With ten new nuclear reactors on the UK horizon, the race is on to more than double insurance capacity to cover them. The taxpayer will not be happy if the government is forced to step in

It’s time to go nuclear. As the country’s creaking coal-fired stations approach their sell-by date, the UK government is racing to find an alternative solution that will fill the power supply gap and be kind to the environment. It believes the answer lies in much-maligned nuclear energy and, deaf to the cries of protesters, has announced plans for ten new nuclear reactors.

But, against a backdrop of increasingly demanding legislation, a nervous commercial sector and an overstretched national Treasury, the big question remains: who will insure them?

Currently, nuclear plants in the UK are insured by Nuclear Risk Insurers (NRI) – a Lloyd’s-centred underwriting agent pooling capacity from 20 insurers. Today, the nuclear insurance market’s global companies’ capacity stands at $2bn (£1.21bn), with $600m-$650m coming from the NRI.

But thanks to new legislation due to come into force, and the government’s ambitious nuclear building programme, that capacity needs to more than double to $5bn.

Getting its act together

The government itself admits that the commercial insurance industry in the UK is not ready for the planned power stations, but has yet to solve the problem. If it fails, it will have to step in itself as insurer of last resort – at a potentially huge cost to the taxpayer.

The situation is a tricky one, as the way that nuclear operators in the UK are held liable for any potential accident is governed by international treaties: the Paris Convention of 1960 and the Brussels Convention of 1963. They set an operators’ liability in the UK at £140m per site. But that’s all about to change.

The devastation wreaked by the explosion at Chernobyl in 1986, which is estimated to have cost hundreds of billions of dollars, showed that these liability limits were far too low. In 2004, after years of political wrangling, the country members of the Paris Convention finally agreed to a protocol raising the operator’s minimum level of liability per site.

According to the new rules, an operator’s minimum level of liability per site has risen to €700m. And that’s not all. Previously, only property, personal injury and death claims could be made in the event of a nuclear incident. Under the new rules, victims can claim for environmental damage and the economic consequences of a nuclear leak.

The UK government is expected to ratify the new rules within two years, meaning they will be in place when the huge nuclear building programme is rolled out, taking the demand for capacity to way beyond what is currently available.

Capacity crisis

The government has acknowledged that the insurance sector in the UK does not currently have enough capacity to help operators to meet the new rules. This has forced the Department of Energy and Climate Change to hire audit firm PricewaterhouseCoopers to draw up recommendations for a solution to the crisis.

“The government is aware that the nuclear insurance market cannot currently provide full cover for the greater liability for nuclear operators being introduced by the amended Paris and Brussels convention on nuclear third-party liability,” a spokesman says.

“That is why we are working with the nuclear insurers and others to see how this insurance gap might be addressed. We intend to go to public consultation on implementing the amended Paris and Brussels convention in the first half of next year.”

NRI’s managing director, Mark Tetley, believes the crux of the problem is the expanded definition of nuclear damage. “Capacity should be no problem on the old scope of damage. We are waiting to see whether the market can cover the new heads of damage,” he says.

So what if the market doesn’t step up? Tetley believes the government will have to provide the required back-up. “This is a new cover for the whole market and I think we may need some assistance while the market develops,” he says.

Aon power and utility practice leader Philip Veale agrees. “The ability to manage a large nuclear event is going to be one of the most crucial and difficult things to consider within the private industry … it is an equivalent challenge to a pandemic,” he says.

If the market cannot respond and the government is forced to act as the insurer of last resort, the taxpayer would ultimately pick up the tab; a move that is likely to fuel public debate about nuclear power.

The other alternative is a formal, legal undertaking by operators to pool their individual resources to provide a collective financial security. Leading nuclear energy expert Simon Carroll believes this is a viable alternative to both insurance and state intervention, but it would be difficult to implement across the EU.

The government wants the first new nuclear station to be fully operational by 2018. That gives the politicians around eight years to solve the problem of who is going to cover it. IT