Month: October 2013

The UK’s innovation deficit and how to repair it

I’ve written a working paper about the long-term decline in the research and development intensity of the UK’s economy, which has just been published on the website of the Sheffield Political Economy Research Institute here. It brings together many of the themes I’ve been writing about on this blog in the last few years. Here is its introduction.

Technological innovation is one of the major sources of long-term economic growth in developed economies. Since 1945 countries like the UK have enjoyed a remarkable run of sustained growth and improvement of living standards, associated with the widespread uptake of new technologies – cars and aircraft, consumer goods, computers and communication devices, effective new medicines, all underpinned by the development of new materials, chemicals and electronics. Now the UK is undergoing its deepest and most persistent period of slow or no growth for more than a hundred years. Is there any connection between this growth crisis and innovation – or lack of it?

The UK is a much less research and development intensive economy than it was thirty years ago, and is less R&D intensive than most of its rivals; this R&D deficit is most prominent in applied research funded and carried out in the business sector, and in government funded strategic research. Innovation can and does happen without research and development as understood in its conventional sense; innovation through organisational change and novelty in marketing, often using existing technology in new ways, can make significant contributions to economic growth. But at the technological frontier the development of new products and processes requires targeted investment of people and resources, and it is the capacity to make such efforts that is lost as research and development capabilities are run down. This loss of innovative capacity is not an accident; it is a direct consequence of the changing nature of the UK’s political economy. In the private sector, a growing structural trend to short-termism driven by the excessive financialisation of the economy, and an emphasis on “unlocking shareholder value”, has led to an abandonment of more long-ranged applied research. The privatisation of sectors such as energy has brought these pressures for short-termism into areas previously thought of as of strategic importance for the state. Together, these factors have led to the systematic liquidation of a significant part of the national infrastructure – both public and private – for applied and mission-oriented research.

Research and development are global activities; the benefits of new technologies developed in one part of the world diffuse across national boundaries, so R&D needs to be considered in a global as well as a national context. The declining R&D intensity of the UK displays in the most acute form a wider problem –
highly financialised market-centred capitalism, while it is it is good at delivering some types of incremental, consumer focused innovation, doesn’t favour more radical innovation which requires larger investments over longer time horizons. We currently are seeing serious global slowdowns in innovation in the pharmaceutical sector and in energy sectors. The former is a particular problem for the UK, because has a strong specialization in the pharmaceutical sector. The slowdown in energy innovation is a problem for everybody on the planet.

The example of energy illustrates why the development of new technology is so important. We depend existentially on technology, to deliver the cheap and abundant energy that our economies depend on, for example. But the technology we have isn’t good enough; the cost of extracting fossil fuels from the earth rises as the most accessible reserves are exhausted, and the consequences for the stability of the earth’s climate of burning fossil fuels become ever more apparent. We need better technologies not just to ensure the continuously rising living standards we’ve come to expect, but also because if we don’t replace our currently unsustainable technologies with better ones living standards will fall.

We should not be fatalistic about a slowing down of innovation in crucial technology areas, either nationally or globally. The slowing down of innovation isn’t a consequence of some unalterable law of nature, nor is it because we have already “taken the low-hanging fruit”. Innovation is slowing down because we have collectively chosen to devote fewer resources to developing it. We need as a society to recognize the problem, recognize that current policy for innovation isn’t delivering, and take responsibility for changing the current situation.

The rest of the paper can be downloaded here.

The UK’s nuclear new build: too expensive, too late

Seven years after a change in UK energy policy called for a new generation of nuclear power stations to be built, today’s announcement of a deal with the French energy company EDF to build two nuclear power plants at Hinckley point marks a long overdue step forward. But the deal is a spectacularly bad one for the UK. It locks us into high energy prices for a generation, it yields an unacceptable degree of control over a strategic asset to a foreign government, it risks sacrificing the opportunity nuclear new build might have given us to rebuild our industrial base, and it will cost us tens of billions of pounds more than necessary. It’s all to preserve political appearances, to allow the government to appear to be abiding by its unwisely made commitments.

The UK is committed to privatised energy markets, no subsidies for nuclear power, and is unwilling to issue new government debt to pay for infrastructure. An opposition to state involvement in energy seems to apply only to the UK state, though, as this deal demonstrates. EDF is majority owned by the French Government, while the Chinese nuclear companies China General Nuclear and China National Nuclear Corporation, who will be co-investing in the project, are wholly owned and controlled by the Chinese government. The price of this investment (as reported by the FT’s Nick Butler) is some as yet unspecified degree of operational involvement. It seems extraordinary that the government is prepared to allow such a degree of involvement in a strategic asset by the agents of a foreign state.

The deal will not, it’s true, be directly subsidised by the UK government (except, and not insignificantly, for an implicit subsidy in the form of a disaster insurance guarantee). Instead future electricity consumers will pay the subsidy, in the form of a price guarantee set at around twice the current wholesale price of electricity, to rise with inflation over 35 years.

The quoted price for two European Pressurised Water Reactors of 1.6 GWe capacity is £16 billion. The first of this reactor design to be built, at Olkiluoto in Finland, started out with a price of €3 billion, but after delays and overruns the current estimate is €8.5 billion. So the quoted price for two of £16 billion – €9.45 billion – bakes in this cost overrun and adds a little bit more for luck. How much of this £16 billion will come back to the UK in the form of jobs and work for UK industry? It is difficult to say, because no commitments seem to have been made that a certain fraction of work should come to the UK. Given the fact that the UK government isn’t paying for the reactors, it doesn’t have a lot of leverage on this.

How bad a deal is this in monetary terms? The strike price is £92.50 per MWh, falling to £89.50 if EDF goes ahead with another pair of reactors at Sizewell, fully inflation indexed to the consumer price index. A recent OECD report (PDF) gives some idea of costs; for reactors of this type operating in France it estimates fuel cycle costs as $9.33 per MWh, operations and maintenance at $16 per MWh, with $0.05 per MWh needed to be set aside to cover the final costs of decommissioning. Taking these together this comes to a little less than £16 per MWh. This leaves £76.50 per MWh to cover the cost of capital of the £16 billion it takes to build it. Assuming EDF manage to run their 3.2 MW of capacity at a 90% load factor, this gives them and their investors £1.9 billion a year, or a total return of £67 billion, fully protected against inflation, for their £16 billion investment.

How much would it cost if the UK government itself decided that it should invest in the plant? The UK government can currently borrow money for 30-40 years at 3.5%. The fully amortised loan for £16 billion over 35 years would cost £28 billion. Unlike the deal agreed with EDF and the Chinese, these borrowing costs would not rise with inflation. Even without accounting for inflation, the UK Government’s ideological opposition to borrowing money to pay for infrastructure carries a price tag of around £40 billion, that will have to be paid by UK industry and consumers over the next 35 years.

I do think we need a new generation of nuclear power stations in the UK, but this model for achieving that seems unsustainable. It’s time for a complete rethink. For more background on why we are where we are, see my last post, Moving beyond nuclear power’s troubled history.

Update at 8.40am 21/10: the Energy Minister, Ed Davey, said on Radio 4 this morning that there was a commitment for 57% of the value of the deal to be spent with UK firms. This isn’t mentioned in the press release.

Update 2, 22/20: The CEO of EDF was reported yesterday as saying that 57% involvement of UK firms wasn’t a commitment, but an upper limit. So I think my original comments stand.

Moving beyond nuclear power’s troubled history

It’s easy to be ambivalent about nuclear power, as my last post illustrated. Nuclear power does provide a low carbon source of energy at scale – if we are serious about decarbonising our energy systems we are going to need a new wave of nuclear power stations, not least to replace an earlier generation of ageing reactors. But nuclear enthusiasts seriously underestimate the scale of the problems that need to be overcome to achieve a large scale expansion of nuclear power. Civil nuclear power has a troubled history everywhere; in Japan consequences of the Fukushima disaster are very much part of current affairs, whose repercussions have spread to countries like Germany. To move beyond this troubled history, to a future in which nuclear power does provide safe and affordable low-carbon energy, we need to understand how this technology got to its current state.

The way in which the technology of civil nuclear power has unfolded was not inevitable; it was the result of the specific circumstances in which it was born and developed. In this sense nuclear power is a great example of the way in which technological trajectories are not pre-ordained; there are many possible paths that nuclear energy could have gone down. What has happened is an example of “technological lock-in” – the particular historical environment in which nuclear power was born put the technology on one particular trajectory, from which it is difficult to make a big jump (as argued in this article by Robin Cowan). This is important because it explains why the current state of the technology is probably not the best place to be given the problems we need to solve.

We can’t understand where we are with nuclear power without appreciating its roots in military technology. Continue reading “Moving beyond nuclear power’s troubled history”