According to an in-depth study by KPMG, reform is needed to provide a framework to secure large scale private sector investment in nuclear energy.
Richard Noble, European Power & Utilities Partner at KPMG, commented: "Nuclear energy has to play a central role in an affordable, secure low carbon generation mix if the UK is to meet the Government's ambitious emissions targets. Nuclear represents the least cost low carbon electricity generation; however, our research indicates that radical changes to the current electricity market will be required to secure the large scale private sector investment required for nuclear new build to proceed.
"Currently, low carbon generation investment, other than nuclear, relies on a series of inconsistent interventions that operate outside the wholesale market. We explore a range of scenarios for electricity market reform. While there is no simple answer, it is clear that a more consistent design is needed to reward low carbon generation. This could be achieved through price mechanisms, such as tradable obligations or premium tariffs, which would leave the generators bearing some degree of market risk.
"Ultimately, any modifications will depend on the scale of nuclear new build considered desirable to ensure Government policy objectives are met. Early decisions need to be implemented if the UK is to achieve its transition to low carbon electricity generation.”
The UK Government has set ambitious targets to reduce greenhouse gas emissions by 2050 and these targets will require substantial investment in electricity generation with low emissions - renewables, nuclear, and fossil fuel generation with carbon capture and storage.
Analysis by a range of sources including the Committee on Climate Change (CCC) and the Department of Energy and Climate Change (DECC) suggests that nuclear generation has significantly lower costs over its lifetime than alternative low carbon generation investments. However, this does not necessarily mean that investments in new nuclear generation in the UK will proceed.
Key findings of the report:
There is a need for much clearer planning by Government on how it will meet its targets under the Climate Change Act and communication of the findings to the market. A transition plan of this kind is likely to show a need for significant investment in new nuclear generation.
Positive investment decisions on the scale of new nuclear generation required under most scenarios are unlikely to be achieved under the current framework. A carbon price floor may provide some benefits to investors in new nuclear generation but will not be effective on its own in achieving positive investment decisions of the scale required
The current approach to low carbon generation relies on Government interventions which are inconsistent with one another. The creation of a more consistent market design to reward low carbon energy or capacity could enable investment in new nuclear generation - and other low carbon investment - to proceed. The key issue is whether there should be a single market for all low carbon electricity or multiple markets for different technologies.
A new market for low carbon generation could be established through imposing an obligation on suppliers (the current model for offshore wind), or through stepping into the market and procuring low carbon energy (the current model for CCS).
Potential investors would generally prefer a price mechanism which left them bearing some degree of market risk. This suggests that use of a tradeable obligation or a premium tariff over and above electricity market revenues would be preferred to a fixed feed-in tariff.
A large scale and rapid expansion of nuclear generation in the UK would stretch on-balance sheet financing by the current consortium partners. If such expansion is deemed desirable, a more radical change may be needed to de-risk the investments and attract in new sources of finance.
For the purposes of clarity, the report does not recommend Government subsidies.