Jeremy Warner's Outlook: Nuclear: Government guilty on all counts

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The Independent Online

Expensive, dangerous and likely to crowd out investment in renewables - that broadly summarises the view of this newspaper on nuclear energy. My own concerns about the options set out in yesterday's Energy White Paper and "nuclear consultation" are less to do with the safety of nuclear, or its merits versus renewables, as its financial viability and the Government's continued lack of urgency in pressing forward with plans to address Britain's looming energy gap.

On this front, the consultation paper again ducks all the important questions and therefore fails to take the debate any further forward than it was a year ago when the Government first formally came out in favour of new nuclear build.

There's no clear timetable, no long-term strategy for the disposal of waste, and no adequate costing of new nuclear build or explanation of how it might be funded. Not a penny could be raised in the City for the construction of new nuclear plant on the basis on this document.

Yet the Government rightly insists that decisions need to be taken "now" if nuclear is going to continue to play a part in Britain's energy mix. Long lead times mean that work must begin almost immediately if new plants are going to be ready to replace older ones as they fall due for decommissioning in ten years time. Despite recognition of the need for urgency, there is as yet virtually no evidence of it.

The same applies to other aspects of the Government's energy policy as outlined yesterday. In frustration, BP last night abandoned plans to build a carbon capture and storage plant at Peterhead in Scotland, kissing goodbye in the process to $50m already spent in preparation for this ground-breaking climate change project.

In another example of the paralysis that seems to grip the Government's approach to energy policy, the energy review delayed the award of the necessary public subsidy until November to allow a competition for the money to take place.

The decision reflects as badly on BP as it does on ministers, as progress with the development of carbon capture technology is a key component of efforts to control climate change. With Lord Browne, whose pet project this was, now gone, it appears that BP's commitment to environmental goals is beginning to falter.

Yet it is Government dithering which is the main mischief here. It will be the death of new nuclear build too unless someone gets a grip soon. When it comes to climate change and the implications of it for energy policy, ministers are very good at talking the talk, but they seem quite incapable of doing anything about it.

Three key components need to fall into place before there is any prospect of the private sector financing new nuclear build. Only one of these - speeding the planning procedures - has the Government yet got round to doing anything about. On one of the others - adequate plans for waste disposal and decommissioning - there is nothing of substance in yesterday's consultation. Nor is there any discussion of where an underground repository for nuclear waste might be located or how it is going to be paid for.

As for the third pre-condition - sustainably higher carbon costs - there is again no convincing explanation of how these are going to be guaranteed. Private sector investors and lenders would only commit to new nuclear build if they could be certain that alternative forms of generation would be forced to pay for their emissions through higher carbon costs.

The first phase of the European Emissions Trading Scheme has been a fiasco, largely because of the over-allocation of permits to German utilities. The second and third look like being more challenging, while the Government's own plans for emissions trading as outlined in the Energy White Paper also look quite tough. Even so, there's no guarantee that these schemes will sustainably push the price of carbon to the level needed to make nuclear - or for that matter, clean coal - cost effective.

In an article in The Times yesterday, Tony Blair said his Energy White Paper was practical but radical. In fact, it was neither. He also said that he had watched energy policy go from being a relatively quiet backwater to something taking on a strategic importance that could be as crucial to Britain's future as defence.

What utter tosh. Britain has known about its looming energy gap since the early 1990s, with North Sea oil and gas running out and ageing nuclear and coal-fired stations approaching the end of their their natural lives. This was never a quiet backwater. It is just that the Government has chosen to do nothing about it. Instead, it has adopted a Micawber-like attitude of hopeful expectation that somehow or other the market will provide.

There's a little bit of fiddling around the edges, but yesterday's White Paper doesn't anywhere near deliver the sense of urgency that Tony Blair, in his dying days as Prime Minister, now thinks is necessary. If he hadn't been so obsessed with Iraq's non-existent weapons of mass destruction, maybe he would have taken more notice of the Russian bear lurking in the undergrowth, laughing quietly into its vodka at Britain's negligent mismanagement of its future energy needs. The end result of all this prevarication is that Britain might become a nation almost wholly dependent on imported gas.

Doves get pushed off the MPC's perch

The hawks are once more in the ascendant on the Bank of England's Monetary Policy Committee, and rightly so after the shock of recent inflation figures. There are now clear signs of overheating in the UK and world economies. The Bank's work in addressing these pressures is plainly not yet done.

Minutes to the last meeting, published yesterday, show not only that there was unanimity in the decision to raise rates by a quarter point, but that there was a serious discussion as to whether the rise should have been as much as 50 basis points. The only thing that seems to have dissuaded these ultra-hawks from voting for more was that it might have been an over-reaction which would create downside risks to economic growth. Yet there was broad agreement that if the economy continued to expand as expected then the rate could be raised later.

Those City economists that had not already after last week's quarterly Inflation Report pencilled in at least one more quarter-point rise this year were hurriedly doing so after yesterday's news. My own forecast of four months back of rates rising to 6 per cent before they peak starts to look not so far-fetched as it did. With a still buoyant world economy set to be further inflated by US recovery early next year, it looks remotely possible they might go higher still.

As the MPC minutes note, growing debt means that there is an increased potential impact on household income if rates rise significantly from current levels. The housing market is already cooling fast in large parts of the country, though apparently not yet London. At 6 per cent and above, there would be financial distress for significant numbers of households.

Remarkably, however, credit is still growing strongly. The debate over whether this is supply or demand led, with the former said to be inflationary but the latter not, strikes me as somewhat academic. The bottom line is that there is still an awful lot of liquidity washing around out there feeding strongly rising asset prices and helping to underpin consumption.

In the corporate market, banks are falling over themselves to lend, or to climb aboard the latest big leveraged buyout, often on terms which in the past would have been regarded as reckless. Low levels of default in combination with ability to defray the exposure through syndication and securitisation has led to a growing trend to "covenant-lite" lending, where traditional checks and balances are abandoned. The phenomenon finds its mirror image in personal debt markets where interest-only and self-certified mortgages are now common place.

This is all evidence of overheating and good cause for policymakers to remain hawkish.

j.warner@independent.co.uk

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