Posts Tagged ‘Hinkley C’

Hinkley C: An alternative response

August 1, 2016

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]

Hinkley C: Is it a good deal?

October 21, 2013
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? Click for a larger view. Image from AREVA – see link at end of article

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.

My thoughts consist of three tangled strands concerning the price of electricity; the wider issue of energy costs; and the barely mentioned issue of carbon dioxide emissions. For this evening, let’s just look at the costs.

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 ‘strike price’ is the guaranteed minimum selling price of electricity generated by the stations and the figure agreed with the government is £92.50 per MWh – with the possibility that the figure will drop slightly if further reactors are built. This is equivalent to 9.25 pence per kWh – the electricity units on our electricity bills.

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 10% per annum return on their investment for 35 years.

Is the ‘strike price’ right? Well I obviously don’t know, but it is interesting to compare it with the current wholesale price of electricity which is quoted to be around  £55 per MWh. This price is dominated by the price of coal  which (as I write) is generating 43% of the UK’s electricity. Coal is not in short supply worldwide but it does emit lots of carbon dioxide into the atmosphere: nearly 1 tonne for every MWh of electricity produced.

The guaranteed  price of offshore wind power is currently £155 per MWh, although this will fall to £135 by 2018. Onshore wind is currently guaranteed £100 per MWh, falling to £95 in 2018, with large solar farms getting £125 per MWh, due to fall to £110 per MWh by 2018.

I am not an economist, but in this context £92.50 per MWh doesn’t seem a crazy price for electricity which has very low associated carbon dioxide emissions. That doesn’t mean that it’s the best possible thing we could do. But it is probably not the worst either.

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