On Wednesday 8 October, the European Commission, by a very narrow majority, approved the UK’s state aid package for EDF’s proposed 3,200MW nuclear plant at Hinkley Point C.
There were a few adjustments to the terms of the deal, but although the modifications pare back the projected long-term rate of return, they do not constitute a deal-breaker. For both the British government and EDF the ruling brought mighty relief, but there remain further hurdles to surmount before construction can begin in earnest.
Crucially, as EDF digests the implications of the approval, it still has to make an irrevocable investment decision. Much will depend on the proposed Chinese partners, CNNC and CGN, and their readiness to provide investment funds.
As for the financial markets, there was little obvious reaction to the Commission’s ruling. For varying reasons, notably the European Central Bank’s continued disinclination to provide stimulus to the weaker eurozone economies, leading European shares drifted downwards last week. EDF’s shares followed this trend.
Furthermore, the Commission’s ruling had been widely flagged for some weeks and, of course, it is just one element of a complex jigsaw to deliver the UK’s first new nuclear plant for a generation.
Nonetheless, the scale of the project is vast, even with substantial Chinese participation. Hence, any material financial developments may well have an impact on EDF’s share price, although its key driver remains the operating returns from EDF’s French-based nuclear fleet.
The total cost over the estimated ten-year construction period is now £24.5 billion. This sum includes both interest and inflation. Compared with previous figures, which were essentially construction costs, this latest estimate represents a substantial uplift.
Undoubtedly, the European ruling is controversial, since the inflation-proof 35-year £92.50 per megawatt-hour price guarantee – almost twice the prevailing unit price for electricity – represents a monumental long-term subsidy.
Not surprisingly, Greenpeace has expressed its unequivocal opposition to the ruling. Its legal adviser, Andrea Carta, stated that “there is absolutely no legal, moral or environmental justification for turning taxes into guaranteed profits for a nuclear power company”.
Within mainland Europe, the Austrian government has indicated its intention to refer the contentious ruling to the European Court of Justice. In effect, it argues that, compared with the financial support available to renewable projects, the state aid for the Hinkley Point C project is manifestly wrong.
The Czech Republic and Poland, with further nuclear ambitions of their own, will be monitoring developments closely, especially in respect of the amount of state aid regarded as permissible.
Irrespective of the robustness of the strategic case for new nuclear, the fact is that £24.5 billion for 3,200MW of new capacity is horrendously expensive, and certainly compared with the construction cost of 3,200MW of gas-fired capacity.
Whether the Hinkley Point C state aid package is over-generous will only become apparent over time, assuming that EDF takes the critical decision to invest.
Nigel Hawkins, director, Nigel Hawkins Associates