Hinkley Point C: What should we think?

A schematic diagram of the European Pressurised Water Reactor to be built at Hinkley Point. What could possibly go wrong?

A schematic diagram of the European Pressurised Water Reactor to be built at Hinkley Point. What could possibly go wrong?

One of the pleasures of writing a blog is that one can re-visit one’s own thoughts on a subject.

Given the current turmoil around the contract for the Hinkley Point C nuclear power station, I was interested to read what I had thought about it 1014 days ago back in October 2013.

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]

Advertisements

2 Responses to “Hinkley Point C: What should we think?”

  1. countcharlie Says:

    Hi Michael
    I am no economist either but I will make a few comments on your article about the Hinkley C project. Your conclusion is that overall the project is neither the best thing nor the worst thing could do and therefore sort of Ok. This rather equivocal judgement is made on the basis that the ongoing cost (of £1.15 billion p.a. for 35 years) is probably worth the price because it frees the UK government is from any upfront investment or later costs due to failure or delays. I think this is a very naive view.

    This project aims to provide at least 7% of the nation’s power. As far as I am aware the UK government has no Plan B to meet this energy gap. This makes the Hinkley Point C scheme simply “too big to fail”. And if it falters or fails it will be for the UK government to salvage it regardless of contracts agreed at the beginning. The deals will be renegotiated when problems arise and the government / nation needs this power so it cannot just walk away or buy an alternative power station off the shelf.

    The situation strikes me as analogous to the Private Finance Initiative (PFI) used to build public sector infrastructure for the last few years. This was sold as a wonderful risk free way of financing new hospitals and schools by using the private sector. Certainly new infrastructure has been built (though often not what was wanted) but at enormous cost which will cripple the public sector for decades. The scheme was devised to avoid government borrowing (even though the costs of this are much lower that for the private sector) but still has to be paid for year in & year out. (It is estimated that the UK owes £222 billion to banks & businesses via the PFI. (The Independent 11 April 2015)

    By seeking to avoid public borrowing to finance Hinkley C the government has made a political and ideological choice which reduces it’s control (through lack of ownership), inflates the cost (even if kicked a few decades into the future) and does nothing to reduce the risks (because the government / nation really needs this energy so has no choice but to stick with it).

    Best Wishes
    Charlie

    PS
    It is also the case that the UK government has explicitly underwritten £2 billion of costs through the Treasury’s (infrastructure) Guarantee Scheme. This was announced by George Osbourne on a visit to China in September 2015 as an incentive to get the Chinese to invest in the project. EDF itself, in its own press release on the deal refers to “further amounts [being] potentially available in the longer-term.” So there is real chance that the UK government will increase the amount of the project it will explicitly underwrite.

  2. Hinkley C: An alternative response | Protons for Breakfast Blog Says:

    […] Making sense of science « Hinkley Point C: What should we think? […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: