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THE EUROPEAN COMMISSION’S STUDY ON POSSIBLE REFORMS TO NUCLEAR THIRD-PARTY LIABILITY INSURANCE: RECCOMENDATIONS MADE

This blog is the final of three on the EC’s study on nuclear third party liability and insurance; previously we have written about the need for the study [1] and, once the report was published late last year, we covered the current difficulties the insurance market is having with some of the revisions to the nuclear liability Conventions [2]. In this blog we look at the recommendations the study makes to alleviate these problems.

With an understanding of the major constraints on insurance provision for the full scope of the revised nuclear liability Conventions, the EC study team identified 14 options that could increase the amount of insurance available (‘capacity’). Some of these options were immediately identified as unrealistic; for example, amending the liability Conventions is unlikely in the short term. Instead the study focused on what could be achieved within the framework of the existing/revised liability Conventions and was conceivably within the power of the EC to implement across all EU member states.

Out of the original 14 options, the 5 options that the study reviewed in detail and recommended were:

  • Allow funds to accumulate to cover the 1st tier of the required liability Convention financial security amount: this arrangement is used in the USA where sufficient premium has built up to allow the required $450 million of financial security for nuclear liability to be fully funded twice over. This allows operators to receive premium rebates and allows insurers to consider their nuclear exposure as more of a catastrophic risk – this alters the modelling on their return on capital and allows them to commit higher capacity.
  • All nuclear liability policies to have single, lifetime limits: some nuclear liability policies limit insurers’ monetary exposure to once in the lifetime of each site; others offer a new policy amount each year. These latter policies will ‘stack’ with each passing year, increasing materially the insurers legacy exposure. The insurance market discovered during the asbestosis crisis that this practice is dangerous, as claimants can claim for each policy year they consider exposure may have occurred. The difference in policy type is purely an illustration of national insurance practice and the nuclear Conventions do not explicitly favour one type over the other; therefore harmonisation is possible. The nuclear liability capacity offering will increase in those countries that removed stacking annual policy limits.
  • Increase nuclear insurance mutual participation with new mechanisms for reinsurance: the nuclear insurance market’s principal competitor is the nuclear industry owned mutual insurers; if these mutuals could offer more insurance (this being backed by reinsurance), then greater capacity could be achieved. New innovative reinsurance mechanisms and new markets (such as the capital markets) could be accessed to increase capacity from the mutuals. Equally, over time, the traditional insurance markets could also develop this way.
  • Mandate a nuclear catastrophe only, EU wide, single event insurance cover to provide funds excess of the current legal regimes: all the liability Conventions mandate the holding of financial security for nuclear liability compensation up to a fixed amount. There is nothing to prevent governments or the EC mandating nuclear site operators buy a separate amount of insurance excess of this; this could be achieved using triggers, identified in the report, to activate this cover. If the use of activating triggers was introduced, significantly more capacity would be available from both the capital and traditional insurance markets. The EC would need to mandate purchase of this new insurance for all EU nuclear operators, but limiting the insurance to a single ‘catastrophic’ event would soften the premium cost, yet offer significant relief to governments (and taxpayers) who are otherwise largely on the hook for such events.
  • Establish an EU wide Protection Gap Entity: the current pandemic has revived interest in Protection Gap Entities [3]. These are entities that will manage catastrophic exposure, perhaps originating from multiple sources (e.g. weather, nuclear event, pandemic or earthquake) to optimise financial protection amongst all stakeholders. In the nuclear sector, this would include governments, insurers, capital markets and operators; sub-dividing and allocating nuclear liability exposure to those most suited would allow material increases in available capacity. For example gradually occurring environmental damage and longevity exposure could be retained within the nuclear industry with tax benefits available to allow the accumulation of funds to support any claims. Cover for only catastrophic nuclear events (similar to Chernobyl and Fukushima) could be allocated to insurers and capital markets; with only catastrophic exposure, higher financial amounts would be offered than today, as nervousness of gradual exposure or longevity risk deters many insurers. Governments could step in to provide high level loss funding, but in partnership with more risk averse capital market players. Such a mechanism would be better suited to a multinational body such as the EC and the mechanism could be used to cover any exposure with systemic loss implications.

It remains to be seen whether the EC implements any of the recommendations or acts upon any of the study content [4]. Achieving a cost-effective higher amount of private financial market contribution to a future catastrophic nuclear event is within the grasp of those willing to confront the difficulties identified in the study; such an outcome could be an opportunity for the nuclear industry, the financial services sector and governments.

Prospect Law was closely involved in the preparation of this study for the EC; for those interested in understanding any aspect of the study in more detail, please get in touch.

[1] See: The European Commission and possible reforms to Nuclear Third-Party liability insurance – Prospect Law

[2] See: Third Party Nuclear Liability Insurance – Will the Insurance Market be able to cope with the proposed changes? – Prospect Law

[3] For more detail and explanation of these entities, see: PGE-Report-FINAL.pdf (city.ac.uk)

[4] The full, published EC study can be found here:  Study on the insurance, private and financial markets in the field of nuclear third party liability – Publications Office of the EU (europa.eu)

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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RISK PERCEPTION: MISTAKES TO AVOID WHEN ASSESSING CORPORATE RISK

A trio of Covid-19 related risks heads up the 10th Allianz Risk Barometer 2021…’ states the introduction to this year’s eponymous survey of the key business risks of each year. 

Previous Risks

What a surprise! Strangely enough, the pandemic did not feature in the top 10 business risks in last year’s (January 2020) survey (it was 17th), whilst the 3 surveys prior to 2020 nominated business interruption as a key risk.

In 2012 (the first year of the survey) the top two business risks were economic risks and natural catastrophes, which reflected the experience in the previous year of both the aftermath of the 2010-11 financial crisis and also the devasting floods in Thailand. 

Actually, none of these rankings are that surprising, but to those of us interested in risk management what is interesting is to see how we humans frequently rate the most recently experienced risk as the most threatening.

This pattern of human behaviour is well known but can be a problem when conducting a business risk management exercise. There is a tendency to prioritise the risks that have just happened over risks that may be equally or more relevant and/or more likely to occur.

Business Interruption

The risks of business interruption feature strongly in the Allianz surveys and the current pandemic has raised their profile more; business interruption is a generic risk that can cover a multitude of events. As insurance is concerned with tagging the financial cost of any interruption to a specific insured event (or uninsured, as we have seen during the past year) it is limited to mitigating at best some of the exposure to financial loss. Other events that can cause business interruptions such as wider supply chain disruptions, staff absenteeism or economic risks will be uninsured. Therefore, a good risk management programme must address business resilience across a wide spectrum of events, from known exposures to those ‘unknown unknowns’ and mitigate these as much as possible, using insurance as well as a range of other measures.

Risk Management

Where should responsibility for risk management lie? For decades insurers and brokers have worked with company risk managers, whose role frequently was limited to managing insurance purchases and thereby minimising insurance spend. Today there is a greater recognition of business risk and the value of a strong risk management programme. This has led to boards of directors becoming more responsible for a company’s risk management strategy. 

This positive trend will continue as the insurance and financial markets become ever closer, developing products that are better suited to protecting a wider range of risks. It is also pleasing to see that the pandemic has encouraged government, financiers, insurers and academics to devise better methods of risk management and to enhancing systemic economic resilience to risks that threaten more than just a limited number of businesses. However, complacency – the ‘it’ll never happen to me’ mentality – is still often prevalent and it remains an obstacle to risk management planning in many economic sectors.

Risk perception is a wide and fascinating area of study; we all have different risk appetites and perceptions of what is risky. When conducting objective risk management exercises we need to put prejudices and pre-conceptions aside and consider what the real issues facing our business are just now. This should be an exercise that involves senior management taking a holistic view of as wide a spectrum of hazards as possible, evaluating the resilience of the business in the face of these hazards and devising an appropriately wide-ranging mitigation strategy. In short, when considering the risks your company faces, try to look around and ahead – not back.  

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter and a broker, in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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THIRD PARTY NUCLEAR LIABILITY INSURANCE – WILL THE INSURANCE MARKET BE ABLE TO COPE WITH THE PROPOSED CHANGES

About a year ago we published a blog about an EC study on nuclear liability and insurance; in that blog we commented on the reasons why this subject was of interest to the EC and gave a broad outline of the report’s content.

The EC has now published the study and although there has been a delay in it doing so, the subject remains topical simply because of the continuing inadequacy of the insurance provision when measured against the soon-to-be revised liability obligation of nuclear operators.

In this blog we will analyse why the insurance provision remains inadequate and in a future blog we will look at the recommendations the study makes to alleviate these deficiencies.

It is almost certain that the liability obligations of nuclear operators in OECD countries will expand materially on 1st January 2022 when the 2004 revision to the 1960 Paris Convention on nuclear liability is ratified. The old definition of nuclear damage will be widened from just property damage and bodily injury to include economic, environmental and preventive measure damages; critically it will also offer the ability for potential claimants to bring a bodily injury claim up to 30 years after the causal incident (the existing period is generally only 10 years). The financial security amount (i.e. the amount the nuclear operators must provide and cover with insurance or some other financial guarantee) will rise to between €700 million and €1,200 million; the existing financial security in the UK is a mere £140 million.

The insurance market can easily cover the existing liability obligations in full – for the full amount, full period and full scope, but at present this will not be the case for the new regime next year – why not?

The study identifies the major blocks on providing this revised liability insurance for nuclear sites as:

  • Ambiguity of language – the Convention’s new, wider scope of cover is less definitively worded than the limited existing cover; for example under one of the new heads of damage operators are liable forcosts of measures of reinstatement of impaired environment but it is not easy for insurers to make provision for exactly how much reinstatement may be required.
  • Volatility – insurers need to make provision for future claims arising under policies underwritten today. The extension of the time to bring a claim for nuclear damage from 10 to 30 years materially increases volatility of outcome for insurers as predicting losses so far into the future becomes guesswork; therefore insurers must allocate disproportionate reserves for such events to cater for unexpected losses.
  • Judicial inflation – insurers are nervous that judicial decisions for claims made decades ahead may be driven by different social and medical values, so increasing the value of claims substantially. This further complicates today’s provision for future liability claims.
  • Other factors such as relatively poor perception of the nuclear sector, the lack of actuarial loss data (there have been very few nuclear insurance losses) and uncompetitive returns on capital have disincentivised insurers from entering the nuclear insurance market, thus restricting innovation and any broadening of the market.
  • Small size of nuclear insurance market – insurance of nuclear risks is mostly provided by nuclear insurance pools; these are national groups containing many insurers in an individual specialist insurance entity that provides cover for most nuclear sites globally. Given that normally competing insurers are grouped into a single entity (a pool), it is axiomatic that these pools are not subject to the normal cut-throat competition seen elsewhere in the insurance sector and this too has limited the development of a fully competitive insurance market for nuclear.

All these factors have challenged the insurers of nuclear liability to provide the required cover for the forthcoming liability Convention revisions. At present the insurers can offer enough financial limit to cover the revised financial security amounts but cannot offer the full scope of the revised nuclear liability language.

As with any market the insurance availability situation is fluid, but it remains unlikely that the full scope of cover will be available for the full amount of €1.2billion in time for next year.

In the next blog we will look at the recommendations the EC study makes to alleviate this situation.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter and a broker, in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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CHANGING BUSINESS CULTURE: THE POSSIBLE IMPACT ON THE NUCLEAR INDUSTRY IN 2021

It is very clear, 2021 will be unique and challenging with many twists and turns to keep us all interested in trading opportunities. COVID-19, Brexit, the political changes in the US and strategic election in Europe being just a few of the high-level factors that will influence business decisions. None should be considered as unduly negative.

Recent Changes

COVID-19 is been seen by many as creating a seismic change in ways of business with the greater use of technology and distance communications.  When can we look forward to ‘normality’ returning? Even with the global vaccine roll-out it is impossible to see meaningful take-up within the general populations before Q3 2021. Each country will make its own decision to enable social mixing, and with the unknown efficacy of the vaccine to minimise the impact of COVID variants, business should not expect any general national domestic relaxation before Q4 2021.

The business impact is challenging, particularly informal inter-company networking and the inability to target promotion of goods and services through face-to-face discussions at conferences and exhibitions. A return to more formal advertising and promotion will be essential, however getting messages across the marketplace will not be easy. For the Client however, who has a ‘unique’ issue, exploring possible embryonic solutions from the global marketplace without creating an undue expectation of award will be difficult. Trying to explain the issue through a formal enquiry process is difficult and therefore the easy option is to restrict dialogue to the same old partners. Potential cost and schedule implications are huge.

Impact on Nuclear

What does this mean for the global nuclear industry? For the New Build market – Probably Nothing!  Saudi Arabia’s decision to reduce oil delivery, increasing the price of oil to over $55/b, coupled with the increasing impact of global warming are very positive messages for the New Build sector. The general cost of energy is stable providing a sustainable business decision-making platform. 

Interestingly, whilst wind-power is considered by some to be a cheaper alternative, some 200 turbines are required for each 1600MW nuclear generator.  Also, nuclear output per square meter of land used is over 1000 time greater than that of wind generation, minimising the adverse effects of land resource. Solar power is even worse.

For the Nuclear Demolition Sector (otherwise known erroneously as Decommissioning) the COVID impact will be more marked. Whilst the applied technologies are well known, the challenges are more varied and the decision-making impact on inter-related systems potentially greater.  Consequently, there is a perceived greater need for dialogue amongst larger teams; not so easy to perform remotely. The solution explored during a ‘30 second’ chat by the coffee machine maybe a thing of the past.

Political change is endemic and hopefully nothing too catastrophic will materialise during the remainder of 2021.

About the Author

John Ireland is an internationally experienced energy specialist and senior business executive skilled in the development, negotiation, and management of businesses and technically complex contracts within both the Government and private sectors. John has grown complex businesses in Asia and the Middle East, and assisted international organisations to develop business in and from the UK through joint ventures and partnerships.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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COSTS TO BUSINESSES & HOUSEHOLDS OF NEW FUNDING ARRANGEMENTS AT HINKLEY POINT: PART II

Various cost scenarios can be run, based on projected compounding rates of inflation and forward base-load electricity prices. However, here a snapshot of the ‘net present cost’ in 1st April 2020 ‘money of the day’ can be calculated simply, if just to give the reader ‘a feel’ of the cost of the arrangements. The calculation is based only on publicly available information. Referencing data freely available online, offered by the Office of National Statistics, the Bank of England and the 451 page contract itself, posted up on the UK Government website here

Some important, certainly wished-for information seems to be missing, unclear or redacted. So the calculation below may not give a completely reliable picture just yet. Although they will hopefully give the reader a good idea of the figures UK consumers could be looking at.  

Let’s consider a successfully-completed project; a twin 1,600 Mega Watt reactor power station which generates electricity at a rate of 3,200 MW over 35 years, 24 x 365 x 35 hours in total, operating on average 91% of the time (the load factor depicted in the CfD contract). The developers, CGN & EDF finally secured a strike price of £89.50/MWh though the prevailing strike price is guaranteed to have rise with CPI, escalating every six months, backdated to October 2012 and compounding thereafter ’til the natural termination of the Contract in 2059/60. In this case, consumers effectively pay to CGN and EDF the difference is between the prevailing strike price (£89.50/MWh in 2012 money) and the wholesale market price for base-load electricity. But since October 2012, the operative strike price has already risen, quite significantly. As of 1st April 2020, it is already calculated to have climbed past £121.50/MWh.  With the contract due to run ’til 2060 and compounding inflation in the interim, the accent Hinkley’s strike price looks set to climb looks a steep one, under all scenarios in fact.  

Base-load prices went on to fall further but even on 1st April this year Forward Season Contract was already languishing at £32.00/MWh on the O.T.C. market. It is important to note that base-load electricity is still being downgraded, regarding by some in trading circles as a ‘residual’ or ‘nuisance’ commodity’ to trade relative to ‘peak-load’ and prized ‘shape’ volumes so the gap between strike and base-load prices may also widen for this reason alone and base-load prices could continue to stagnate and fall in value relative to inflation, whatever the fiscal or monetary environment. Indeed, the gap between the operative HPC strike price and market price is already quite substantial and it could widen in the years ahead, especially if inflationary conditions change at points over the four decades ahead of us. Consequently, the estimated figure calculated, in today’s money (or 1st April, 2020), should be treated with caution, conservative as they are. However, below is one estimate of the direct cost element of Hinkley’s funding arrangements, based just on the CfD contract.  

Scenario calculations are more precise. But to illustrate simply, the cost to UK consumers in subsidising this one power station through the CfD surcharge added to electricity bills can be estimated as:     

(£121.50/MWh – £32.00/MWh) x 3,200 MW x 24 x 365 x 35 x 0.91 (load factor) = £ 79,907,318,400

This estimate is in ‘today’s money’ or start of current tax year 6th April, 2020. By the time the power station comes on-line, likely in 2025, the estimate could be markedly higher; the strike price escalating a further twelve of thirteen times in the interim.

The estimate considers direct funding i.e. through the CFD alone. It excludes any separate taxpayers’ contribution or liability by way of construction costs (circa £25 billion), project default risk, waste disposal and clean-up or plant decommissioning.

Given the further escalation and separate costs questions above, the estimated cost is likely to be a conservative figure. One scenario being modelled just now (a High Case but perfectly plausible) envisages a significant further loosing of fiscal policy and, in particular, monetary policy by central banks in response to the current pandemic, leading to higher inflation which an become difficult to control above 3.5% . Higher CPI rates feed directly into the strike price, pushing the final cost of Hinkley’s price support towards £115 billion by the time the power station is fully online during 2026.    

To the outside world, this order of subsidy might seem a high price to pay for any new power station, barely supplying 5% of national electricity demand on an average basis in this case and inflexible base-load power at that, which will not address the principal security of supply challenge ahead, i.e. to offer both reliable & flexible volumes to manage peaks and troughs in wind, solar and other renewable generation.

The paper does not in any way profess to be ‘the final word on the matter’. Base-load or not,  there is no doubt that the UK needs significant new ‘low carbon’ electricity anyway to replace retiring nuclear power stations. However, given the sheer scale of cost involved in supporting this nuclear and others planned soon, it is vital to keep the debate open.

Certain other contract considerations (e.g. a limited degree of possible profit-sharing or cost-sharing with the developers) may need to be considered too and incorporated in the cost estimates predicted. They will still remain high however. Nit all these details are clear or available from the information available to date but this paper should still give the reader an impression of the cost to expect and the impact on finances or electricity bills. As things stand, it does look like ‘the balance’ in terms of market and inflationary risk has been left firmly with the consumer, who will subsidise this and potentially other EPR1 projects to  2060 or beyond in the case of any second such power station.

It would be fair of the consumer to ask why so high degree of inflation (a 100% quotient in this instance) was used for the contract price indexation formula, rather than a typical varied basket of commodity indices, as is normal for any term exceeding 10 or 15 years, 35 in this case. Generally, the negotiators on the seller’s side push for as high an element of inflation as possible and the negotiators on the buyer’s side seek to keep it to a minimum, who would seek to include indices that are directly related to the commodity they are buying as well as the product they go on to produce with this feedstock. Equally, the unusual was the agreement to allow such indexation to CPI to escalate upwards twice each  year, rather each year which more usual; especially given  such a long period; potentially 48 years in this case over 2012 to 2060 so 96 upwards-only and compounding re-adjustments to the strike price.

Equally to ask why, in the case of the near identical EPR1 project at Olkiluoto  which started construction before Hinkley Point C, was able to proceed although without the same concessions made by the Finnish taxpayer or consumers in terms of their expected scale.

Such questions are important given discussions taking place now with the same developers in respect of a second such power station destined for Sizewell, albeit based on an alternative Return on Asset Base (RAB) model. Although very little information is still available and the actual details are unclear at the moment. In conjunction, such talks will include discussions over a third new-build plant, a ‘first of its kind’ thorium nuclear reactor of Chinese design which CGN wants to take a lead in building at EDF’s Bradwell facility in Essex.

About the Author

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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COSTS TO BUSINESSES & HOUSEHOLDS OF NEW FUNDING ARRANGEMENTS AT HINKLEY POINT: PART I

Hinkley Point C (HPC) is a nuclear power station based on the French European Pressurised Reactor design, code-named the EPR1. The project involves the commissioning of twin 1,600 MW reactors which will ultimately deliver a final output of 3,200 MW (3.2 GW).

The plant is being constructed in Somerset by developers, CGN (China General Nuclear Corporation) and EDF. The plant could meet up to 6% of the UK’s electricity needs. However, it should be pointed out that this output is predominantly inflexible base-load which cannot be used to balance swings in demand or to off-set changes in renewable generation. Nonetheless, with seven of the UK’s eight remaining reactors due for retirement soon, base-load as well as peak-load generation will be required, especially where it is ‘low carbon’.

Background

HPC’s building programme has been dogged by delays. Although similar delays have been reported at the two other sites where EPR1 reactors are being built, at Olkiluoto in Finland and at Flamaville in France, both of them started construction before Hinkley and each should have been working by now. Such have been the delays and the extent of cost over-runs at EDF’s Flamaville plant in Normandy that France’s own National Assembly voted this year to block any new projects, in France, based on the EPR1 design. Possibly awaiting an alternative design (code-named the EPR2) which the same French manufacturer, Areva, is understood to be working on; of modular construction and mooted to offer enhanced construction reliability and reduced costs.

The UK meanwhile is believed to be advancing its discussions with EDF and CGN over final consent and government support for a second new-build nuclear power station project, this one at EDF’s Sizewell plant, based on the same EPR1 still under construction at Hinkley.

Subsidy Arrangements

The Hinkley Point C project will include the developers being paid a guaranteed strike price, giving rise to a surcharge added to consumer bills. This is revised every six months but in upwards-only movements, as will be discussed shortly. This direct funding part of the government support is based on the Contract for Differences (CfD). This provides for a surcharge to be added to consumer bills under the 35 year term agreement, payable from the time that the plant starts to produce electricity, a date now expected to near the end of 2025. However, the strike price itself (£89.50/MWh in 2012 prices) is calculable from the date of the original signing of the heads of terms. In other words, the strike price against which the subsidy is calculated (vs. the wholesale market price for base-load) has already started rising, backdated to October 2012, and will continue rising forthwith every six months.

Unusually it was agreed that the operative strike price be linked exclusively to inflation or the consumer price index (CPI). Equally unusually, it was also agreed for the indexation to be bi-annual rather than yearly. Consequently, if HPC were to start generating in 2025/2026 as now expected and it fulfils its 35 year contract term at or around 2060, the strike price will have increased with inflation over 95 times, in upwards-only price revisions, carrying forward and compounding spikes in or periods of inflation along the way.  

CfD – Possible cost to consumers

This article will not detail the various scenarios being modelled and refined just now. However, it will offer the reader a simple estimate, a ‘present value calculation’ if you like, of the expected minimum cost to the UK consumers, or the direct subsidy element of the  Contract for Difference contract which was originally negotiated and, after a rethink, was finally signed off in 2016.

The cost estimate given below is based on a provision calculation only. The figure is also based on a comparatively limited and a ‘historically low’ period of inflation. The final value of the CfD to the developers will remain sensitive to the CPI index, before HPC comes online as well as thereafter.  Just now, our compound inflation model and calculations currently estimate that the extra cost to bills by way of the CfD will be £80 billion, in today’s money.

The initial estimate given looks at direct UK funding only. It does not consider indirect nor unquantifiable costs, such as loan guarantees backed by the Treasury or potential other ‘de facto’ contributions by the taxpayer towards the construction costs or insurance, nuclear waste disposal and final decommissioning of the nuclear power station itself.

Secondary Costs

Of course, the estimate is of the cost of CfD subsidy only. It excludes the actual cost of the electricity generated which will be traded on and repurchased off the wholesale market in the usual way. If we wish to include the ‘final cost’ of the electricity volume and add that to the cost of the price support then the ‘all in’ cost of the project rises to £109 billion. In fact, this second estimate is easier still to calculate accurately because constantly-changing electricity market prices are now absent from the calculation. This ‘all in’ calculation is then a simple case of multiplying the inflation-adjusted strike price (in £/MWh) by the output (3,200 MW) of the power station and by total running time (in hours) of the 35 year contract, adjusted for load factor to be conservative.   

The CfD surcharge is an item that is already present in business and household electricity bills today, providing support for renewable projects generally. However, this quotient will be a ‘step jump’ once HPC and possibly other nuclear plants start up in the years ahead.   

Negotiations with the developers had been temporarily suspended whilst the project was reassessed in 2016 and the agreement was re-negotiated amid industry and also public concern about the perceived ‘overly generous’ terms afforded to the developers. However, the project was finally signed off. Most changes made to the contract were in fact only peripheral and other still not totally clear now.

Following the renegotiation, the strike price was reduced, from £92.50/MWh (at the 2012 base date) to £89.50/MWh. However, it was agreed that the base date (to which the strike price is indexed) will remain the same, in spite of delays and much firmer power market, so operative strike prices will still be backdated to the 4th quarter of 2012, rendering the headline reduction in strike price quite superficial in mathematical terms. More to the point, the bi-annual indexation to CPI provision also emerged from the discussions unscathed before the final contract was signed off.

Part II of this article will put forward a costs scenario analysing the possible costs of the arrangements set out above.

About the Author

Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

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UAE READY TO START-UP ITS FIRST NUCLEAR REACTOR. WHICH COUNTRY WILL BE NEXT IN 2020?

The first unit of the Barakah nuclear power plant in the United Arab Emirates has received its operating licence from the UAE’s Federal Office of Nuclear Regulation (FANR) and commenced loading its first charge of nuclear fuel. The start-up has been eagerly awaited, as is was originally planned for 2017. The reasons for those delays have now been overcome and the international community is confident the plant is in a full state of readiness to produce electricity.

The UAE’s nuclear programme has been subject to many international peer reviews. The International Atomic Energy Agency (IAEA) has conducted 11 such reviews, with the last two being the Integrated Nuclear Infrastructure Review (INIR) in July 2018, and, in September 2019, its emergency preparedness. In addition, the World Association of Nuclear Operators, WANO, has undertaken 30 support missions and peer reviews, the latest of which concluded that following an extensive operational readiness assessment, Unit 1 is ready for start-up. 

Mr. Mark Reddemann, Chief Executive Officer of Nawah Energy Company (Barakah’s operator), said: “Successfully completing WANO’s PSUR [Pre-start Up Review] of Unit 1 of the Barakah Nuclear Energy Plant is a testament to our commitment to the highest national and international regulations and standards. As we progress towards the secure and safety-led start-up of Unit 1, we will continue to work closely with our partners to ensure we demonstrate our readiness to receive the Operating License from the Federal Authority for Nuclear Regulation, as we work to pursue the highest standards of operational excellence.”

In a recent article entitled A Strategic Perspective of Barakah: a Success in International Cooperation, the UAE’s Permanent Representative to the IAEA, Hamad Alkaabi, said “Thanks to our visionary leadership, along with a team of remarkable experts working in close collaboration with international entities, we have worked over the span of a decade to steadily progress to become the 33rd nation to enable nuclear operations for peaceful purposes.”

The four-unit 5600 MW(e) plant is being developed jointly by the Emirates Nuclear Energy Corporation (ENEC) and Korea Electric Power Corporation (KEPCO). The four 1400 MW(e) APR-1400 units, based on the Shin Kori 3 & 4 reactors in South Korea, will supply nearly 25% of the UAE’s energy needs and save 21 million tons of CO2 emission each year. With Unit 1 completed, Unit 2 is at 93% completion and Units 3 and 4 are at 91% 82% respectively.

Another country about to embark on a new nuclear future is Belarus. Their two 1194 MW(e) reactors are Russian designed VVERs and fully constructed, awaiting the go-ahead to load their first fuel. As with the UAE, the country’s ability to operate a nuclear power plant has been subject to international peer review by the IAEA and WANO.

Bangladesh and Turkey have started construction of their first power reactors, and Egypt is well advanced in developing its nuclear infrastructure. Saudi Arabia is also rapidly developing its plans to construct two large nuclear plants, as well as smaller plants for desalination purposes.

Worldwide, new reactor construction is now at a 30-year high, with more newcomer countries embarking on nuclear programmes. If these programmes are successful, it will result in a corresponding reduction in the dependency on fossil fuels.   

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy, infrastructure and natural resources  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and other technical experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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THE EUROPEAN COMMISSION AND POSSIBLE REFORMS TO NUCLEAR THIRD-PARTY LIABILITY INSURANCE

Prospect Group experts have recently contributed to a study completed for the European Commission on nuclear third-party liability (NTPL) insurance. The EC’s interest in more work on this topic was driven by the following factors:

  • The differing legal regimes for NTPL evident within EU member states have led to wide disparity between the amounts of statutory financial security required by nuclear operators to pay for compensation to off-site victims that suffer nuclear damage (perhaps from a severe accident).  For EU countries with nuclear power plants, these amounts range from €43.9 million in Bulgaria to €2.5 billion in Germany (the UK amount is currently £140 million). To fulfil their statutory obligations, nuclear operators normally buy insurance to cover these financial security amounts.
  • A recognition that although the highest of these financial security amounts existing today globally apparently correspond to the insurance market’s available capacity, they do not match the potential total costs resulting from a severe nuclear accident. For example, at the time of Japan’s Fukushima accident in 2011, the financial security amount required of the operator was ¥120 billion (c. £844 million/$1.1billion) yet the compensation paid has already exceeded ¥9.33 trillion ($85 billion/£66 billion).
  • There is currently some uncertainty as to whether the nuclear insurance market can offer insurance cover for the full scope of the revised liability regimes, due when the 2004 revisions to the 1960 Paris Convention are ratified – probably early in 2021. The insurers have expressed concerns over the insurability of some of the revised heads of damage and at present most have refused to cover the extension of the time limit to bring a claim for bodily injury or death from 10 to 30 years.

Despite these difficulties with the provision of nuclear insurance, insurers can meet much larger loss amounts for other events that cause widespread damage to businesses and homes, such as natural catastrophes, for which claims totalling more than $50 billion per event are now quite frequently paid. With other events easily able to call upon such sizeable amounts, the EC commissioned this latest study to discover whether insurers could provide substantially more insurance for severe nuclear accidents, and if so, under what conditions.

The previous EC work on this subject revealed some interest from certain insurers in providing materially higher insurance amounts for catastrophic nuclear losses, but with this insurance cover activated by a trigger of some sort. Of course, at present using a trigger to activate a nuclear site operator’s required financial security for NTPL compensation is not permissible – the funds must be available for all nuclear damage, no matter how it arises.

However, if triggers are combined with other mechanisms or if new capacity is used to supplement the existing financial security requirements, could governments (and ultimately taxpayers), as the payers of last resort, be moved further away from the cost of a severe nuclear accident? The EC thinks the subject is worthy of further study, which is timely as the gradual merging of the capital and insurance markets is opening up new sources of capital and new ways of looking at risk.

In addition, the EC feels that it has made progress on other fronts that could have relevance to the field of nuclear liability. For example, in the EC’s view significant enhancements have been introduced to the EU legal framework, with the adoption of the revised Nuclear Safety directive and the revised Basic Safety Standards (BSS) directive; in particular, the revised BSS directive lays down uniform dose limits covering public exposures and occupational exposures and requires EU members to ensure that reference levels for emergency and existing exposure situations are established.

Will these changes permit greater EC intervention in the field of nuclear liability and will market developments encourage insurers to commit higher insurance capacity to nuclear liability?  To find out, the EC commissioned the study to assess the latest structure and capacity of the insurance and financial markets in the nuclear third party liability arena, with a view to evaluating how and to what extent these private market providers could increase cover in the event of severe nuclear accident.

Two future blogs will follow the EC study, examining firstly the current state of the NTPL insurance market and then possible mechanisms that might see more private capital and insurance backing NTPL financial security amounts.

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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“THE PREREQUISITES FOR NUCLEAR ENERGY IN AUSTRALIA”: A BRIEF ANAYLYSIS OF THE HOUSE STANDING COMMITTEE’S FINDINGS

In August we reported that the Australian Parliament’s cross-party House Standing Committee on the Environment and Energy was undertaking an inquiry into the “prerequisites for nuclear energy in Australia”.

After nine country-wide public hearings and 309 submissions, the Committee has now published its findings: Not without your approval: a way forward for nuclear technology in Australia.

The meat of the report is some 93 pages long, with additional appendices, and has come up with three main recommendations to enable a way forward for nuclear technology in Australia; in summary these are:

  • the Commonwealth Government consider the prospect of nuclear technology as part of its future energy mix;
  • the Government undertake a body of work to progress the understanding of nuclear technology in the Australian context; and
  • the Government consider lifting the current moratorium on nuclear energy partially—that is, for new and emerging nuclear technologies only, and conditionally—that is, subject to the results of a technology assessment and to a commitment to community consent for approving nuclear facilities.

The first recommendation would be achieved by prioritising reliable and affordable energy while fulfilling emissions reductions obligations; adopting a strategic approach that would consider collaborating with international partners, developing Australia’s own national nuclear capability, procuring next-of-a-kind and not first-of-a-kind technologies; adopting a holistic approach which looks at opportunities in other nuclear areas such as medical applications and also non-energy areas such as health, water, food and agriculture. The community would need to be put at the centre of these efforts.

In developing its further understanding of nuclear technologies, the Australian Nuclear Science and Technology Organisation (ANSTO) should produce an assessment of the various nuclear technologies, and, in particular, consider the newer and next generations of reactor, including Small Modular Reactors (SMRs). Associated with this would be an economic viability of nuclear and an assessment of the other requirements which would need to be in place. A community engagement programme should be established that would “educate and inform” Australians.

There is a current moratorium on nuclear development in the country, and so the Committee calls for a partial lifting of this which would allow, subject to the above technology assessment, the potential development of the newer generation reactors. Moreover, development of a reactor or waste disposal site would require local community consent.

The report is not a consensus view of the whole Committee. The Labor members and an independent member, Zali Steggall MP, have produced dissenting reports, included in the main report. The Labor view is, inter alia, that there is no economic case for pursuing nuclear and that nuclear is in decline elsewhere. It has come up with a number of its own alternative recommendations. Ms Stegall goes along with the first two recommendations but says that the lifting of the moratorium is “pre-emptive”.

The report has been presented to the Speaker of the House of Representatives, for the Government to take the next steps.

In terms of lifting the moratorium, the Mineral Council of Australia (MCA) recently poll of some 1500 people has shown support for lifting the ban rather than opposing it, although it recognised 54% of them were unaware there was a such moratorium. The MCA has also welcomed the Standing Committee’s “pragmatic and methodical approach outlined in the report”, saying also “ … the current bans mean Australia – with the world’s largest deposits of uranium – is missing out on a potential industry which could employs tens of thousands Australians with high paying jobs, mostly in regional areas.”

We await with interest what the Government’s response will be.

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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THE GEOLOGICAL DISPOSAL OF RADIOACTIVE WASTE IN ENGLAND: RECENT DEVELOPMENTS

There have been two recent changes in the quest to find a permanent site for the geological disposal of higher activity radioactive waste.

Written Ministerial Statement

In a written statement to Parliament on 17 October, the Minister for Business Energy and Industrial Strategy, Nadhim Zahawi, designated the National Policy Statement (NPS) for Geological Disposal Infrastructure, following its laying before parliament on 4 July. This marked the final parliamentary step in the NPS process.

The Minister stressed the importance of those who have benefited from nuclear technology taking appropriate steps to manage the associated radioactive waste, adding the important role nuclear technology plays in transitioning to a carbon neutral economy. He also acknowledged that geological disposal is internationally recognised “as the safest and most secure means of permanently managing a proportion of this waste not suitable for other management regimes”.

He went on to say that the NPS provides an “appropriate and effective framework for the Planning Inspectorate and the Secretary of State for the Department for Business, Energy and Industrial Strategy to examine and make decisions on development consent applications for geological disposal infrastructure in England.” (Note that responsibility for this area in the United Kingdom is devolved to its separate countries and this NPS therefore only applies to England).

As well as the geological disposal facility (GDF), the NPS also covers deep borehole investigations which will be necessary to characterise the geology at potential sites. Accompanying the NPS, the government has also published associated documents:

  • Equality Analysis for the National Policy Statement for Geological Disposal Infrastructure, which concludes that people with protected characteristics would not be more or less affected than other groups by the impacts of the NPS;
  • Habitats Regulations Assessment of National Policy Statement for Geological Disposal Infrastructure, which supports the Secretary of State in meeting his obligations under regulation 110 of the Habitats Regulations; and
  • Post Adoption Statement for the Appraisal of Sustainability of the National Policy Statement for Geological Disposal Infrastructure. This is required by the Strategic Environmental Assessment (SEA) Directive 2001/42/EC and relevant implementing regulations to ensure that environmental considerations are taken into account.

Further Backing

Further endorsement of the approach to achieving geological disposal was announced last week by the nuclear and environmental regulators. Implementation of geological disposal is the responsibility of Radioactive Waste Management (RWM), a subsidiary of the Nuclear Decommissioning Authority. They are not yet subject to formal regulation, but in their joint annual report, the Office of Nuclear Regulation (ONR) and the Environment Agency (EA) reported on the outcome of their scrutiny of RWM during 2018-19.

ONR and EA work together “to make sure that any future geological disposal facility (GDF) will meet the high standards for environmental protection, safety and security that the public expects.” They will engage with RWM early in the process of identifying potential sites so that when a site is identified RWM already clearly understands what it needs to do as part of the regulatory process. They also liaise regularly with RWM to make sure that it gives the right advice to waste producers about packaging radioactive waste for future disposal at a GDF.

They say that RWM has significantly improved its generic Disposal System Safety Case, including taking the regulators’ earlier advice, noting though that “RWM still has a significant amount of work to do to develop a comprehensive, site-specific safety case and many aspects can only be fully evaluated once a site has been selected and specific designs produced.”

They added, “We are satisfied that RWM liaises with government and regulators to establish common understanding and manages any necessary changes through its change control process.” Further, “RWM has made significant progress towards addressing the need to protect groundwater resources and human health from the non-radioactive component of the inventory for disposal, and is providing the necessary advice to waste producers.”

While these two pieces of news are positive, the overall quest to find a site is still a work in progress and RWM is engaging with communities to inform this work.

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental  sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here