I was surprised recently to see a headline (Daily Telegraph Business 3 July) that said ‘New nuclear possible by 2020, Davey insists”.  Apparently Ed Davey, the Secretary of State for Energy and Climate Change, said that Britain could have a new nuclear reactor generating by 2020.  My immediate thought was, what did he have for breakfast that day or what was he smoking, as we all “know” that every nuclear plant project around the world is years late and way over budget. I decided to check into this by looking at the statistics on the World Nuclear Association (WNA) website which helpfully has a lot of data on every nuclear power station and project.

For details see: http://world-nuclear.org

So is it really possible for the UK to build and commission a new nuclear plant by 2020 which is six years and five months away (77 months)?

Here is some data from the WNA website to help you judge.  For the first pass I just looked at reactors that had been commissioned since 2000.

The average time to build for all reactors commissioned since 2000 was 9.6 years (115 months).

Now this includes all types and sizes of reactors including some 220 MW capacity PHWRs (Pressurised Heavy Water Reactors) whereas the planned UK reactors at Hinckley Point C are PWRs (Pressurised Water Reactors), or to be more precise EPRs (European – or Evolutionary – Pressurised Reactors).  The EPRs are 1,650 MW capacity.  So let’s take the non-PWRs out of the equation and just look at the build times of PWRs, build time is defined as construction start date to date of first commercial operation.

The average time to build for all PWRs commissioned since 2000 was 10.4 years (124 months)

To be fair there are some obvious outliers in the data, mainly Russian, Ukrainian and Czech reactors that took inordinate amounts of time to build – an amazing 27 years in the case of the Rostov 2 reactor, (started 1^st May 1983, commercial operation 10^th December 2010).  Clearly there were special circumstances, i.e. the little matter of the fall of the Soviet empire.  So let’s take out all the plants that took longer than 15 years to build.

The average time to build for all PWRs commissioned since 2000, excluding all those that took longer than 15 years to build, was 6.4 years (77 months).

To move one step further and to favour the nuclear industry, let’s take out all those PWRs that took longer than 10 years to build.

The average time to build for all PWRs commissioned since 2000, excluding all those that took longer than 10 years to build, was 5.1 years (61 months).

So let’s look at the track record of EDF building EPRs.  The other EPRs being constructed are Olkiluoto 3 in Finland and Flamanville 3 in France.  Construction of Olkiluoto 3 started in 2005 and originally the station was supposed to be completed by 2009.  It is now expected that operation will start in 2016 – implying a build time of 11 years.  Originally the cost estimate was €3.7 billion, (an obvious low ball bid!) but the cost is now expected to be €8.5 billion.  Flamanville 3 construction started in December 2007 with an estimated build time of 54 months (4.5 years), implying commercial operation some time in 2012.  Estimated costs have, like Olkiluoto 3, risen from €3.5 billion to €8.5 billion, and estimated completion is now in 2016 (implying a build period of 9 years, 108 months).  EDF Energy has, according to the Telegraph, “refused to give an up-to-date timetable for building” the reactors at Hinkley Point C (perhaps not surprising!).  Ed Davey did hedge his bets by saying; “We are still hopeful we could see new nuclear generating in maybe 2020, 2021. I’m not going to say it will definitely be there because we haven’t signed a deal yet.”  In may, Chief Executive of Centrica, which pulled out of the project in February, said, “instead of … taking four to five years to build, EDF were telling us that it was going to take nine to 10 years to build” – which implies EDF are less optimistic than Ed Davey of generation by 2020.  Given the experiences at Olkiluoto and Flamanville nine to 10 years seems a more realistic estimate than the six to seven years implicit in Ed Davey’s comments.

So is it really possible that we could have a new EPR nuclear plant up and running by 2000?  Looking at the data, and being positive you have to say it is possible but it certainly doesn’t look likely.

I can only assume the comment by the Secretary of State was designed as part of the current reassurance campaign that the lights won’t go out as the supply margin gets smaller as older nuclear plant and large coal plants are decommissioned.  It is clear that the risk of the lights going out is increasing, but then we knew that a long time ago and previous governments ignored the issue.  To quote “Old Sparky”, who writes the “Keeping the Lights On” column in Private Eye (which should be essential reading for all energy analysts), Plan A for keeping the lights on was “windfarms, new nukes and pixie-dust”, Plan B was a new dash for gas.  Plan C is to “pay large electricity consumers to switch off when requested; encourage industrial companies and even large hospitals to generate their own diesel-fired electricity (not a hard sell when the grid can’t be relied on); hire diesel generators to makeup for the intermittency of windfarms.”  Plan B – the dash for gas – probably won’t ease the problem in the next three to four years, (neither will EMR), but plan C probably will………with any luck……….and a following wind, (or more accurately good wind days on days with high demand),……….if nothing goes wrong on the wrong day at the wrong time.

Never having read Alice in Wonderland I decided to look up the quote about believing six impossible things before breakfast.  In response to the White Queen telling Alice that she is one hundred and one years, five months and a day old, Alice says

“I can’t believe that!” said Alice.

“Can’t you?” the Queen said in a pitying tone. “Try again: draw a long breath, and shut your eyes.”

Alice laughed. “There’s no use trying,” she said: “one can’t believe impossible things.”

“I daresay you haven’t had much practice,” said the Queen. “When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.”

Now, believing six impossible things before breakfast is a useful skill, especially when thinking about the future or for people who want to change the world like entrepreneurs.  However, I am not sure it is a useful skill for politicians in charge of energy policy.

Iam going to cover the topic of Electricity Demand Reduction (EDR) and the Electricity Market Reform (EMR) soon, that is the essential piece of the puzzle that is being ignored in all of this debate.  All I will say for now is, as new nuclear is getting a £10 billion guarantee and a strike price in the range of £80 to £115 per MWh, can we have let’s say a £1 billion guarantee for electricity demand reduction projects and a strike price that is a fixed percentage of that for nuclear – let’s say 75% –  and let’s see how many MWh (or more accurately negawatt hours) the energy efficiency industry can deliver by 2020.

It is easy to forget in a modern, developed democracy but there is a very real link between electrical power and political power.  This is most noticeable in emerging economies but it is true everywhere – probably because in most countries used to 24/7 reliable power a prolonged (or even a short) time without electrical power would quickly lead to the fall of a government.

This link was most noticeable to me in my time in Romania (1994-1998) which was quite soon after the fall of Nicolae Ceauşescu and communism.  There was an old adage in Romania. ‘When the President of the country telephones the President of the electricity company the President of the power company may or may not take the call, depending on what he is doing or what he feels like.  If the President of the power company calls the President of the country, the President of the country always takes the call.’  I am not sure how true it was but it was told to me by a former President of the power company and it really reflected the power of the power utility.  It was further brought home to me when during the election of 1996, (which led to the first post-communist change of power and the first President who was not associated with the former regime), when there were stories of local power officials using the threat of power cuts to industrial enterprises to encourage block voting in a certain way.

Anyway, there clearly is a link at many levels – the prolonged absence of electricity could cause civil unrest and ultimately the downfall of a government.  If the UK power crisis does get to the situation where the “lights go off”, i.e. there are blackouts – which with luck we will avert (luck not the best thing to plan on!) – we will once again see the close link between electrical power and political power, a link not really seen in the UK since the dark days of the miner’s strike and the three day week of the 1974.

For any readers too young to remember the three day week see http://en.wikipedia.org/wiki/Three-Day_Week for details.

Here is my latest guest blog on the 2 degrees network:

“Energy performance contracts, too good to be true?”

On the 5th June I spoke at Ecosummit 2013 on “The Magic of Energy Efficiency” and here is the talk on Ecosummit TV and some photos.

It was good to be back in Berlin (even though I was there only the previous week!) and I am looking forward to Ecosummit London at The Crystal on 15-16 October 2013. It is a different format to most events and a great way to bring together start-ups and early stage businesses and investors.

The ESCO (Energy Service Company) industry appears to have a number of obsessions that result from its history and don’t help to advance the cause of energy efficiency and third party financing, something that the industry actually does – or should – want to advance. Here are some thoughts that may cause controversy.

The ESCO/EPC industry grew out of good work in the US public sector and even to this day 85% of EPC deals in the USA are in the Municipal, Universities, Schools and Hospitals (‘MUSH’) market and the Federal government. Most of these deals have been funded by the clients issuing bonds or some form of municipal lease, which in the US have tax advantages which make them a cheap source of finance – for more details see here.

Back in the 1980s and 1990s the US government, through agencies such as USAID, and the US ESCO industry did a great job of selling the ESCO/EPC model around the world. As communism collapsed in Central & Eastern Europe (C&EE) and the Former Soviet Union (FSU), many missions were organized to promote the concept and they were very successful. I saw them first hand when I was working in Romania in the mid- to late-1990s. As well as in C&EE and the FSU the concept was promoted in China, Asia, Africa and Latin America. In Western Europe the EPC concept was promoted as a solution to improving energy efficiency. Unfortunately the model was exported without the access to the long-term low cost finance provided by muni bonds.

Now, in many markets we seem to have a situation where the ESCO industry, and its supporters are confused. Typically there are two refrains; one – ‘why don’t customers buy EPCs when it is a no brainer’ and two – ‘we need to bolster the balance sheets of ESCOs’. This is then overlaid by government or IFI support schemes trying to address these ‘market failures’. (I should say that there has been some great work going on, particularly by the EBRD, who really do understand these issues, in providing debt through local banks and building capacity in local banks to understand and evaluate energy efficiency investments). In all markets the ESCO/EPC market has not achieved its perceived potential.

Maybe the ‘market failures’ referred to by the ESCO industry are not market failures at all – but rather poor marketing (and I mean marketing in its true sense – really understanding the market and providing what it needs – not advertising and communications).

To be fair the ESCO industry in the MUSH market has consistently delivered, and over-delivered, on savings but it has also made large margins on front-end capital. For all the talk of ‘shared savings’ the traditional ESCO/EPC deal is designed to produce maximum capex (on which the ESCO makes a healthy margin), and a small stream of net savings after financing to the client. So we have a situation where the client:

may not be confident about the savings (despite an ESCO guarantee)

• is being asked to sign a long-term, complex deal (10-15 years plus in many cases)
• is paying a high price for capex and development
• receives a small stream of savings relative to energy bills
• has high transaction costs.

Just maybe EPC is not such a good deal as the ESCO industry presents. It maximizes the return to the ESCO but not the host – incentives are not truly aligned. At the same time most ESCOs design and develop projects in a very traditional way – there is much talk but little delivery of holistic, integrated design which has been proven to increase energy savings and reduce capex requirements time and time again.

When the ESCO industry has tried to move into the commercial sector it has hit a number of barriers including the fact that commercial organisations are better at procurement than the public sector and typically demand a high level of transparency – something that the public sector has not done. The level of margins made by ESCOs in the MUSH market has not been acceptable. This is in addition to other well-known issues such as the split incentive.

Some other obsessions of the ESCO industry and IFIs and government departments interested in the sector which I have heard recently include the following.

ESCO balance sheets and how to strengthen them.

ESCOs are developers of projects, they could be two men and a dog as long as they are good. They don’t need balance sheets to develop projects – consultants can do it as well as ESCOs and may ESCOs use consultants anyway. Implementers of projects, i.e. contractors, do need balance sheets but they don’t have to be an ESCO – all an ESCO usually does is sub-contract the implementation piece to ‘ordinary’ contractors. In the renewables industry, or even the conventional power sector, project developers do not need balance sheets. Typically they are either consultants working for a site owner or are parlaying time and expertise spent on development, along with option agreements, into a small proportion of the project equity on financial close. The ESCO industry seems to think it is different – as I have said before, the very term ESCO adds to the confusion and it is time to drop it. We don’t talk about ‘Wind Energy Service Companies’ – we talk about:

developers who pull together the technical and commercial aspects of the project

• contractors who build things
• investors who fund the construction and benefit form the uplift of value by funding construction risk
• O&M companies
• and long-term owners who like long-term stable income streams without construction risks
• and of course there are specialist insurance companies, which will under-write different aspects of performance.

What is the difference between wind/solar/conventional power and energy and energy efficiency? We need to un-bundle the ESCO proposition.

Given this there is no need to bolster the balance sheets of ESCOs, this seems to be based on the belief that ESCOs will fund projects off their own balance sheets. Even the big guys don’t want to do this.

Project financing and asset financing

At first glance energy efficiency financing has similarities to both project financing and asset financing. However, typical projects are far too small for project finance and project finance departments in most banks rightly won’t get out of bed to look at them. Asset financing has been done for energy efficiency but it is best applied to single, stand-alone assets such as Combined Heat and Power (CHP) plants which can be taken away if the client stops paying for any reason. It is very difficult to take away most energy efficiency projects such as low energy lighting, Building Energy Management Systems (BEMS), software or insulation, all of which are embedded in the building and have little or no value if removed.

Energy efficiency financing is all about cash flow financing – not project finance and not asset financing.

Payback period

We often hear about the fact that most organisations have a two or three year payback period on energy efficiency investments and this is inhibiting ESCO/EPC deals. It is true that for self-funded projects a two or three year payback criteria is normal (as well as understandable). Self-funded projects have to compete in the capex budget with projects that are central to the organisations core purpose – making widgets, selling tins of beans or developing new software. We can, and should argue that CEOs and CFOs can profitably increase the level of self-funded projects, as well as improve energy management generally, but the same payback period can’t be applied to a third party financed energy efficiency project as it is being funded by a different investor with different criteria. The only important thing for the project host is, how much does this deal reduce their cash operating expenses (quantified as NPV)? The payback is important to the third party investor but much of the point of third party finance is to be able to fund longer-term projects by accessing the kind of money that likes long-term, low-risk income at lower rates of return.

On/off balance-sheet. Traditional EPC contracts were usually on balance sheet but a number of structures and regulations could affect that, depending on geography and sub-sector even within the public sector. The accounting standards bodies, the IASB and the FASB, are now harmonising a position on leasing and off-balance sheet financing which will affect energy efficiency financing. Off-balance sheet leasing is likely to be stopped by 2016/17 and all structures will be subject to more scrutiny. The ESCO industry does need to worry about this and evolve new, service based structures as has happened in the US with Metrus and the Efficiency Services Agreement (ESA).

The global ESCO/EPC industry and its boosters need to recognize the realities of the situation and develop new models – continuing to push a model that isn’t very attractive to potential customers will be frustrating and un-productive. There needs to be innovation.

A historical note

It is often thought that the ESCO ‘shared savings’ concept originated in the US in the 1970s. I was recently reminded that it was in fact introduced by Boulton and Watt when they joined forces in 1775 to commercialise Watt’s steam engine which was far more efficient than the prevailing technology. The application was pumping water out of mines and Boulton and Watt sold the engine on the basis of taking a share of savings. Interestingly enough they often had Measurement and Verification problems due to the variability of coal quality and got into disputes with the project hosts. So, shared savings, another British invention commercialised by others! If you can find one the current Bank of England £50 note commemorates Boulton and Watt.