Saturday, 3 September 2016

EDF leaders get desperate over Hinkley C

EDF leaders are now in such a state of panic over their Hinkley C proposals that desperate messages were being sent out to tell the British Government that they need to take a £6 billion equity share in the proposal. Signals are coming from Downing Street that the Government wants to decouple Hinkley C from the 'deal' with China allowing them to build their own nuclear power plant at Bradwell. The Chinese have responded that they would no longer be interested in funding their (approx one third) share of Hinkley C.

A Chinese response of withdrawing from the Hinkley C deal would be entirely logical from their point of view since the only point of taking a huge risk of funding Hinkley C would be the possibility (in their imagination at least) of opening up a western market for their own nuclear power stations. The 'deal' with China was always a bizarre arrangement compared to the normalities of building power plant and really reflects earlier desperate attempts by EDF and some pro-nuclear allies in the UK to prop up what had become, by 2012, a project of increasingly dubious commercial realities.

I know that some people still occasionally produce projections that on the basis of the now notorious 35 year contract to pay EDF £92.5 per MWh in 2012 prices (now worth about £97 per MWh) EDF can still make a profit on a rate of return of around 7 per cent. But, and this is a VERY important 'But' without a) the ability to finance the bulk of this from bank loans as opposed to equity capital which needs to be serviced by much higher returns and b) any reasonable certainty that the project would be delivered relatively close to projected cost and timescale, then the scheme is something that no sane boardroom in the private sector could possibly ever contemplate taking on.

The Treasury has quietly edged away from offering the sort of guarantees that would have allowed EDF to take out bank loans to finance the deal - fearing quite rightly that the guarantees would most likely be transformed in the fullness of time to a state funded blank cheque. Meanwhile the construction disasters for the Hinkley-style EPR models in Finland and France have  made the achievement of cost and timescale delivery projections look like, as they say these days, a 'heroic' ambition.

So it is no surprise that there would be no private sector takers for the Hinkley C investment. Centrica withdrew their plans to invest in Hinkley C in 2012, and remember that the previous year the other privately owned big electricity companies had walked away from the British nuclear programme. But a foreign Government with their own techno-political agenda, China, then decided, in effect that Hinkley C might act as a 'loss leader' for their ambitions to be major nuclear exporters. I think this hope is much misplaced and that China should stick to exporting the solar panels, but I shall reserve that story for another time.

Of course if one country has a political agenda in investing in another, then it is hardly a surprise if the host country (in this case the UK) considers its own political agenda, as we read in the papers. But the point here is that this issue (China's involvement) only arises simply because the Hinkley deal is commercially inferior to the various other clean energy options that the UK has at its disposal, none of which will have any major problems in delivery or financing. The only problem here is that the Government does not want to offer any long term contracts for them - and is even (now) delaying offering contracts for some more offshore windfarms.

People can often be heard to say that nuclear power is needed to provide energy security. Yet what is remotely secure about the technology which you don't know whether or when it will be delivered? Indeed, this produces the opposite - insecurity!

EDF's desperate plea that the British Government take over the Chinese share in Hinkley C is unlikely to be welcomed by Treasury officials who would (or at least should) see that as tantamout to locking in the British state to shovelling money down a black hole, with a lot more inevitably following the first £6 billion equity.

See FT report:

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