Sunday 7 July 2013

Davey denies offering EDF a nuclear blank cheque



Energy and Climate Change Secretary of State Ed Davey has denied that the Government is offering EDF a blank cheque for Hinkley C nuclear power plant. He is reported in the Guardian as putting his reputation on the line (' a personal test'), saying that "I am determined that the consumer or the taxpayer will not bear the risk of construction over-runs. Nuclear will get no preference in comparison with other low-carbon technologies."

 Now the first part of the sentence is more important than the second, assuming the Government does stick to that position, because the Government appears not to be keeping to the second part. Nuclear power is being offered much more favourable terms compared to renewables since nuclear, according to the same (Guardian) article, is being offered a 35 year contract for premium prices. Moreover, the Treasury announced ten days ago that EDF would be offered £10 billion worth of loan guarantees. Meanwhile contracts offered to renewable generators are only to last for 15 years, a reduction compared to the Renewables Obligation where the premium prices last for 20 years. And of course, renewables have not been offered £10 billion of loan guarantees! See

http://www.guardian.co.uk/politics/2013/jul/05/davey-minister-nuclear-power-hinkley-point

 But that still leaves the point that the Government still says that it will not underwrite EDF's construction costs. That is very significant and barring some incredibly high 'strike' price, is enough to stop the project. Why? Well, nuclear power is so very uneconomic partly because of the tremendous uncertainty over how much the plant will cost and how long it will take investors to get their money back. So the city will downgrade any investment that is dependent on hopeful cost estimates for construction costs. That is why 'underwriting' is so important for new nuclear power. It seems the Government has not offered (yet) to guarantee to pay for any construction costs overruns. Barring some national French Government priority being made for Hinkley C (that seems unlikely) investing in Hinkley C looks like a very unattractive prospect for EDF unless the construction costs are underwritten. This is in addition to being offered a higher strike price than the Government are apparently considering. The gap between the £10 billion offered by the Government and the £14 billion (or more??) that the project is set to cost according to EDF has to be filled by somebody, and banks will not do it without guarantees. Other sources of capital will not lend their money without very big profits being assured, and no assurances are on offer even if the prices offered by Government were good enough.

The strike price is another issue, with Hinkley C being unattractive at less than around £100 per MWh even with the 35 year contract and £10 billion worth of loan guarantees. The Treasury has been talking about around £80 per MWh. There is more to come as well. Renewable generators have been offered a deal based on the 'consumer price index' (CPI) being used to uprate the contract-for-differences (CfD) strike price which (as discussed in a recent blog post) is inferior to the retail price index (RPI). This matters to EDF since its future income stream would be much less using CPI as an inflation adjustment as opposed to using RPI.

 All in all, Hinkley C looks, on the basis of the Government policy, to be an unattractive investment. That is not because the Government are giving preference to renewables - quite the contrary since nuclear is being offered a better deal on key issues - but it is a measure of just how uneconomic nuclear power is. Indeed, some people are even calling for electricity to be part re-nationalised so that we can have nuclear power. See http://www.utilityweek.co.uk/news/news_story.asp?id=198843&title=Come+back+CEGB

Given that the UK is so firm on the notion that liberalised, privatised markets are the best way to achieve best value for the consumer in industries like electricity, why is it suggested that state ownership is the way forward for nuclear power? Could it be precisely because nuclear power does not represent good value for the consumer?

 You would think that no other country in the world could get by without building more nuclear power stations! Why do some British people think we need them so bad? Maybe it is a feeling for the old times - after all, the UK was the last country to phase out steam engines from mainline railways!
 I respect Ed Davey for announcing his refusal to budge as a personal test, but the Government has already shifted its ground so much towards offering nuclear power better terms than renewables, that Ed had better watch out before he risks getting a lot of egg on his chin. After the Lib Dems debacle over tuition fees, anyway, their credibility on sticking to cast iron commitments is not exactly riding high!
 But the point is that if Ed is telling us the truth, and he’s not going to budge, why not give the loan guarantees to renewable schemes.....tidal stream and offshore wind projects could do with that £10 billion, and we would get more renewables going as a result.

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