Nuclear physics is a mysterious subject to most of us, but not nearly so incomprehensible as nuclear economics.
Consider the case of Hinkley Point C – a new nuclear power station that will be built in Somerset by the French state-owned power company EDF and two Chinese groups (the not-at-all sinister-sounding China National Nuclear Corporation and China General Nuclear Power Corporation).
Previous attempts to build EPR (European Pressurised Reactor) power stations at Olkikuoto in Finland and Flamanville in France have been dogged by construction delays and cost overruns. Why, then, would anyone want to have another go? The answer is that the British Government has promised them a ridiculous amount of money to do so. Just how ridiculous is set out in a new report from Liberum Capital:
“Based on the disclosure so far this looks likely to be an outstanding deal for Edf and its partners. On a leveraged basis we expect Edf to earn a Return on Equity (ROE) well in excess of 20% and possibly as high as 35%. We forecast that cash dividends of between £65bn to £80bn should be payable during the life of the Cfd.”
The ‘Cfd’, in case you were wondering, stands for ‘Contract for Difference’ – effectively an agreement to buy the electricity produced by the plant at a set price (or ‘strike price’ to use the jargon). For Hinkley Point C, the Government has agreed to a strike price of £92.50 per megawatt hour – that’s about double the going rate for wholesale power.
What’s more, the strike price is guaranteed for 35 years (much longer than subsidies for renewable power) – oh and it’s index-linked too:
“When the station commissions in 2023 the strike price will likely be above £121/MWh. For this to be competitive with fossil fuels, the gas price will need to have increased by at least 130% from today’s levels.”
If the fracking of shale formations in Europe has anything like the impact it’s had in America, then the price of gas will most likely go down not up – meaning that Hinkley Point will be an even worse deal when we start paying for it than it is now.
The report’s authors note that a build cost of £5 million per megawatt (MW) of generating capacity makes “Hinkley Point the most expensive power station in the world (excluding hydro schemes).” And that’s before one considers the opportunity costs:
“By way of contrast, for the cost of £16bn for the 3,200MW to be built the UK could build 27,000MW of new CCGT gas fired power stations solving the ‘energy crunch’ for a generation.”
It should also be noted that CCGT units would be up and running many years before Hinckley Point is completed:
“Edf has been given an astonishing 9 years to complete the construction. This makes Hinkley Point both the most expensive power station in the world and also the plant with the longest construction period.”
Ministers argue that it is EDF and its partners who are putting up the capital for this project – and that in striking a deal they have secured an investment of £16 billion for the British economy. Of course, if you or I had the power to force energy consumers to pay well over the odds for decades to come, then we could ‘secure’ billions in ‘investment’ too.
Of course, unless we want all of our new power stations to be gas-fired,we have to pay extra for the more expensive alternatives – be they nuclear, renewable or coal-fired. But if we’re going to subsidise these other technologies, then there needs be evidence that their costs will come down over time as we learn from their ongoing deployment.
The problem with nuclear power is that the more we learn about it the more expensive it gets. There is some hope that a new generation of nuclear power stations will make progress on both cost and safety. Hinkley Point, however, represents a last hurrah for the old generation.
Our Government has purchased an end-of-the-line product at a premium price.