PAC report: Closure of 7 power stations by 2028 will “significantly reduce” UK energy-generation with no replacement except import

• Taxpayer on the hook for billions in extra nuclear plant decommissioning costs
• Closure of 7 power stations by 2028 will “significantly reduce” UK energy-generation with no immediate replacement except imports: “The decommissioning dates of these power stations were clear decades ago”

In a report today the Public Accounts Committee says the terms of the 2009 sale of 7 nuclear power stations to EDF Energy “placed a disproportionate amount of risk for meeting future decommissioning costs on the taxpayer”, and failures in the Government’s investment strategy for the Nuclear Liabilities Fund have already seen the taxpayer having to top it by an additional £10.7 billion in just two years.

The Fund, set up to meet the decommissioning costs of the seven Advanced Gas-cooled Reactor nuclear power stations now owned by EDF, has failed to meet its investment targets or keep up with increased estimates of decommissioning costs, which have almost doubled since March 2004 to £23.5 billion in March 2021. “In response, government has chosen to top up the Fund with taxpayers’ money.”

In 2020, nuclear power accounted for 16% of UK electricity generation, and the timetable for the closure of the seven nuclear stations by 2028 will result in a significant reduction in the UK’s generating capacity. While DBEIS acknowledges there will be a gap in generating capacity, “it is not concerned with there being a shortage owing to its confidence that electricity capacity could be bought from other sources ahead of time.” The Committee recommends that DBEIS and EDF together should “double-check whether it would be technically feasible, safe and cost-effective to extend the lives of any of the remaining operating stations”.

DBEIS recently reached agreement with EDF that, after it defuels the AGR stations, ownership of the stations will be transferred to the Nuclear Decommissioning Authority (NDA) to complete decommissioning. The pace at which the stations can be defueled could have a big impact on the costs, between £3.1 billion and £8.0 billion depending on the time taken, and the Committee says the handover agreement does not appear to sufficiently “incentivise cost efficiency and ensure a smooth transfer of defueled stations to the NDA”. The Committee is also concerned about the NDA’s capacity to take on the seven AGR stations in addition to its other responsibilities, including decommissioning the Magnox reactors, which the PAC has previously reported on.

Sir Geoffrey Clifton-Brown MP, Deputy Chair of the Public Accounts Committee, said: “Our current generation of nuclear power plants are reaching end-of-life and there is huge uncertainty over the risks and timescales of decommissioning and commissioning this energy infrastructure. But we are seeing clearly the near-term risks of having to import energy.  Government must prioritise the deliverable, safe and efficient plan to decommission these facilities and sustainably replace energy production that we owe to future generations, to alleviate the impact of rising energy costs on the public and business and insulate the UK from disruptions to our energy supply.

“The decommissioning dates of these power stations were clear decades ago. The Government should have been commissioning this replacement at that time, so that by now they would be generating base load power into the grid. For these major projects with long lead times, effective forward planning by Government is essential.”

PAC report conclusions and recommendations

6. Government’s investment strategy for the Fund has delivered poor returns and has resulted in the taxpayer having to top-up the Fund with an additional £10.7 billion in just two years. As at March 2021, the total value of the Fund was £14.8 billion, of which around 80% was invested in the National Loans Fund which in recent years has earned a very low return. In contrast, the Fund’s investments in private sector assets, which are about £3 billion, have generated returns of 6.2% on average in the three years to 2020-21. The Department told us that the low performance of the Fund had been clear for some time but that it had received a clear instruction from HM Treasury about the investment approach to be taken. The Fund has for the last seven years failed to meet the target return judged necessary by the Fund trustees to meet the expected costs of decommissioning. As a result, the taxpayer has had to step in to strengthen the position of the Fund. In 2020-21 government provided a £5.1 billion top up because of increases in decommissioning costs and low returns from the investments. Following an increase in the rate of corporation tax, HM Treasury agreed to provide a further £5.6 billion of taxpayer support in 2022.  Both top-ups have been made on condition that the money is invested in the National Loans Fund with a very low return. However, HM Treasury and the Department informed us that top-up funds placed in the National Loans Fund do not have an impact on the taxpayer at the current time as they are transfers within the Exchequer and do not require cash to be raised or ringfenced at the point of investment. However, this means that the investments in the National Loans Fund do not represent a cash fund which the government is accumulating to pre-fund these liabilities. Any future drawings from the assets held in the National Loans Fund will require additional tax receipts to be raised from future taxpayers or Exchequer borrowing.   

Recommendation: HM Treasury and the Department, working with the trustees of the Fund, should within twelve months review the investment approach and write to the Committee setting out the expected performance of the Fund based on the chosen investment strategy and the extent to which this will avoid further calls upon the taxpayer. The departments should set out the rationale underpinning the investment strategy, in particular the split between investment placed in the National Loans Fund earning a low return and the sum invested in higher performing private sector assets.  

7. The estimated cost of decommissioning has nearly doubled since 2004-05 and there remains a significant risk that the costs will rise further. The estimated cost of decommissioning the AGR stations, plus the PWR at Sizewell B, has increased from £12.6 billion in 2004-05 to £23.5 billion in 2020-21 in real terms. There remain significant uncertainties that will need to be managed to prevent further increases in costs and ease pressures on the Fund. The cost of defueling will depend on the stations not closing significantly earlier than planned and how quickly they can be defueled once electricity generation ceases. EDFE’s latest decommissioning cost estimate excludes the early and unplanned closure of Dungeness B in June 2021, which could increase costs further by up to £1 billion. We have previously reported on the decommissioning of the Magnox stations, the first generation of nuclear stations, where uncertainty over the condition of the sites and how to approach the decommissioning task led to increases in estimated costs worth billions of pounds. However, we were informed that the Magnox stations have all now been defueled, furthermore Bradwell is the first Magnox station to enter the care and maintenance stage of the decommissioning process. The Department accepts that the circumstances of the AGR stations may change and therefore so would the estimates of the costs of decommissioning them.

Recommendation: As part of the 2022 revaluation of the decommissioning liabilities, the Department, working with the trustees of the Fund, should ensure the estimates make explicit allowance for the risk of optimism bias. The Department should report back to the Committee on the new estimates when they are available.  

8. The terms of the 2009 sale of the nuclear stations agreed by the Department with EDFE placed a disproportionate amount of risk for meeting future decommissioning costs on the taxpayer. The negotiations surrounding the sale of the stations to EDFE in 2009 were focused on maintaining operations, with less attention paid to meeting the costs of decommissioning. Although EDFE successfully extended the lives of all the AGR stations, which bolstered the UK’s capacity to generate electricity, there was no requirement to extend the contributions made by the operator to the Fund despite increasing decommissioning costs. The history of the AGR stations and the operation of the Fund provides important learning for government for planning and funding the decommissioning of new nuclear stations. For example, around the need for planning for decommissioning from the beginning of a new nuclear programme and having mechanisms in place to adjust operator contributions to any decommissioning fund in line with changes to the estimated costs of decommissioning. The Department expects the financial risk associated with decommissioning future nuclear power stations to be lower than that experienced with the Magnox and AGR programmes as the need for decommissioning will have been built into the design from the start.   

Recommendation: As proposals for building new nuclear stations are firmed up, the Department needs to learn lessons from AGR decommissioning for how the decommissioning of new nuclear stations will be funded, for example linking contributions more closely to reliable estimates of liabilities, and building in mechanisms for adjusting contributions from operators should estimates of liabilities increase. 

In addition, the Department should report to the Committee within three months about what decommissioning improvements have been built into Hinkley Point C and what proposals there are for the proposed new small modular reactors.   

9. EDFE’s timetable for the closure of the stations will result in a significant reduction in the UK’s generating capacity until new capacity comes online. In 2020, nuclear power accounted for 16% of UK electricity generation. The closure of seven nuclear stations by 2028 will therefore have a significant impact. EDFE considers that the AGR stations will be reaching the technical limit of safe operations and so their use could not be extended while we wait for new generating capacity of come online. Only the existing PWR station at Sizewell B and the new station at Hinkley Point C are expected to be operating when the last of the AGR stations closes. While the Department acknowledges there will be a gap in generating capacity, it is not concerned with there being a shortage owing to its confidence that electricity capacity could be bought from other sources ahead of time. The UK’s old nuclear station sites could be reused as locations for the development of new small modular reactors. Both NDA and EDFE told us they are in active discussions with parties interested in exploring these new opportunities. 

Recommendation: The Department, working with EDFE, should double-check whether it would be technically feasible, safe and cost-effective to extend the lives of any of the remaining operating stations if needed. 

The Department and NDA should publish plans within 12 months setting out how they will make best use of NDA’s nuclear sites in future, including whether they are suitable for new nuclear infrastructure, such as modular reactors. In particular they should clarify how the transfer to the NDA from EDFE will allow for these Modular reactors. 

10. We are not convinced the Department has struck the right balance in incentivising the NDA and EDFE to deliver safe and efficient defueling of the AGR stations on time while reducing costs. The Department has introduced financial incentives to encourage cost-efficient defueling and station transfer with EDFE potentially earning or paying out £100 million depending on its performance. EDFE estimates the costs of defueling could be between £3.1 billion and £8.0 billion. The speed at which it can be undertaken safely will dictate the final costs. Successful defueling will depend on all parties being ready and working together, including the NDA being ready to receive and dismantle the volume of fuel arriving at Sellafield. Any delays in the defueling process could result in costs increasing substantially. Key to successful delivery is that stations close as planned, as premature closure of a station would mean that it would not be ready to start accelerated defueling. Making provision for a station to do so early could disrupt existing plans for decommissioning the rest of the AGR fleet. The early and unplanned closure of Dungeness B in 2021 has increased the estimated defueling costs by between £0.5 billion and £1.0 billion. There are significant risks to be managed and we are not convinced the Department’s financial incentive for EDFE to earn or lose up to £100 million, primarily directed at accelerated defueling, is sufficient to fully incentivise cost efficiency. The Department asserts that it has other measures it can use to direct EDFE but does not believe it will have to use them. 

Recommendation: The Department should write to the Committee within six months outlining how it will assure itself that the incentives are working and setting out the actions it will take if the incentives are not working. 

11. Arrangements for transferring nuclear stations to NDA are worryingly under-developed, and there is a risk that transfer negotiations between EDFE and NDA could drag on and increase the costs to the taxpayer. The first of the stations could transfer to the NDA as early as 2026. The NDA and EDFE believe there is sufficient time to prepare for the transfer of the sites. However, the negotiations between the Department and EDFE over the new decommissioning agreements did not provide clarity about what will be transferred to the NDA, when or how. Discussions between EDFE and the NDA to agree on the details only started in 2021. There is a risk that the costs associated with transfer to the NDA could increase. The issue of what happens to pension liabilities, for example, has yet to be worked through as are the precise details of the land and buildings to be transferred at each site. At the same as tying down these details, the NDA will need to develop its understanding of the sites and determine its preferred decommissioning strategy post-transfer. EDFE and NDA are currently working to identify and prioritise planning work for the transfer, but this is not yet complete. 

Recommendation: Within the next six months the Department, following discussions with NDA and EDFE, should write to the Committee with a detailed plan and timetable for how the transfers will take place. This plan should cover all the major aspects of the transfer including land and people, and it should identify where uncertainties remain, how those uncertainties might affect costs, and when they are likely to be resolved. 

12. Given the scale and complexity of decommissioning the AGR stations, we are concerned that the Department’s oversight of a complex set of governance arrangements is itself not subject to sufficient scrutiny and challenge. The Department is performing a variety of roles with regard to the decommissioning of the AGRs: it negotiated the decommissioning agreements with EDFE and has an ingoing role in ensuring the agreements work in the interest of the taxpayer; it is the sponsoring department of the NDA but will need to ensure that both the NDA and EDFE work effectively, for example to ensure that a site licence is granted by the regulator to the NDA prior to the handover of each station; and it has existing relationships with EDFE in relation to new nuclear projects. However, the centre of government has yet to put in place arrangements that can provide assurance that the Department is discharging its various responsibilities appropriately and that the decommissioning programme is performing effectively. The Department told us there were no immediate plans to include the programme in the Government Major Projects Portfolio (GMPP), which provides independent assurance of government’s riskiest or costly projects, but it expects it to do so when the stations transfer to the NDA. In the meantime, the Department is developing metrics that would be akin to GMPP to provide assurance to HM Treasury and Cabinet Office. However, these metrics have not yet been developed.

Recommendation: The Department should write to the Committee within the next six months setting out how it is assuring itself that it is discharging its oversight role effectively and detailing the current and future plans for reviewing the Department’s own performance. 

In addition, despite the Department’s assertions to the contrary, it should write to the Committee and explain why it shouldn’t place the programme on GMPP at an earlier stage in the transfer phase from EDFE to NDA so it can benefit from advice on the adequacy of the proposed transfer terms between EDGE and the NDA.