23rd April 2012
The UK industry has not had a great 2012, so far. First, Scottish and Southern Energy announced it was abandoning the NuGeneration consortium led by GDF Suez because it wanted to focus on carbon capture and storage projects and renewable energy. Then RWE and E.ON, hit by Germany's move to shut down all of its nuclear capacity early, announced that they would not, after all, build proposed new plants in Wales and Gloucestershire.
Nuclear: The Dream that Failed?
The government has pledged no public subsidies for nuclear, just a carbon floor price applicable to all low-carbon energy. Now GDF Suez says it will need more government support if it is to proceed with a plant in Cumbria, as reported in the Guardian.
Where this leaves the UK's nuclear programme is anyone's guess, although the Economist, in a special report in March, made its view quite clear with the title The Dream that Failed.
Nuclear's problem, according to the Economist, is that while the power plants can be run very profitably once they're running, they are cripplingly expensive to build – and likely to remain so. "Forecast reductions in the capital costs of new reactors in America and Europe have failed to materialise and construction periods have lengthened. Nobody will now build one without some form of subsidy to finance it or a promise of a favourable deal for selling the electricity."
Solar will be cost-competitve with nuclear by 2020
UK energy regulator Ofgem's announcement that EdF, now in the box seat when it comes to new nuclear capacity in the UK, is unlikely to start generating electricity from its Hinkley Point plant until 2020 sits uncomfortably alongside a report from Mckinsey, Solar Power: Darkest Before the Dawn, which says that photovoltaic technology will be cost-competitive with nuclear by 2020. So by the time the UK's next nuclear power station comes on line, its cost advantage will have disappeared.
Where nuclear differs from renewables is that it is not getting any cheaper, while renewables demonstrably are. "Every nuclear power station takes longer to build and is more expensive than planned," says Ketan Patel, SRI analyst at Ecclesiastical.
Solar subsidies have worked
Solar power, by contrast, is a model of how subsidies should be used, according to Bruce Jenkyn-Jones, managing director of cleantech investor Impax Asset Management. "In the last two years, the cost has come down by more than 50%. The improvement in the economics has been lost in the news relating to subsidy cuts. The subsidies have worked incredibly effectively and they are coming down all the time, too. I can't think of another industry where this has happened – certainly not nuclear."
Baseload Capacity: The Joy of Nuclear
So should investors be throwing their money at solar and wind power? Not so fast. Solar is bedevilled by overcapacity that is great for consumers (and governments) because it is driving costs down, but it is terrible for individual companies as they struggle to emerge as winners in the consolidation process that is happening at the moment. Wind is also in a state of flux, as evidenced by recent announcements that Korean company Doosan is abandoning plans to open a R&D centre in Scotland while Spanish group Gamesa announced plans for a turbine manufacturing plant there.
"The great joy of nuclear is its baseload capability, which is not something that renewables can promise. For renewables to provide a solution, they need some kind of way to satisfy demand when the sun is not shining or the wind blowing. Gas can provide that, but also more distributed energy and energy efficiency look like interesting opportunities," says Jenkyn-Jones.
Investing in Renwables: A Network of Opportunities
Energy storage will be one such opportunity for investors – and it is notable that Bloomberg New Energy Finance has just announced that the price of electric vehicle batteries has fallen 30% since 2009 – but also the more traditional engineering challenges of increased interconnection of grid systems. This will create a more flexible and allow developments such as electric vehicles both providing demand for wind energy at night and feeding electricity back into the system at peak times.
As grids become smarter and more flexible, it will create investment opportunities in fields such as smart meters, power networks and software to help utilities manage power flows more effectively. There are also opportunities on the demand side. Buildings and the devices that go into them – from lighting and heating to computers and household appliances – are becoming more responsive and energy efficient. They are also increasingly being integrated into building management systems that make them more efficient still.
"There are phenomenal improvements going on in areas such as motor technology, air conditioning and refrigeration," Jenkyn-Jones adds. "The challenge from an investment perspective is to find companies that have an edge and that benefit from superior efficiency."
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