Monday, 25 June 2012

Funding Hinkley C is impossible for the Government

Barring some unlikely  bizarre manoeuvres  and political chicanery it is impossible for EDF to achieve the terms they need to fund even one nuclear project, namely the 3.2 GWe twin reactor project at Hinkley C.
How do I come to this conclusion? Because the sheer cost of the sort of contract that EDF would demand in order to proceed with the project at Hinkley C would be far too prohibitive for the Treasury to accept under the terms of the ‘Electricity Market Reform’ (EMR) as proposed in the recently issued Energy Bill. Using Peter Atherton’s analysis (Citigroup) of the ‘strike price' needed by nuclear, (£166 per MWh), then funding of Hinkley C would raise average electricity prices by 8 per cent over 30 years. This figure would be about 6 and a half per cent for domestic consumers and around 10 per cent for industrial consumers. (Under my own analysis of what financial markets would expect nuclear to be paid the figures look even worse for nuclear!)
This increase in consumer costs is politically impossible just for the production of 6 per cent of UK electricity (which is all that 3.2 GWe of nuclear is likely to generate). You could have twice as much electricity production from offshore wind turbines and solar pv projects and many times the production from onshore windfarms for that increase in prices. Yet the Treasury do not even appear to want to fund offshore windfarms at much lower prices than would need to be offered to EDF for Hinkley C. So EDF’s demands are out of the question.
One proposition to help nuclear power is to give state guarantees to enable cheap loans to be secured by EDF for the project.  It is the ‘blank cheque’ option since in practice the state would have to pay for  nuclear construction cost-overruns, as is usual. However, this also is highly unlikely. Although the price of any contract issued for Hinkley C generation would be reduced somewhat (although it would still be very expensive), this would also mean that the cost of Hinkley C (£14 billion) would have to be added to the Public Sector Borrowing Requirement (PSBR). This would do significant damage to the Government’s debt reduction plans and would likely mean greater cuts in public spending.

As if this was not enough, such an arrangement would be difficult to get through the EU’s rules on ‘state aid’ to electricity generation. Ironically, the European electricity companies have kicked up a fuss about renewables funding meaning that the protocols are quite strict. The Commission is unlikely to agree to member states giving blank cheques to major electricity companies for windfarms, let alone nuclear power.
Moreover, if you gave nuclear such help, there would be a queue of other people wanting the same treatment, with the various different parts of the renewables lobby at the head of the queue. In short , it really would be incredible if EDF got their way.

Of course the nuclear lobby (which includes the Department of Energy and Climate Change) will carry on issuing hopeful sounding press releases about the future of nuclear power. They cannot afford to admit that nuclear is far too expensive for the country to pay for it.

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