Tuesday, 22 October 2013

On 21st October, EDF issued a press release titled: “Agreement reached on commercial terms for the planned Hinkley Point C nuclear power station.”
My aim in this article is to examine exactly what has been “agreed” and its implications for the likelihood of Hinkley C being built and if so, when. 
In the first paragraph of the press release, the claim in its given title above is qualified, when we read that “EDF Group and the UK Government have reached in principle an agreement on the key commercial terms for an investment contract of the planned Hinkley Point C…” [my emphasis here and in the quotations below.]
The release then goes on to list other “agreements” that have been arrived at, in addition to the “key commercial terms”.  These are
  • “Confirmation that the project will benefit from the Government’s Infrastructure Guarantee under terms and conditions to be agreed on.” 
·         “Letters of intent with equity partners.”
·         “The four main contracts for engineering and construction.”
·         “Terms for a Funded Decommissioning Programme for Hinkley C.”  This is not expanded on in the press release; it would be interesting to examine the terms.
The document then adds: “Finalisation of these agreements and construction of the plant are subject to a final investment decision.  The Government and EDF Group will work together to address the remaining steps which must be taken before that final decision can be taken.”
At the end of the document these remaining steps are listed:
  • “Agreement of the full investment contract.”  I suppose this means the contract being agreed in concrete rather than just, as at present, “in principle”.
·         “EDF Group to finalise agreements with industrial partners for equity funding and with Infrastructure UK for debt funding.”  I’ll come back to this later.
·         “A decision from the European Commission on state aid.”
So a final investment decision by EDF and any partners it may or may not acquire will only be taken after all the above steps are achieved. 
Nevertheless the document says, “Subject to a final investment decision by July 2014, the power station is expected to complete commissioning of the first unit [ie Hinkley C; the document envisages the possibility of Sizewell C being also commissioned in the future] in 2023.
But this is a big “if”, especially as required the steps two and three above are out of EDF and the Government’s hands.  As we have seen potential investment partners with EDF have not actually agreed investment in the project but only signed “letters of intent” to do so.  And it seems extremely optimistic to suppose that the European Commission will come to a decision on the Government’s proposal of state aid for the project in nine months, let alone that it would be favourable.  Some sources have suggested it might take years.
And what’s this with Hinkley C being built in 9 years from the final investment decision anyway?  Just two other EPR reactors of the type to be built at Hinkley are being built elsewhere in Europe.  In Finland the EPR began construction in 2005 with an estimate that it would begin operation in 2009; currently the estimate is that it will not begin operation until 2015 at the earliest; in France, the EPR started construction in 2007 with the estimate that it would begin operation in 2012; the latest estimate is that it won’t be completed until at least 2016.
By the “key commercial terms for an investment contract” is meant it seems the mechanism of “Contract for Difference”, which involves, the document helpfully explains, that once the plant is operational, “If wholesale prices rise above an agreed “strike price”, consumers will not pay extra.  If they fall below this price the generator will receive a top-up payment.”
So it is crucial what the “strike price” is to be set at and for how long.  Here the document is precise: it is set at:
  • “£89.5/MWh if Sizewell C goes ahead” and
·         “£92.5/MWh…if Sizewell C does not go ahead.”
This strike price, “indexed to inflation through the Consumer Price Index” will be maintained “for 35 years from the date of commissioning”.
It cannot be over-emphasised what a potential enormous financial burden this agreement places on future consumers and/or taxpayers.
The current wholesale price of electricity is just over half the £92.5/MWh figure and there is no way of predicting how electricity prices will move by the date Hinkley C is commissioned.  Indeed the prices of electricity from renewables are tending to fall at present.  Unless the wholesale price rises near the £92.5/MWh by 2023 or whenever Hinkley C is commissioned, consumers/taxpayers are locked in to paying enormous subsidies to EDF and whatever other foreign firms own Hinkley by then for a period of 35 years!
The document reports: “DECC forecasts…electricity from Hinkley Point C will be competitive with future gas generation as well as all low carbon energy sources.  It is estimated that the UK new nuclear programme will save households £74 a year in today’s prices by 2026-2030.”
They would, wouldn’t they?  But how can they possibly know?  The game is given away by the suspiciously precise figure of £74 a year.  When Edward Davey was tackled on this on Channel 4 News on October 1st he was forced to admit he could not defend the figure and that any such claim was problematic.  And he should know – he is after all the Secretary of State at DECC.  It seem to me that the status of the £74 claim is much that of the claim in the “Iraq dossier” that Iraq could deploy chemical weapons within 15 minutes, a claim that sounds impressive but actually has no basis in fact whatever.
What about the question of “equity partners”?  EDF had previously said it wanted to sell a 49% stake in the Hinkley project after the UK Centrica sold out its 20% stake in it in January this year.
The document says that “Agreement in principle on the scope of the UK Guarantees scheme [see below] and on the key terms of the investment Contract allow EDF Group to move ahead to secure partners for the financing of the project.  The share of the equity is expected to be: EDF Group: 45-50%; AREVA [the designers of the EPR planned to be built at Hinkley]: 10%; China General Nuclear Corporation and the China National Nuclear Corporation: 30-40% [between them].  Discussions are also taking place with a shortlist of other interested parties who could take up to 15%.”  So nothing is actually signed and delivered on this front yet.
The costs of constructing Hinkley C (including £2Bn costs already incurred) is estimated in the document as £16Bn.  65% of this cost is to be guaranteed by the Government under the “UK Guarantees scheme”.  Of course, another enormous subsidy since it will be financed by government debt.                                                                                      David Polden