Comparing public subsidies for nuclear and solar generation is mixing apples with pears.*



The public subsidy scheme being proposed by the Czech government to support the construction of two new nuclear power plants at Temelin is very different to the schemes used to support new solar power plants.

The Czech Republic is intending to model its nuclear subsidy scheme on the United Kingdom’s Contracts for Difference (CfD) nuclear price floor. The UK scheme is defined as ‘long-term contracts to provide stable and predictable incentives for companies to invest in low-carbon generation’.

The floor price set by the UK is £92.50 (~€108.225) for 35 years. In addition, the British government will underwrite the construction costs of the new power plants to the tune of £10 billion (~€11.7 billion). The CfD program description includes as well a plan to index the subsidy to inflation.

If the same scheme were to be implemented in the Czech Republic, as looks likely, CEZ would benefit not only from a guaranteed floor price but quite possibly from underwritten construction costs as well. Furthermore, CEZ would benefit if inflation rises faster than wholesale electricity prices in the future, which seems highly probable.

The historical tendency for power prices to move in a correlated fashion with GDP changes can no longer be taken for granted. Since 2008, inflation, GDP and electricity prices have started to decouple, a tendency caused by the large feed-in of renewable energy, with its negligible marginal costs of production. And given the assumption that the share of renewable production in the system is going to increase, we expect the downward pressure on wholesale electricity prices imposed by renewables to increase as well. At the same time, nominal prices, assuming inflation indexation at 2% a year, will double over the lifetime of the Temelin subsidy.

It may be tempting to see the CfD subsidy as nothing more than another version of the subsidies and feed-in tariffs offered all over Europe to producers of renewable energy. After all, both types of projects receive state support because they are said to be in the public interest and yet commercially unviable without this support.

In fact, there are substantial differences between the proposed CfD scheme in the Czech Republic and the typical renewable energy feed-in tariff schemes, such as that used in Germany.

Subsidies for renewable energy are structured in such a way that the net amount of money transferred to producers decreases over time as production becomes less costly. In contrast, the CfD scheme as proposed would establish a minimum price for purchasing energy produced by Temelin 3&4. As the real price and the minimum price diverge over time, the subsidy transferred to CEZ from the state will increase per unit of energy produced.

There is another difference too: the impact of each subsidy on technological advances.

Subsidies introduced for renewable energy producers have typically resulted in substantial technological improvements over time. Participants in the renewable energy value chain have strived to maximize their economic gain by reducing the capital and operating costs of their projects. In an important sense, renewable energy subsidies may be considered as R&D grants paid to businesses for delivering technological improvements.

In contrast, the subsidy introduced for Temelin 3&4 is unlikely to lead to any technological improvements. The reason for this stems from the way each subsidy is constructed.

Renewable producers in countries such as Germany sell their energy at decreasing prices each year, which means they have to increase their cost efficiency or see their profits eroded. They do not have a minimum guaranteed rate of return, only a maximum from which they could go down if they fail to innovate and optimize. While different national subsidy schemes for renewable energy have varied in the success with which they stimulate innovation and control costs, overall renewable energy has become greatly more economical in recent years.

In contrast, the subsidy for Temelin 3&4 in the form of a floor price will either stay the same or increase in real terms, giving CEZ little incentive to operate more efficiently.

In brief, where the renewable energy subsidies contain carrot and stick, the nuclear subsidy being proposed for Temelin 3&4 has only the carrot, or what the British government describes, without a trace of irony, as 'stable and predictable incentives'. Never has an industry been offered more stable and more predictable incentives to continue doing what it has been doing since the first nuclear power plant went into service half a century ago, in Shippingport, Pennsylvania.

If the nuclear floor price subsidy awarded to CEZ is €108/MWh (in 2013 prices) for 35 years (as is the case in Britain), the total annual subsidy payment from Czech consumers to CEZ would approach €1 billion, paid every year for 35 years. This payment amounts to 0.67% of 2012 Czech GDP; 1.17% of 2012 state revenues; and 16% of the state’s spending on education in 2012.

Quite a carrot.


*This is an edited excerpt from our second and final study on the economics of Temelin, TEMELINomics 2, which may be downloaded free from our website.