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New year, new nuclear: Hinkley fallout

A special extended bumper New Year edition

By Dave Elliott

The UK starts 2015 with a big new year headache- the Hinkley nuclear project. It is a huge uncertain project, and it is far from clear, if goes ahead, whether  it will prove to be a wise investment, given the fall in energy costs and the emergence of cheaper renewable alternatives. Last October, the European Commission (EC) agreed to let the UK government subsidize EDF to build the 3.2GW Hinkley plant, with two European Pressurised-water Reactors (EPRs), via a special allocation under the new Contracts for a Difference system, with potentially around £17.bn of public money being available. However tougher profit claw-back arrangements were requested, which may soften the impact on consumers bills.The EC also said that the proposed investment guarantee fee, which EDF would have paid to the UK Treasury, was too low for a project with this risk profile. So it was ‘significantly raised’, reducing the subsidy by more than £1bn. But there are still big financial risks, which taxpayers and consumers may yet be called on to meet if things go badly: this £24bn project may well be seen as too big to allow to fail. A 4 year construction-delay grace period has, it seems, been built into the contract. But even by 2023, when, all being well, it’s meant to start up, gas prices may be low (if you believe the rhetoric on shale gas). More likely, prices for wind and PV will be lower. Either way it could become a ‘stranded asset’, but with consumers still having to pay the high CfD index linked price for 35 years- and the possibility of a review of the price upwards after 15 and 25 years if operational costs are higher than expected. Quite a deal. Greenpeace described it as ‘the heist of the century’ and certainly a strong strategic and economic case had been put to the EC against it: www.bartlett.ucl.ac.uk/energy/news/european-commission-consultation.

For its part, at one point, the EC said that the internal rate of return would in theory be ‘below that typically granted to large generation projects in the energy sector, or to renewable energy generators funded through state aid.’ But it is hard to get to grips with the economics of such a large long-lived project: once built, it’s meant to run for 60 years. Using the term ‘profit’ in this context is a little odd- the plant would not be ‘profitable’ without the CfD subsidy to pay off initial loans and the financial risk would not be acceptable without the £10bn loan guarantee offered by the UK government. What the EC has done is to arrange to shave a bit off this support if, over its life, the plant gets built and works reasonably well. The CfD mechanism itself is also meant to ensue that if the market price it gets for its power is too high, that is clawed backed. http://europa.eu/rapid/press-release_IP-14-1093_en.htm

It’s a complex first of a kind package, but having been accepted, the way may now be clear for others to follow, in the UK and across the EU, if there is investment capital (from China?) forthcoming. In the UK, new contracts would have to be negotiated and, unless the government can somehow convince the EC that there is still a special need (it was argued that Hinkley was needed to fill an impending energy gap), they may have to be less favorable. The government might, in any case, find it hard to impose even more costs on consumers and taxpayers. But plants at Wylfa and Oldbury (Advanced Boiling Water Reactors), Sizewell (EPRs) and Sellafied (AP1000s) have been proposed -16GW in all. And maybe more after that- there has been talk of a 75GW by 2050 programme.

However the Hinkley project is still not a 100% done deal. The EC decision on state aid was far from unanimous, and some say it was rushed through before the then current commissioners retired from their posts. Indeed, according to the BBC, only 16 commissioners voted in favour of the project, just ahead of the 15 votes needed for approval: www.bbc.co.uk/news/business-29536793 With a new set of Commissioners now in place, the decision maybe challenged in the courts. Certainly Austria warned that it might do so and some UK lobby groups are likely to, including some representing renewable energy interests, a key issue being that the 35 year CfD support is beyond anything offered to renewables (they only get 15 years). So is the $10bn loan guarantee.

German environment minister Barbara Hendricks said the decision was ‘utterly wrong’: ‘As far as I know, the nuclear power plant Hinkley Point C will receive guaranteed prices for more than 30 years, which are considerably higher than our feed-in tariffs that are being decreased successively’. Germany aims to gets 80% of its power from renewables by 2050, may therefore join Austria (near 80% already) in challenging the EC decision: like Denmark (aiming for 100%), they may fear that investor funding for their renewables programmes could be undermined by heavy subsidies for nuclear projects elsewhere. No new nuclear projects are planned in France, but Areva welcomed the EC’s ‘positive signal for nuclear investors in Europe,’ which it said will help ‘consolidate the leadership of French nuclear industry in the third generation nuclear reactor market.’

Certainly there are those who want more nuclear power. Last year, the Czech Republic, Bulgaria, France,Hungary,Lithuania,Poland,Romania, Slovakia, Slovenia and the UK petitioned the EC, claiming that ‘market failures’ were preventing new nuclear build from supporting European goals for energy security, and calling for a ‘level playing field’ for all low-emission sources in the EU. They said National support mechanisms, consistent with the Internal Energy Market and the competition rules provided by the Treaty on the Functioning of the European Union (TFEU), may therefore be needed’, i.e. nuclear needed subsidies, to ensure competition!

With lobbying like this, and no doubt pressure from key companies, it’s perhaps no surprise that, in the event, the EC looked favorably on the UK’s proposed nuclear CfD/loan guarantee funding. That’s despite the absence of a competitive tendering/ auction process of the sort that UK renewables project now have to go through to get CfD contracts. Asked in parliament whether, prior to entering into negotiations with a single company for a new nuclear plant at Hinkley, DECC had invited tenders or expressions of interest from other companies, as required under Article 8 of EC Directive 2009/72, the then Energy Minister Michael Fallon said: ‘We do not consider that the potential investment contract for Hinkley Point C falls within the scope of Article 8. The investment contract, if agreed, is designed to be a market-based intervention to provide price stability for nuclear generation during the transition to a low carbon economy.’

Given that the Con-Lib Dem Coalition Agreement said in May 2010 that new nuclear power stations would be permitted only ‘provided that they receive no public subsidy’, there had been regular political insistence, from the Lib Dems especially, that the nuclear support arrangement did not involved public subsidies, or at least, that (as a fallback position), the support on offer was similar to that available to renewables. However, it’s hard now to see the Hinkley deal as anything other than a special arrangement designed to buttress nuclear with state aid. In its interim statement earlier last year the EC had said the measures proposed by the UK may not ‘avoid overcompensation’ and it had ‘doubts on the structure of the CfD for nuclear which, by its design, duration and scope, has the potential for distorting competitive conditions.’ It also doubted ‘whether the combination of aid measures, and in particular of a CfD with inflation indexation and a credit guarantee, is proportional to the potential benefits.’

Now the EC seems somehow to have been mollified and, after some minor adjustments , has bought into what nevertheless still seems to be the risk of significant market distortion and escalating costs. It does not bode well for the future of rational energy policy development, market-based or otherwise. With consumers likely to suffer and renewables being undermined. http://realfeed-intariffs.blogspot.co.uk/2014/10/hinkley-c-deal-likely-to-wipe-out-uk.html

Energy prices have become political issue, so much so that last year a ‘full market investigation’ of energy prices by Ofgem was set in train. It has been claimed by SSE that the Hinkley nuclear project, could ‘add considerable costs to consumer energy bills for 35 years.’ However Energy Secretary Ed Davey said: ‘The investigation will not deal with that, because it involves policy on the generation mix. A mixed, diverse source of low-carbon energy is the best way in which to protect the consumer’. You might expectDECC’s ‘CfDImpact Assessment’ to cover nuclear cost, but it notes that it does not cover ‘CfD policy applying to technologies and /or projects not subject to the “generic” CfD allocation process (including nuclear and CCS), which is still under development’.

However, buried deep in euro-commission minutes from 8 Oct., is an admission that there was ‘regret, expressed by some, that all the long-term costs for the British Treasury had not been integrated into the calculation of the cost of the project, for instance the cost of storing the nuclear waste or of dismantling the plant at the end of its lifetime’. So even the £24bn may be a bit of a fiction. www.independent.co.uk/news/business/news/treasury-rebuked-by-eu-over-hidden-nuclear-costs-9819900.html

All in, with insurance, capital loan costs and inflation also included, a total cost of up to £34bn or more has been cited, and an initial consumer/taxpayer costs of £2bn p.a. or even more. http://www.theguardian.com/world/2014/oct/08/hinkley-point-european-commission-nuclear-power-station-somerset  http://www.thetimes.co.uk/tto/business/industries/utilities/article4231296.ece  andhttp://www.greenpeace.org.uk/newsdesk/energy/analysis/comment-why-hinkley-bad-deal-uk-consumer

The National Audit Office has been looking at the Hinkley deal, but that’s retrospective, and maybe we wont know for sure what the impact will be until we see it on our bills! If it goes ahead. There are those who think that it’s an obsolete, over complex, design, and may be hard to complete as a viable commercial project. Moreover, although EDF is keen to follow it up with another at Sizewell, the rest of the proposed UK nuclear expansion programme is to be based on different designs (ABWRs, AP1000s), so there won’t be much opportunity for learning from serial development and for consequent cost reduction: http://www.carboncommentary.com/blog/2014/10/22/cambridge-nuclear-engineer-casts-doubt-on-whether-hinkley-point-epr-nuclear-plant-can-be-constructed/

The prognosis doesn’t look good. The EPRs being built in Finland and France are both heavily over-budget, each now being expected to cost around €8.5bn, up from the original €3-3.5bn estimates, in part due to extensive delays- the projected completion of Flamanville has been delayed by yet another year, to 2017, and the Finnish project is now expected to be competed by 2018, 9 years late. This adds to the financial woes of EDF and the French nuclear construction company Areva. All of which means it’s far from certain if Hinkley EPR will get built on time and to budget, even assuming it goes ahead.

Having reviewed the UK nuclear story in some detail in this post, in my next post I will look more briefly at the global situation, before getting back, in subsequent posts, to looking at how renewables are faring in the UK and elsewhere – they did manage to supply over 15% of UK electricity last year. And according to DECC they are popular: in its Sept 2014 public opinion poll, while 42% backed nuclear, 78% backed renewables. But there are problems there too. Welcome to 2015!

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