As the long-awaited strike price for new nuclear power was announced on Monday, the big question for the government and EDF’s executives was: is it
good value?
That question is one that divides the energy sector. Renewable generators worry that nuclear support could divert a big chunk from the budget available to them. Whereas renewable costs are coming down, critics say nuclear costs tend to go in the opposite direction, largely due to increased safety requirements. Meanwhile, the value case for low-carbon generation as a whole depends on rising gas and carbon prices, which is by no means guaranteed.
Nuclear power can, however, offer low-carbon electricity at a stable price and at a scale renewables would be hard pushed to match.
This week energy secretary Ed Davey sat beside EDF bosses and sought to assure the public they were getting a fair deal. The headline is a “strike price” of £92.50/MWh for 35 years at Hinkley Point C, nearly twice the current wholesale power price. Whenever the wholesale power price falls below £92.50/MWh, customers will make up the difference. If the wholesale price rises higher than level, the generator pays back the excess.
The price is inflation-linked for the duration of the contract, despite most of the cost being incurred upfront.
Customers will not pay for the power until the plant starts generating, which is scheduled for 2023. Davey says it will have a “negligible impact” on bills in 2023 and the Department of Energy and Climate Change (Decc) estimates that building 10GW of nuclear will cut the average household bill by £77 in 2030 compared with a scenario with no nuclear power. That is because it reduces dependence on gas, which is forecast to become more expensive.
Davey admits it would be “absurd” to treat that estimate as a guarantee. “You want me to guarantee there will be £75 off bills. I can’t guarantee that, of course I can’t.
“The whole world of energy is full of uncertainties. What is the gas price going to do? How fast will the cost of offshore wind come down? Will carbon capture and storage be viable this decade? We have to manage those uncertainties.”
He said it would be “risky” to depend on gas and there would not be enough renewable power to fill the capacity gap. “This deal is cost-competitive with onshore wind at the moment and it would be quite a brave person to suggest we could produce the power coming from Hinkley Point C with wind turbines.”
Indeed, Decc claims it would take a 250,000-acre windfarm to produce an equivalent output to Hinkley Point C.
Davey talks up a “gainshare” arrangement, by which investors will split with customers any significant windfalls from underspending on construction, refinancing or equity sales.
He also points out that investors will bear the risk of construction overruns. That is not trivial, given that the EPR technology to be used has a poor track record. EPR plants in Finland and France have faced substantial and costly construction delays.
“We are hugely incentivised to deliver in time and under budget,” says EDF Energy chief executive Vincent de Rivaz.
The strike price may be adjusted, either up or down, to reflect changes to certain costs such as network charges, business rates and taxes.
It covers the full cost of decommissioning and an unspecified share of waste management costs. “With the clean-up costs included at the outset, we will avoid the mistakes of the past, which we are still paying for,” says Davey.
There are also measures to guard against a political U-turn further down the line. Any future government shutting the power station down without a pre-approved reason must compensate investors for their expected equity return.
De Rivaz says that new nuclear plants will give the market “more stability, more certainty, more visibility”, and that this will help limit future price rises to consumers. “In the long term,” he says, “this project and others will bring certainty for investors and stability for customers.”
The deal also includes a surprise sweetener for the government, in that if EDF Energy builds a second new plant, Sizewell C, it will reduce the Hinkley C strike price to £89.50 on the assumption it can share first-of-a-kind costs between the two plants. That depends on a deal being successfully agreed for Sizewell, and in a timely fashion.
Davey says negotiations over Sizewell will “hopefully not be so protracted” but the deals will be different. “There is no way they will be identical and let me just tell my EDF colleagues, we will be looking for a much lower price.”
For EDF, the offer is a sign of confidence in the UK’s plans for a nuclear fleet. De Rivaz says: “We believe the UK government has a clear ambition to develop a nuclear programme and we want to be part of it… It is important that we show that we believe the cost of the next EPRs after the first will be lower and it will clearly be the case.”