Strike it lucky?

So a nuclear strike price for Hinkley Point C has been agreed between the government and EDF, but is it a good deal? Dan Roberts crunches the numbers.

Last week the government agreed a price with EDF for the output of Hinkley Point C. The deal guarantees the company £92.50/MWh for the proposed new nuclear plant for a 35 years (with a small reduction in price if EDF builds a second nuclear plant).
Debate has raged over whether this is the “right” price. No matter how detailed the assessment from the Department of Energy and Climate Change (Decc), the truth is that no-one really knows. But what evidence there is makes the price look reasonable.
Decc has just updated its estimates of generation costs. It says the numbers should not be considered a guide to strike prices, however their central estimate of £90/MWh, based on a 10 per cent real pre-tax return, is close to the announced figure. The key element in this central figure is the overnight construction cost, estimated as £4,100/kW for a first of a kind plant (excluding pre-development costs of £210/kW). Decc’s high case is around £4,600/kW, and its low case £3,700/kW.
EDF’s proposed plant will be an EPR, a design that is already being built at Flamanville in France and at Olkiluoto in Finland (as well as in China). Both the European projects have suffered delays and cost increases. EDF originally expected Flamanville to cost €2,000/kW, but in late 2012 it revised the cost up to €5,000/kW (just over £4,000/kW at today’s exchange rate). It will be four years late coming on line.
The US Energy Information Administration’s 2013 estimate is $5,530/kW (£3,435/kW) for a third generation PWR. Although this suggests a significantly lower cost, no new projects have yet been completed in the US, so there is no proof that the lower costs can be delivered.
Numerous other international data sources exist, some quoting much lower numbers, but these are often for countries with very different planning and safety regimes, and so are unlikely to be reliable benchmarks.
On these numbers, Decc’s strike price does not look out of line. That does not mean the rest of the Decc proposal is the best it could be. EDF has been guaranteed a price for 35 years, which leaves customers bearing wholesale risk. However, since many wholesale price drivers are politically driven (the carbon price and renewables subsidies), there is some logic here. The deal does leave EDF in a good position, since it guarantees it against all wholesale price movements, including that of gas.
We are where we are. The way policy has been developed, the government can only review the best evidence it has, set a price and see what happens. Steps one and two are complete: now only time will tell.

Dan Roberts, director, Frontier Economics