Sunday, July 16, 2006
Amid the uncertainty, a powerful case for nuclear
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

A new film in America, EV Confidential: Who Killed the Electric Car?, claims that there was a corporate conspiracy in the 1990s to kill off General Motors’ EV1 electric car in favour of traditional gas guzzlers. It is a claim that GM, needless to say, vigorously denies.

Conspiracy theorists, it seems to me, could have a field day in another area. Three or four years ago the nuclear industry was nowhere, being widely regarded as expensive and dangerous, and most alternative energy sources were regarded as gimmicky and barely relevant.

Now, thanks to geopolitical tensions that have pushed oil prices up to $78 a barrel (another record last week), heightened worries about energy security and the acceptance in the political mainstream of global warming predictions previously regarded as extreme, things have changed beyond recognition.

“Under likely scenarios for gas and carbon prices, new nuclear power stations would yield economic benefits in terms of carbon reduction and security of supply,” the DTI’s energy review said. Nuclear and alternative energy are each intended to supply 20% of electricity generation by 2020.

If you were a conspiracy theorist you might wonder at the miraculous change between the last energy white paper, in 2003, which was lukewarm on nuclear, and last week. You might wonder about global circumstances that could not have been more designed to benefit an integrated energy company; high oil and gas prices now, followed by lots of demand for alternatives and nuclear later.

Leaving aside the conspiracy theories, which are almost always wrong, there is a fundamental question to be asked. If things can change so dramatically in three years, what will they look like in three, five or 10 years’ time? Will the case for nuclear, or for wind farms, be stronger or weaker than it is now?

There are three arguments in favour of new nuclear power stations, and greater use of alternative energies. Easily the weakest, though ministers tend to present it as the strongest, is global warming. I say this at the risk of further alienating Lord Rees, president of the Royal Society, who last week accused economic commentators of downplaying global warming risks and ignoring “compelling” scientific evidence.

As I’ve written before, I don’t doubt global warming is occurring but do dispute the extent that this is man-made rather than part of the earth’s natural cooling and warming cycle. I am also sceptical about whether greenhouse gas emissions mean the world will heat by 6 degrees C over the next 100 years, 10 times the warming over the past century.

While I’m at it, Lord Rees should look at some of the contributions of his fellow scientists. My mind boggled when I heard Professor James Lovelock say on radio recently that the reason he favoured nuclear over alternative energy was that he didn’t want a wind farm in his back yard.

The real point about UK nuclear and global warming, however, is that we are too small - 2% of global greenhouse emissions - to make a difference. Every little helps, but it is a little. Britain intends to cut emissions, through shifting the balance of energy supply and greater energy efficiency, but other countries will keep pumping them out. The review envisages a 50% rise in global carbon emissions by 2030. Britain’s efforts look like gesture politics or, as Tony Blair puts it, so we can “give a lead internationally”. We may lead, but there is no guarantee others will follow.

So the nuclear case rests mainly on two things - the future cost of energy and security of supply. The cost argument is both simple and highly complex. The simple point is that if oil, gas and the carbon price (used for the EU emissions trading scheme) stays high, nuclear becomes more viable. The complex point is the safety and cost of nuclear waste disposal.

Last week’s renewed Middle East tensions, a spooky echo of the conditions that gave us the the first oil crisis three decades ago, made it hard to envisage lower oil prices - ever. A calmer perspective was offered by the Paris-based International Energy Agency in its first mediuim-term oil market report. the suuply-demand balance will ease over the next couple of years, it says, with the implication that prices should fall. But from 2011 onwards, oil demand will grow faster than supply.

That probably means expensive energy. Whether oil drops to $40 a barrel, as I still (perhaps heroically) expect, it is hard to envisage another cheap oil era. The energy review’s central scenario is $40 a barrel oil - in today’s prices - in 2010, $45 in 2020. But it also has a high scenario, $67 and $72 respectively, and a low one, where the price falls to, and stays at, $20. Leaving the latter aside, nuclear looks economically viable on the others.

A bigger point, which barely featured three years ago, is energy security. Over the next 25 years, North Sea oil and production, equivalent to 4.5m barrels a day as recently as 1999, will wither away, possibly to just 500,000 barrels a day.
Without replacing the existing nuclear stations, the proportion of electricity generated from gas will rise from its present 37% to 55% by 2020. By that time we will be importing between 80% and 90% of our gas, much of it from less-than-reliable Russia, this weekend’s G8 summit host.

We will also be importing most of our oil and, with 75% of reserves located in the Organisation of Petroleum Exporting Countries and medium-term supply-demand prospects tight, the ball will be firmly in its court. Whether lights stay on and heating remains hot will depend on supplies outside our control.

So there’s a strong case for energy diversification, into both alternatives and nuclear. The government’s targets for increasing alternative energy supplies probably go as far as the sector will bear. Its targets for nuclear, which so far amount to merely replacing existing stations, do not go far enough.

PS What should we make of the Bank of England’s dire warnings last week about the vulnerability of the financial system? It identified six separate areas of risk, including high levels of corporate debt, UK household indebtedness, global economic imbalances, unusually low risk premiums, the growing importance of large cross-border financial institutions and the dependence of British banks on infrastructure such as the clearing and payments systems.

Among the scenarios the Bank “stress-tested” in its Financial Stability Report were a 30% fall in the dollar, a UK recession with house prices falling by 25% and commercial property by 35%, a 4 percentage point rise in commercial bond spreads and a two-week shutdown in the “Swift” payments system. It then rather spoiled the effect by saying all these things were very unlikely.

Why do they do it? The Bank’s warnings reminded me a bit of Chicken Licken telling everybody that the sky was about to fall in (the report also mentions avian flu). Or, perhaps more apt, there was a touch of Yes Minister about it. When politicians complain they have never been warned about something canny civil servants always have a file to hand to show they were. Appropriately, Sir John Gieve, the Bank deputy governor responsible for the report, used to be permanent secretary at the Home Office.

There are, having said that, some signs of strain. Shares in Kensington, which lends in the “sub-prime” mortgage market, fell last week when it revealed a rise in arrears and bad debts. It insists these were in line with it expectations. But trouble has spread from such small beginnings before and unemployment is at a six-year high. The Bank’s monetary policy committee will, from the autumn, have two new members, British Airways’ chief economist Andrew Sentance and Professor Tim Besley of the London School of Economics. They’re joining at an interesting time.

From The Sunday Times, July 16 2006

Comments

Nuclear has always been a good idea for the UK. End of story. In Japan, with approximately double the UK's population, they have no less than 52 nuclear power plants in operation (they're building three more this year too).

Pish-tush and boo ha ha to the doomsayers about the economy. The city is booming, house prices have stabilised on a welcome breather, inflation is very low and debt is under control with no prospect of rising interest rates. This is the Old Lady panicking to cover her rear, that's all.

Posted by: Grahame Woolfson at July 16, 2006 11:53 PM

We face the same problems with nuclear now as we ever did - the cost of building plants, the even greater cost of decommissioning them, the fact that however good we get at building them the human factor in the safety equation hasn't changed. But what does amaze me is that a century of experience of the political machinations resulting from the need to maintain stable oil supplies didn't encourage western countries to find alternative power sources sooner.

As for the economic jitters - when you've had a sustained period of growth where conditions have been close to perfect by historic standards it's only a matter of time before some of the factors that have sustained that perfect scenario change - and the likelihood is that they change for the worse.

Nothing has yet happened to suggest that we will ever break out of the cycles that have defined our economic history since the dawn of trade. Recession is just recalibration - it's to be expected. Our challenge is to acknowledge that such periods are inevitable and to learn to mitigate the human and social costs.

I suspect Mr Wolfson belongs to the Branson School of Economics - which holds that balloons can go up indefinitely.

Posted by: Jonathan at July 17, 2006 02:23 AM
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