Friday, 15 February 2019

New funding crisis looms for Hinkley C

It seems increasingly likely that the French or British Governments will be sinking more money into Hinkley C over and above what has already been agreed. EDF is close to failing to fulfil contract conditions necessary to be given loan guarantees by the Treasury. These conditions were set out in the agreement between the UK Government and EDF in 2013. This is because EDF's new French reactor at Flamanville continues to experience construction delays and seems unlikely to show good performance by the end of 2020 as required in the 2013 agreement with the UK Government.

The UK Government (in 2013) agreed a contract with EDF and agreed to pay them £92.50 per MWh for 35 years (2012 prices) from the date of commissioning. However, in addition the Treasury agreed to guarantee many billions of loans that EDF needs to borrow from banks on condition that the Flamanville 3 reactor was brought fully online by the end of 2020, something that now seems unlikely to occur.  It is only recently that EDF has begun serious construction of the Hinkley C reactor itself (as opposed to developing logistical support infrastructure), and given an expected 8 year timescale for completion of the twin reactor project, the reactors will not be fully operational until 2027 - of course, only if things go well.

The loan guarantees needed are estimated by Steve Thomas (1) to amount to £14 billion. Yet according to the UK Government's conditions, loan guarantees will only be approved, (according to the EU Commission's analysis of the documents)  if the the Flamanville power plant has fulfilled the performance requirements set by the Government during the 'trial operation period' by the end of 2020 (2). However, the trial operation period, that is after grid connection and first generation (3), is not going to start until, at the earliest, part way through 2020 itself. Even this dateline is highly likely to slip as the French nuclear safety regulator demands further assurances (4).  A trial operation period might be expected to last a year, so it will now be very difficult for EDF to fulfil the criteria set for the automatic granting of the loan guarantees. The point of this loan guarantee condition was that the Flamanville plant is of the same type (European Pressurised Reactor - EPR) as the design for Hinkley C.

If the Treasury refuses to give the loan guarantees because EDF had failed to satisfy the performance conditions attached to Flamanville then It would be pretty impossible for EDF to find £14 billion pounds out of its own resources. The French Government is now poised to re-nationalise the remaining (minority) of shares held in private hands as part of a process of rationalising the company to prepare it for the financial challenges of either refurbishing or decommissioning its ageing reactor fleet. Indeed the conditionality of financial guarantees in the Hinkley C deal formed a big part of the financial context which surrounded the resignation of EDF Chief Financial Officer in 2015.  Equity requires high returns to pay shareholders, and the potential reliance on such funding is very risky, and if EDF does not have the necessary loan guarantees the only way to complete the power plant would be to put the funding on its own balance sheet.

The outcome of this (delay at Flamanville) is that some financial restructuring of the Hinkley C now seems very probable, with either (or both) the French or British Governments taking on increased financial risk for the project. Of course the most sensible financial decision would be for the Government simply to use the terms of the contract to make EDF either pay for the rest of it or abandon it altogether.

The British Government could, under the cover of what has misleadingly been called the 'Regulated Asset Base' model, put in extra Government money, maybe in return for negotiating a slightly reduced return for EDF. But the cost of that would be that the UK Government would be taking on some of the construction risk, breaking the commitments made by Ed Davey as Energy Secretary in 2013, and, more to the point carrying the very probable outcome that the British taxpayer/consumer would end up paying billions of pounds extra for the likely cost-overruns. Perhaps the French Government could be pushed into providing some or all of this extra cash. Such a decision would rest on political calculations and would rate as a substantial further loss for the French Government and further drain on its finances.

Professor Steve Thomas has commented: 'If the plant was already under construction, the government could refuse to assist it and simply leave the plant to be abandoned part-built. All experience with large projects suggests this will not happen and the government will pour additional taxpayers’ or electricity consumers’ money into the project to ensure it was completed' (5)

It should be borne in mind that no nuclear power station built in the west this century has been built even close to its projected start date. We really should not believe all the stuff about how nuclear constructors have 'learned lessons', when the lessons we have learned are that the rose-tinted view of construction plans proferred by the developers have been worthless. The Treasury should use the opportunity of  EDF failure to fulfil the contract conditions concerning Flamanville performance to tell EDF either to pay for the Hinkley C itself or scrap the whole thing. Whether the Treasury has the sense or even the political ability to take this prudential step remains to be seen. As I and a great deal of others have been arguing, there's so much cheaper low carbon alternatives already available to supply the energy services necessary it makes no sense to increase the amount of of bail-out cash offered for Hinkley C. The project already resembles a financial black hole and if we do not watch this carefully the British Government will dig us deeper and deeper into it.


(1) page 9




(5) (pages 8-9)

Excerpt from EU document:
'The Base Case Condition is that satisfactory evidence has been provided that Flamanville 3 has completed the trial operation period and that the requirements of the Guarantor in respect of performance during such period have been met. The Guarantor has the option to extend the date for meeting the Base Case Condition into the future by increasing the amount of Base Equity and procuring that such increase benefits from the required credit support. The Base Case Condition date cannot fall later than 31 December 2020' ( page 50)


  1. I am interested - what are the timescales by which the Treasury could decide to not finance Hinkley C;

    "The Treasury should use the opportunity of EDF failure to fulfil the contract conditions concerning Flamanville performance to tell EDF either to pay for the Hinkley C itself or scrap the whole thing."

    Weeks/ months/ in time for a new Labour Government?


  2. Flamanville is supposed to be in commercial operation by the end of 2020, which is looking unlikely, so it would be in early 2021 that the Treasury could take a decision whether to extend bank loans. Now it could be that the French Government could do the underwriting of course, although the idea of the french Government in effect paying a lot of money to provide a power station for the British is interesting. But then by providing extra equity for the Hinkley C deal though the extra share issue (mainly taken up by the Government who owns most of the shares) they have done some of this already!