only way to compensate for this is to move quickly and efficiently from a FOAK to a NOAK situation, saving around 20% of the cost," he said.
There is also need for a competitive supply chain in order to ensure efficiencies in time and cost. "One of the initiatives we are prepared to follow up as a result of the PINC is to work with industry to increase standardisation in the supply chain. We have new technologies, we have new suppliers and it is important that the industry engages in the standardisation in order to become cost-competitive," he said.
The EC is also working together with European regulators to bring about more cooperation in licensing. "This is a very long process and every national regulator in Europe and worldwide has its own standards. There is no significant cross-fertilisation of knowledge, particularly now that we have to move from FOAK to NOAK between the different regulators. And therefore we think that's where significant efficiencies can be achieved," he said.
Researched and written
by World Nuclear News