Speech: Cutting costs with the fleet approach
"At the end of May this year, we submitted our Development Consent Order for Sizewell C in Suffolk after eight years of public consultation. We've also applied for a Nuclear Site Licence and have applied for environmental consents as well. Early works (e.g. road schemes) are ready to go and GBP300 million (USD390 million) of work could be awarded this year.
We strongly believe in an optimal energy mix for the UK. We are in favour of a lot of technologies; indeed, EDF itself has almost all generating technologies and spends about GBP2 million a day on R&D. Nuclear isn't essential in all countries, which may have geothermal or hydro. But in the UK, we have wind and wind is intermittent. It’s in that context that we believe that nuclear is essential for the UK.
The offshore wind industry has done a brilliant job in bringing down the cost of generation, but the costs of transmission, distribution and balancing are quite high. What actually impacts consumer bills in the UK is a complicated mix of the cost of the individual generating technology (nuclear is much more expensive to build), the operating cost of the technology (nuclear is cheap) and the cost of transmission, distribution and balancing the system.
Because this is complicated, it doesn't lend itself to the media narrative, which tends to suggest that the individual costs of generating offshore wind ‘versus’ nuclear is a relevant comparison. The issue for consumers is, 'What does it cost to have a low-carbon electricity system in which you can turn on your lights on a windless night?' It's the cost of the system that enables you do that.
Hinkley Point C, the twin-EPR plant under construction in Somerset, is already showing the benefits of fleet build with unit 2. About 45% more steel has been installed in the same timeframe; it has taken 50% less time to install the cooling system components; there has been an 85% efficiency saving from reducing the time between the arrival of the common raft's sumps to concrete pour; and there has been a 30% increase in the speed of installing the liner cup floor.
As a copy of the Somerset plant, Sizewell C will effectively be units 3 and 4 of the UK EPR fleet and will cost up to GBP4 billion less to build. Half of this figure comes from not having to repeat the design approval process with UK regulators.
The reasons for the success or failure of 'megaprojects' are well understood. Research by IPA Inc has found that 70% of industrial megaprojects are more than 25% over-budget, over schedule and with poor operability. However, with a good front-end-loading process, the success rate jumps from 30% to 64%. Some 80% of projects with additional good basic data and successful shaping were successful, with -4% costs overruns on average.
IPA has a database of 5000 projects and a varied analysis of the common factors of successful projects and of unsuccessful projects. So, by identifying the common success factors, we're hoping to ensure that Sizewell C meets these success criteria, which if you were to summarise in one line it's about being well-prepared: Have your design first, know exactly what you're building, use the team that has preferably built it before, and so on.
That sounds very simple, but it's more complicated when you’re doing something that is essentially governmental in nature; almost all megaprojects in the UK do have some extensive interaction from government. You have to marry up the politics with the engineering and that’s what we're hoping to do so that Sizewell C is firmly in that group of successes and not in the group with time and cost overruns.
Construction risk is unsurprisingly reduced when you copy what you've done before. HPC in itself has shown the benefits of the fleet approach because it has two units. All of this reduces risk.
The construction cost of Sizewell C is roughly GBP20 billion, of which GBP10 billion is what I call 'stuff' - the steel, equipment, aggregate, cable and so on. If you know exactly what you’re building before you start, then you know the cost of stuff.
The other GBP10 billion is the cost of labour, which breaks down into two groups, the cost of civil engineering and the earthworks, and the cost of installing the equipment. At Sizewell, we plan to use the same supervisory teams, the same Tier 1 contractors, so that they can bring all their learning from Hinkley. And of course we plan to have a large local workforce and supply chain, bringing huge benefit to Suffolk. So, if they reduce the cost of the time to install the steel by 45% on unit 2 at Hinkley, then we expect them to start at that increased productivity rate at Sizewell.
The French design of the EPR is in operation at Taishan in China. An EPR takes around nine million tonnes of carbon out of the atmosphere in comparison with operating a CCGT to produce the same amount of electricity. That design, which originated in France, was brought into the UK in 2008. Twelve years and GBP2.5 billion later we have a detailed, UK-approved design and this is why we wish to replicate it exactly so that we don’t incur design costs. People who finance the project don't have to worry that the design is going to change or that there's going to be a regulatory ratchet up causing design change. The regulator is supportive of replication.
All sorts of megaprojects are well known for being over budget and late. Hinkley C in fact, although the Press often don't report this, is on time. What was late was the paper process of reaching the point where we could start construction. Since we started construction in 2015 it's met all its construction milestones on time.
As well as reducing the construction cost, it's very important we also reduce the cost of money and that's why we need the government to decide the financing model.
The Contract-for-Difference model used for Hinkley was much criticised by the National Audit Office, and that's because the cost of money is the predominant cost of nuclear to the consumer. It isn’t the cost of construction, despite the general media's focus on this.
If the building of Sizewell C were financed in the way that transmission lines are financed - the terms of the regulated asset base (RAB) deal from which Scottish and Southern Electricity benefits - then Sizewell C would cost consumers somewhere around GBP40/MWh. That's with private sector investment at a standard achievable return for this nature of long-term inflation-linked project. If the RAB deal were to impose more risk on investors than, for example, the Scottish and Southern RAB, and it were to look quite like the Thames Tideway Tunnel, which takes the RAB content and applies it to a singular asset, and imposed more risk on investors, then the power price would be higher.
The cost of money depends on the level of risk that is thought right to impose on investors. It's getting the balance right between incentivisation to keep the construction costs down and the overall cost of electricity to consumers. Our modelling shows that, provided nuclear comes in in the UK at around GBP75/MWh, then the cost of electricity bills to consumers comes down because we're not comparing nuclear with wind or solar, we're comparing nuclear with other ways of making power when the wind's not blowing.
EDF's strategy post-Hinkley and post-COVID is that it no longer wishes to be the on-balance-sheet developer and this gives the UK an opportunity to form a new British-led approach to the ownership of further nuclear in the UK.
EDF will always remain the long-term strategic partner and an important part of the supply chain, but if the regulated asset based model is what the UK government chooses, then ownership could be divided between government itself, who might choose to put in an equity stake upfront and then sell down as construction proceeds, and financial investors, including British pension funds, who are keen on long-term CPI [Consumer Prices Index], very stable products.
Nobody should be promoting a technology for its own sake if you leave aside commercial interest. What we're aiming for is a low-carbon system. Not all countries need nuclear, but what all countries do need is firm low-carbon power. In some there are no obvious ways of making it except nuclear and so having a system which is able to distinguish between, 'Is offshore wind a great thing?' Yes it is; and, 'Is adding more offshore wind in Germany when they're also opening unabated coal plants and shutting down nuclear a good thing?' Clearly, it's not. It's a narrow approach that's being taken in rating systems and a move to a more systematic approach - 'Does this make a low-carbon, low-cost system?' - would be much more productive for the climate.
The final risk point is political risk. It's one thing to contain political risk with contracts and that is a necessary approach, but another approach containing political risk is, 'What do you use the nuclear for?' In the energy industry everybody wants to portray the optimal energy mix as featuring their own technology, and that makes the debate particularly difficult because some positions are presented as being disinterested and based on a view of what is best for the planet, but generally speaking people tend to promote their own technology.
We believe in an optimal mix with most technologies favoured, but one thing we're doing with Sizewell - as well as looking at its use for electricity - is putting in valves to make sure we can take out the heat at different temperatures. That means that, because in the UK we only use around 30% of the heat a nuclear power station makes for electricity, there is a huge potential to use nuclear for heat-assisted hydrogen to work with the offshore wind industry to make sure that electrolysis is as efficient as it can be to use it for heating for industrial process and cooling data centres, and even for district heating. In other countries, heat is pumped up to around 80 kilometres.
A lot of these things depend on how the government in the future chooses to use heat and a carbon tax. Using nuclear in this way is good for mitigating political risk because, if a power station is embedded in and necessary to a decarbonised heat economy, then we think it can make a huge contribution, and political risk is inherently reduced."
Julia Pyke
