Hinkley C: An alternative response

My earlier article on Hinkley Point C received a well-conceived and written response that deserves to be somewhere better than a comment page: here it is:

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.

I basically agree with everything you are saying. And if I had had the time I might already have written some of it myself.

However the point of the article was that in narrowly financial terms, this deal isn’t as insane as it is being made to sound.

Concerning Plans A and B, here are some other thoughts.

  • If we want nuclear power, then the current EDF design is one of the very few options available. The real missed opportunity here is that the decision to build was delayed so long that the option for using UK technology was lost.
  • Like you, I find the government’s aversion towards state ownership bizarre. How can it be OK for foreign governments to own our infrastructure, but not the UK government? That is just bonkers. As you say, if this is critical infrastructure then the owners of the infrastructure – the Chinese and French governments – will be able to hold us to ransom in the future.
  • Assuming the project goes ahead, then – taking a positive view – the government will have freed up the capital resources to invest in what I think is the real challenge facing us: integrating energy storage into our generating mix. But that is a story for another evening.

Thanks for your thoughts.

Michael

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[August 1st  2016: Weight this morning 73.4 kg: Anxiety: Very High]

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