With seemingly endless discussions about the nuclear strike price and its duration, notwithstanding reported job losses at Hinkley, there are increasing fears that EDF Energy will walk away from this key £14 billion new nuclear project.
After all, EDF, over 80 per cent of whose shares are owned by the French government, already has net debt of around £34 billion. It is desperately seeking a major investor partner, who – after Centrica’s withdrawal – seems to be highly elusive (although the recent co-operation agreement with China’s Guangdong Nuclear Power Holdings may provide a much-needed breakthrough).
If EDF does back out, which would be a grievous blow, what next? Initially, the government may focus on Hitachi, which declared a real interest some months ago and would be the only new nuclear player still standing. But the company’s boiling water technology would represent a fundamental deviation from the Areva/EDF model.
Importantly, following the recent general election, the revival of Japan’s nuclear industry is now under way as the post-Fukushima panic has subsided. Hence, there will now be more domestic opportunities for Hitachi. Furthermore, if EDF deems the UK government’s final subsidy terms insufficiently attractive, it is difficult to see how any other potential private sector investor would take a radically different view.
So what is Plan B?
One option for the government would be to simply throw in the towel for nuclear new-build, implicitly accepting the lead of Germany by deciding to exist in the long-term without nuclear electricity. A similar policy has been adopted by Italy, Switzerland, Spain and Sweden among others.
Such a policy would necessitate a far greater reliance on gas-fired plants for new baseload generation. In effect, this would be a “one-club” strategy, which greatly enhances the inherent risks of rapidly escalating gas import costs even if the requisite gas supplies were available. The risk of serious transport-related interruptions, exemplified by the persistent Russian/Ukraine arguments, would be very real.
Under current legislation, old coal-fired plants, such as Didcot, are being closed down – a ludicrous policy given the uncertainties about long-term UK baseload plant. Theoretically, it could be reversed, although the political and legal ramifications would be complex.
Another option would be to extend further the lifetimes of existing nuclear plants, although there is inevitably a finite limit to this policy, which might need a sudden reversal in the event of a serious fault.
Renewables are set to surge, but given their pronounced intermittence, they will be of little use for satisfying baseload demand.
The goal posts could be moved, of course. Given the recent collapse of the carbon price, both the European Union and the UK may revisit their carbon reduction policies. If major reforms were agreed, there could be more scope for fossil-fuel generation to replace the expected long-term contribution from new nuclear.
Or the government could adopt the view that new nuclear is vital and that, if the private sector refuses to invest, then the public sector will have to fill the breach. After all, the construction of the last UK nuclear power station at Sizewell B was led by the Central Electricity Generation Board (CEGB), an all-powerful public body whose abolition resulted from the privatisation of the electricity supply industry in the early 1990s. Once Sizewell B was commissioned in 1995, it became a core operating division of the privatised British Energy.
It is perfectly feasible for the government to set up a quango – a nuclear CEGB – whose specific remit would be to deliver new nuclear power stations. The most recent template for such a policy would be the two high-speed railway projects, HS1 and the immensely controversial HS2.
In the case of HS1, the building of the Channel Tunnel Link between London and Kent was undertaken by the public sector under the stewardship of the Department of Transport. Quite simply, public money was used to build a line that was broadly delivered to time and budget at a cost of around £6 billion. HS1 was subsequently the subject of a 30-year lease to the private sector at a far lower figure of circa £2 billion, thereby incurring a substantial loss for the taxpayer.
HS2 is a very different kettle of fish. Phase 1, which will not begin for years and is due for completion in 2025, is a project to build a high-speed link from London Euston to the West Midlands. At £18 billion it more expensive than the £14 billion cost of Hinkley Point C. While HS2 is mired in controversy, there is no suggestion that either Network Rail – with net debt of £28 billion – or any of the major rail companies, such as Stagecoach, should manage the project. The government plans to do so.
Extrapolating this approach to Hinkley Point C, a new quango – Nuclear New-Build (NNB UK) – would assume control of the project and issue tenders to the vast number of interested parties. Clearly, many major private sector companies, including Areva and EDF Energy, would become involved in delivering a highly complex project where the risks of serious time and budget overruns would be considerable. No doubt detractors would quote recent financial disasters on the modernisation of the deep Tube lines as ominous precedents and say NNB UK would end in tears.
On the financial issues, which might well be the straw that breaks EDF Energy’s back, four specific points are relevant. First, to allay Treasury concerns, the costs of NNB UK’s capital expenditure could be kept off the public sector net debt balance sheet in the same way as Network Rail’s debt is treated for accountancy purposes.
Second, ten-year government gilts have been trading in recent years at around 2 per cent – a remarkably low yield that inevitably will be driven upwards when international interest rates rise. Nonetheless, such rock-bottom borrowing rates are very attractive.
Third, NNB UK may provide a real opportunity for the recently inaugurated Green Investment Bank to play a pivotal financial role, both in drawing up and managing the complex financial arrangements.
Lastly, some of the planned output from NNB UK’s plants could be sold forward to supply companies on attractive terms. This would help underpin the project’s finances. Alternatively, an obligation to buy part of the output – at preset prices – could be prescribed.
Any government would be extremely reluctant to go down the risky path of sanctioning public sector management of nuclear new-build, especially a Conservative-led administration for whom it would represent a massive U-turn on electricity privatisation. But if EDF Energy withdraws and new nuclear plants are deemed essential, as one recently deceased prime minister once put it: “There is no alternative.”
Nigel Hawkins is a director of Nigel Hawkins Associates which undertakes investment and policy research
This article first appeared in Utility Week’s print edition of 10th May 2013.
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