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My Lords, the Queen’s Speech, which we are debating today, has been unprecedented in its vacuity. This gives us a licence to discuss what is not in the speech as much as the little that it does contain. I have ben pre-empted somewhat in what I intended to say by the powerful speech of the noble Lord, Lord Broers. However, I am glad to be able to emphasise the message.
The Queen’s Speech has given scant recognition to the greatest issue of our times, which is the need to respond to climate change. It makes barely a mention of our strategy for power generation, which must respond to climate change while satisfying the domestic and industrial needs of the country. Without a vigorous programme for building nuclear power stations, there will be no possibility of meeting the net zero target for CO2 emissions by 2050.
The real costs of nuclear power have been badly misrepresented. Invidious comparisons in terms of price per kilowatt hour have been made between the electricity from the new nuclear power stations and electricity from renewable sources, which is predominantly from wind power. When the intermittency of renewable power is taken into account, its real costs far exceed the quoted figures. If the proportion of electricity generated by renewable power exceeds a modest level, expensive back-up plant is called for, which ought to be included in the cost. The cost of building the Hinkley C nuclear power station embodies the cost of the first of a kind; it is estimated that the next example, which is to be built at Sizewell, will cost at least 20% less. First generation wind turbines were also burdened by similar start-up costs, and it is with them that a fair comparison should be made. However, a fundamental reason for the adverse costing of nuclear power originates in the economic nostrums of privatisation.
The proponents of privatisation have insisted that major infrastructure projects should be financed by private capital. The corollary of the high commercial rates of interest demanded by private capital is a severe discount rate that belittles the value of future benefits. The interest rate of 3.5% that is commonly used in government cost-benefit analysis implies that £100 received 20 years hence has a discounted present value of £50. However, if we apply a commercial rate of interest of 9%, that £100 has a present value of less than £18. In order to satisfy their short-term time preference and to indemnify themselves against risk, the private providers of capital demand an exorbitant rate of return. The risks are those of delays and cost overruns, and they include regulatory risks, which are a heterogeneous category of hazards arising from the tendency of Governments to change their minds.
When a commercial rate is applied to a programme to construct a large nuclear power station, its abundant future benefits are so heavily discounted relative to the costs entailed in its construction that its economic viability is called into question. We should not be adopting short-term commercial criteria when considering a nuclear project of which the benefits are expected to last for 50 years or more. The Government have failed to raise the necessary finance for building additional nuclear power stations from private sources. They judged that the terms available to them were too costly. Conversely, what they have offered to investors has seemed to them to be insufficient. The Government now propose to make their offers more attractive by reducing the risks that putative investors are liable to face. This is the purpose of the so-called regulated asset base methodology.
The intention is to indemnify lenders against the aforementioned risks. There are two effects. The first is that the capital funds are more likely to be forthcoming when the risks are alleviated. The second is that the rate of return demanded by lenders is liable to be lower when the risk premium has been factored out. Therefore, it will appear that the cost of a project under the regime of a regulated asset base is less than it would be under alternative arrangements, such as a contract for difference. This is an illusion. Any risks that materialise are liable to be borne by the Government or by the consumers of the electricity via higher prices. Moreover, the rate of return demanded by the lenders is still subject to their exorbitant short-term time preferences.
There is an obvious alternative recourse. It is to finance the project by direct government borrowing, which could be by the sale of designated infrastructure bonds. These bonds would bear a much lower rate of interest than commercial rates. The long construction periods that affect large nuclear reactors could be avoided by resorting to small modular reactors that can be constructed off site. These will require a period of development, but it is reasonable to propose that the Government should bear a large proportion of the associated costs. One might wonder why such a recourse has not been pursued.
One explanation lies in the fetish associated with the so-called net borrowing requirement of the Government, which successive Administrations have tried to hold in check. However, a distinction must be made between borrowing that is to service current expenditure and borrowing to finance investment in productive infrastructure. The latter should be no more subject to constraints than are the borrowings of manufacturing enterprises that are invested in plant and machinery.
We need urgently to invest in the nuclear power plants that will sustain our future prosperity as consumers and producers, and which will do so while allowing us to fulfil our commitment to staunch our emissions of carbon dioxide. Without plentiful electric power, we shall be unable to electrify our public, commercial and private transport; nor will we have the power to sustain the industrial recovery that must ensue if we are not to suffer severe impoverishment.
At present, the nation’s electricity generation is preponderantly in the hands of foreign owners. Moreover, unless we support our own nuclear industry, which is still capable of bringing a small modular rector into existence, our nuclear future will fall into the hands of the Chinese, who are currently participating largely in every viable British nuclear project.