Location, location, contamination

In September 2004 the UK government’s Department of Trade and Industry (DTI) published a six-page policy statement, The Decommissioning of the UK Nuclear Industry’s Facilities, which followed the November 2003 public consultation on Modernising the Policy for Decommissioning the UK’s Nuclear Facilities. The policy statement from prime minister Tony Blair’s ‘New Labour’ government was remarkable because it represented a major change in the presumed fate of retiring nuclear sites – they would no longer be fully cleaned up.

This view was apparently shared by the government’s independent Radioactive Waste Management Advisory Committee (RWMAC), which had advised ministers in March 2003: “In the committee’s opinion, any perception that sites can be returned to a totally uncontaminated greenfield status, such as existed before the nuclear facilities were built, is likely to be unrealistic for the vast majority of large installations.” Unusually both sides of the nuclear debate – private sector decommissioning businesses and green environmentalists – were privately worried; businesses need a level playing field of agreed remediation standards to drive innovation and generate commercial cleanup revenues, while environmentalists want tight cleanup controls to protect communities from what they regard as a potential nuclear contamination threat.

The government pointed out that the new policy retained many of the key principles of the original 1995 policy statement of prime minister John Major’s Conservative government: decommissioning should be undertaken when it is reasonably practicable to do so; regulatory approvals will still be required; and plant operators must not take steps which foreclose decommissioning options. But what had changed was the government’s view that there might, in the future, be more potential uses for decommissioned nuclear sites than were previously considered in the 1990s, and that site restoration to a standard allowing unrestricted future use might not always represent the ‘best practicable environmental option’ (BPEO) – a longstanding British regulatory concept originally developed by the Royal Commission on Environmental Pollution (RCEP) three decades ago in 1976.

The government argued that BPEO sometimes had insufficient flexibility, for example in circumstances where it may be more environmentally disruptive to move radioactive contamination from one location to another – in Britain sometimes referred to as the ‘Dig and Drigg’ approach, named after the national radioactive waste disposal facility for low-level wastes at Drigg near the Sellafield site in northwest England. Instead the government’s nuclear decommissioning policy now envisaged a range of different end uses for nuclear sites – ranging from industrial and commercial use to completely unrestricted uses such as for housing, schools and farming – and accordingly that the sites of the decommissioned nuclear facilities may represent a potentially valuable economic resource. The government had in effect put up a ‘For Sale’ sign and entered the nuclear property market.

The relaxed decommissioning policy has brought about a ‘sea-change’ from a position where good environmental performance that was once seen to add real value to nuclear companies, is now regarded rather less favourably as something of a regulatory straitjacket on nuclear operations. But despite the natural tendency for industry to blame regulators for pushing up decommissioning costs, relaxing cleanup standards may prove to be commercially unwise in the longer term because setting tough but transparent standards for land restoration has two obvious business advantages: it provides a driver for innovation – without R&D investment, clean technologies don’t just develop by themselves; and it reduces total lifecycle decommissioning costs by establishing a clear goal or target for final site clearance. The effect of the new decommissioning policy has been to create a shift away from a tough but well understood level playing field of fixed radioactive cleanup standards to a much more flexible – but by the same token inherently uncertain – system of negotiated cleanup ‘end states’ that has now been enshrined in the Energy Act 2004.

The Nuclear Decommissioning Authority’s (NDA’s) five-year strategy document is required by the Energy Act to include details of the condition to which each of its nuclear sites are to be restored. The review of nuclear site end states is a key part of the NDA strategy since this will dictate both the likely speed and timescale, and therefore ultimately the total cost to taxpayers, necessary to complete each site’s unique nuclear decommissioning programme. Every site is considered on its own merits, requiring complex regulatory safety cases for the five key decommissioning stages comprising of plant shutdown, post operational cleanout, care and maintenance, plant decommissioning and finally land restoration. The central question around the negotiated final end state is the extent to which radioactivity will finally be removed from a site and whether any contaminated structures or ground contamination will be left behind.

In practice land restoration is likely to be a multi-staged process in which the nuclear site boundary gradually shrinks over a number of years, as the lightly contaminated ‘outer zone’ is cleaned up and sold off, keeping the more difficult ‘inner zone’ under longer-term governmental control. This is a politically tricky area because regulatory decisions on delicensing and the leasing or sale of formerly contaminated nuclear property often raise difficult questions of public confidence that go beyond purely technical radiological protection reasoning. They enter the real-world realm of buyer perception and market economics, where costs and benefits can’t always be reduced to a simplified financial equation.

The property market

A basic problem with the government’s commercial outlook for selling off parts of old nuclear sites is that while the property investment market generally favours flexibility and choice for developers, it is extremely sensitive to uncertainty, especially where potentially hidden financial liabilities from any residual radioactive contamination may be concerned. For example, in his book Environmental Risk Management and Corporate Lending, Phil Case, a former environment director of the British high street bank Barclays plc, points out that even after a favourable scientific assessment of the environmental status of a commercial property has been completed, lenders funding investment – and crucially their professional advisors – must consider what a buyer would actually be prepared to pay for it, especially if the banks might need to recover their business loan. This is where judgements must be made of market sentiment, where logic and science sometimes have to take second place.

Early decommissioning might make sense on financial grounds for a few high land value premises located in southeast England within commuting distance of London such as Harwell in Oxfordshire, or Winfrith in Dorset, where there is a stronger economic case for full cleanup. But land use arguments stand up less well for the majority of nuclear installations dispersed widely around the British coastline. Even over relatively long commercial timeframes it is hard to see remote sites such as Sellafield or Dounreay becoming diversified economic centres with valuable commercial real estate. Moreover, Britain’s next generation of nuclear reactors will probably be built on expanded nuclear power station sites rather than make use of decontaminated land. Construction will take place adjacent to the existing sites, effectively expanding them onto undeveloped greenfield property nearby. Even if proposals for accelerated decommissioning of retired Magnox nuclear power stations within a relatively short timeframe of 25 years or sooner are achieved successfully, the partially restored land is still not likely to be available in good time for the first tranche of new nuclear stations expected to be built during the 2010s and 2020s.

The NDA Annual Report & Accounts 2006/7 reveals that in March 2007 the total land assets of the NDA’s 20 nuclear sites was estimated to be worth some £3.6 billion, while its decommissioning liabilities were estimated as costing £72.7 billion; the costs of decommissioning were a factor of 20 times greater than the value of the land. This simple relationship illustrates a basic problem with the business case for selling decontaminated nuclear property; economically speaking, it is not likely to be worth the effort involved as the government will most probably lose 95% of the money invested in the cleanup operation.

Experience in other sectors has shown that the cost of remediating contaminated land is not matched pound for pound by an increase in the residual value of the cleaned up property. An element of stigma usually remains in which formerly contaminated properties almost always sell for less than the cost to clean them up. The financial risks are highest before cleanup, then decline during cleanup, and reduce further still when cleanup is completed, but the ‘cost to cure’ is rarely balanced by a corresponding increase in the total market value of the site.

This ‘diminution value’ has triggered a general reluctance by banks to lend money in certain sectors, especially to smaller enterprises where there is greater chance that the business might fail, leaving banks with direct liability for contaminated properties. The lending chill factor experienced in the USA during the 1990s reflected concern by banks that contamination is an unknown, especially before cleanup, and unknowns create uncertainty which is tantamount to greater risks for banks lending money for commercial and industrial real estate.

Unfortunately it is precisely the smaller embryonic firms that are most likely to want to locate at diversified nuclear science parks such as the Harwell Science and Innovation Campus, as the former nuclear sites and their workforce make the difficult transition from ‘big science’ government funded nuclear projects to much smaller scale niche commercial science-based businesses. These small high tech businesses face a difficult obstacle: banks prefer to lend money to big organisations that don’t really need it. The large, financially robust, well run ‘blue chip’ companies that are most able to afford unexpected environmental costs are equally unlikely to default on bank loans, which are backed by various forms of financing collateral such as equity, shares and cash. On the other hand, smaller riskier enterprises that might be attracted to nuclear science parks are much more likely to offer only land and property as loan collateral. For these firms it is essential that the true residual value of the land for mortgage lending is accurately known by the bank because these smaller nuclear companies present a much higher credit risk than blue chip firms.

The overall weakness of the government’s sale strategy for nuclear property is that the factors which tend to attract smaller businesses to cleaned up sites – access to a highly skilled resident labour force, collegiate atmosphere, and some measure of government and political encouragement – must be offset against the financial risks perceived by investors and lenders of locating businesses on redeveloped nuclear land. Since lenders provide a large proportion of the capital for commercial and industrial real estate development and acquisitions, the withdrawal of this source of capital could have significant knock-on effects on commercial real estate values and prices that the government is realistically able to achieve for the sale of cleaned up nuclear sites.

The lesson for government is that it is very difficult to make real money from selling cleanup sites to multitudes of small businesses. There are good reasons for decommissioning retired nuclear plants but land and property incentives should not drive the UK’s cleanup mission. The best commercial future of nuclear sites lies in attracting big business to build replacement nuclear power stations.

Ian Jackson is the author of Nukenomics: The Commercialisation of Britains Nuclear Industry, to be published by Nuclear Engineering International in April 2008. Ian Jackson, Jackson Consulting (UK) Limited, PO Box 142, Newton le Willows, Cheshire WA3 2WB, UK