One of the pleasures of writing a blog is that one can re-visit one’s own thoughts on a subject.
First some light relief: I opened with:
So the UK is finally ready to embark on building some new nuclear power stations. I – like most people – don’t know whether this is a good thing or a bad thing. But I do feel a sense of relief that we have finally made a decision.
Ha Ha Ha. Nearly three years on and we have still to make up our mind.
Back in 2013, newspapers and commentators seemed resigned to the inevitability of the contract.
Now, given the significant fall in energy prices worldwide, they portray the project with much greater contrast: some calling it a white elephant, and others an essential piece of national infrastructure, all the while prevaricating on whether it is a good idea or not.
What has not changed much are the numbers. Back then I wrote:
The power station, planned to begin operating in 10 years time in 2023, consists of two massive plants each generating 1.6 GW of electricity. The build cost is estimated to be £16 billion which French and Chinese government-owned companies will invest. Yes, this really is an investment backed by foreign governments.
The start date is now shifted to 2025 and the estimated build cost has increased to £18 billion.
However what is not made clear in many news stories is that the UK (government, taxpayer or electricity consumer) still does not have to pay one penny of this.
The gist of the deal is that these foreign governments take all the risk in return for a premium on the price of the electricity they produce. And the risk is substantial.
- Construction of the first reactor of this type at Olkiluotu in Finland began in 2005 and the reactor is still not operational. Currently it is ‘expected’ to begin generating in 2018.
- Construction of the second reactor of this type at Flamanville in France began in 2007 and the reactor is still not operational. Currently it is ‘expected’ to begin generating in 2018.
Both projects are billions of euros over-budget, and the ‘expected’ start dates are questionable. The Hinkley Point C project is larger than either Olkiluoto or Flamanville.
Considering only the financial aspects of the deal, whether it makes sense or not depends on the size of premium we have promised to pay when account is taken of:
- the investment required (£18 billion)
- the length of time before the investors make any return (>10 years),
- and the risk (substantial)
So how much have we promised to pay them?
If the plants operate for 90% of time generating 3.2 GW of electricity then the guaranteed minimum income for the plant is £2.3 billion per year. Subtracting the operational costs – typically relatively low for nuclear plant – then after 10 years of no income and substantial risk of construction problems and delays, the operators should generate around 13% per annum return on their investment every year for 35 years.
It has been argued that this electricity is as much as twice as expensive as the current price. So we are effectively paying a premium of £1.15 billion per year for the privilege of (a) not investing a penny up front; (b) not paying a penny if the project is delayed or fails to deliver; (c) having 60% of the contracts awarded to UK companies.
Does that represent good value? Back in 2013 I wrote:
I am not an economist, but in this context [this may not be] the best possible thing we could do. But it is probably not the worst either.
And I still think the same.
[July 30th 2016: Weight this morning 74.1 kg: Anxiety: Very High]