A High-Risk Strategy?
SMRs without the
right framework
Great British Nuclear – Are we sailing in the wrong direction?
Steve Wardlaw, December 2023
The issue with writing short, discrete energy pieces is that the energy market doesn’t work that way. Take this one for example. The original focus on this article was small modular reactors (SMRs), for good reason.
As I have mentioned previously, politicians of all persuasions love a big gesture (Boris Island?) even where more good can be achieved with smaller initiatives. Think the fanfare for wind farms but not roof insulation, despite both of these potentially delivering the same amount of extra energy/energy reduction. More governments should have a ‘small-scale delivery unit’ that works on the boring but important parts of achieving goals.
There is a prima facie argument that nuclear should be counted into our complex future energy mix. Consider the profiling of our electricity usage. Baseload (the minimum amount of electricity required to be generated – think of a horizontal line below a wave on a graph) may be expected to increase because of the needs of significant charging capacity for electric cars (EVs) and the need for large data banks for AI processing. Baseload cannot be met with just renewables unless we also advance on battery and storage methodologies. To meet our net zero commitments by 2050 we will need to find 30-40 GW of ‘firm’ (ie reliable) baseload generation.
So we need significant baseload generation capacity (ie generation that largely runs 24/7) that was previously provided by coal. And note that target of 2050 – in generation infrastructure terms that is not too far away.
However, SMRs have their detractors - around the levels of cost (until ‘modular’ means that we produce many, are the savings there?), complexity (SMRs are about size not any breakthrough fission generation, so those risks are there) and yes, fashion (why build them when you can build more wind or solar?).
What is true is that these are complex, risky, sizable – yet strategic – projects. Which of course are exactly the projects where government involvement can have the most effect.
With amazingly prescient timing for this piece, the government announced in July 2023 the formation of Great British Nuclear (GBN), as part of the government’s intention to create the UK as an international champion in new nuclear technology. As part of that, the government and GBN has asked companies to pitch for a share of a £77m grant to accelerate development.
In theory, this should be seen as a positive step forward, and as I think that we should have an energy policy and an industry policy much more directed by government, this should be worthy of support.
Yet it isn’t. Quite.
I mentioned above that these are complex projects. They are complex in terms of technology but also in terms of external factors – the final green light only appears (usually) once planning and financing have been ironed out. To maximise the chances of this happening, government-led joined-up thinking is required. What we have here with GBN is silo thinking – that we can fix our energy issue with a logo and a competition to disburse funds.
We can see this from the government’s own website. Note – no need to look at the Great British Nuclear website. Despite this being a headline project in July and having shortlisted competitors for the grant, it’s still a holding page.
There are more details on the government’s own website that you can access HERE.
Nevertheless, and despite the fanfare, there are three structural – and interrelated – issues as to why it looks difficult for GBN to succeed without a significant rethink by government.
The first is in relation to the government’s own timetable and funding. Under the structure of GBN, there is a timetable that will select companies for a share of the £77m of investment capital that the government has promised. That has been done and a shortlist was published. The next stage is for the government and GBN to decide which of those it is going to support and award contracts in the summer of next year.
There is a lack of clarity here in relation to the award versus reward. The aim is to accelerate the process, which it may do. However, what is the government getting in return? For example, is it taking a percentage of the monetisation of the R&D, or even taking a stake in any UK-based development company? Contrast this with the concept of Great British Energy from the Labour party, which may become the umbrella for this initiative. All across the infrastructure sector the government should have a coherent strategy about how it co-invests and what it gets back. A lack of strategy is always an expensive position to be in.
The second is whether the government has the correct aims here, or rather if the government is correct about its aims. The current notice about the selection of a shortlist for this competition may not dovetail with the initial announcement that we are bringing nuclear home, which had strong implications that the UK state would be taking a part in the development and global monetisation of this new tech.
The current energy secretary Claire Coutinho said in October, when announcing the shortlist:
“This competition has attracted designs from around the world and puts the UK at the front of the global race to develop this exciting, cutting-edge technology and cement our position as a world leader in nuclear innovation.”
This raises questions. Are we at the front globally simply because of geography ie SMRs are to be built in the UK because the UK gave out multi-million pound grants (which is not terrible in itself) or have we used that money to get something more long-term, such as a stake in the technology we have helped pay for. The focus here is not whether we have made progress but whether we have leveraged our position to get as much as we could. We can all see time is now short to meet our 2035 and 2050 obligations but that should not mean giving away more than needed.
In the currently climate of energy insecurity, the government should not just be looking for a fast import of technology, but the ability to have a stake in the future export globally of such technology, providing the UK with recognition and an income stream.
It is not enough to allow companies to prosper – what about a payback for Government backing, acknowledging the risk taking by the state. This will also help to show a profitable portfolio in the inevitable case that one investment does not succeed. This is the same as an investment portfolio for a large investment bank, and allows flexibility but also instills discipline across the portfolio.
The third issue relates to planning, Final Investment Decision, and timing.
It is often the case in any project that the further ahead you look, the less detail there is. For a complex energy project, there can be four phases – the pre-execution work (consents, design, negotiation of agreements), signing the agreements, moving to Final Investment Decision, moving forward with borrowing and construction.
Final Investment Decision (FID) is where the partners for a project agree to commit funding, to sign finance agreements and to sign construction agreements. While permits and consents should be obtained before that phase, it is clear that partners are more willing to indicate this final commitment knowing that a government and its agencies are aligned.
Under the current GBN timetable, the government is hoping to reach FID by the end of 2029. That is six years to design, agree and – vitally – get all the planning and environmental consents required. Given that these processes have caused significant problems with UK infrastructure, such as for wind farms or grid connections, the government needs to be looking a lot wider than seed capital and a hope that everything can be permitted and financed within six years.
Conclusion
Any action to create a new national strategy from government is to be welcomed, given the acknowledgement from both major UK parties in relation to the need for a more interventionist stance from government. However, this intervention is binary. Getting most of the tasks required to allow for a rapid design, permitting and build means that the project is still not feasible. There are significant gaps here that may require rethought and amendment:
Has the government really thought longer-term here. While grants and the like are good, why are we not taking a stake in the further development to buy a future income stream?
Is there any preference now for British companies or British ownership? How else can we develop national champions?
Timetable for build is short and there are significant project risks, which may slow down financing. Has the government thought about a state lending operation that would take on some of the significant political risks and allow banks to move more quickly to commit the required amounts?
Lastly, have we done enough holistic thinking? Have we looked at permitting, planning, appeals and judicial review to make sure that strategic projects are not help up unnecessarily?
This is a critical time for the UK, its energy infrastructure and its baseload capability. The disaster would be to get this wrong, or rather only 90% right, and end up like the GBN website – just a holding page.
December 2023
Cover: stock