HinkleyPoint C (HPC) is a nuclear power station based on the French EuropeanPressurised Reactor design, code-named the EPR1. The project involves thecommissioning of twin 1,600 MW reactors which will ultimately deliver a final outputof 3,200 MW (3.2 GW).
Theplant is being constructed in Somersetby developers, CGN (China General Nuclear Corporation) and EDF. The plant couldmeet up to 6% of the UK’s electricity needs. However, itshould be pointed out that this output is predominantly inflexible base-loadwhich cannot be used to balance swings in demand or to off-set changes in renewablegeneration. Nonetheless, with seven of the UK’s eight remaining reactors duefor retirement soon, base-load as well as peak-load generation will be required,especially where it is ‘low carbon’.
Background
HPC’s building programme has been dogged by delays. Although similar delays have been reported at the two other sites where EPR1 reactors are being built, at Olkiluoto in Finland and at Flamaville in France, both of them started construction before Hinkley and each should have been working by now. Such have been the delays and the extent of cost over-runs at EDF’s Flamaville plant in Normandy that France’s own National Assembly voted this year to block any new projects, in France, based on the EPR1 design. Possibly awaiting an alternative design (code-named the EPR2) which the same French manufacturer, Areva, is understood to be working on; of modular construction and mooted to offer enhanced construction reliability and reduced costs.
The UK meanwhile isbelieved to be advancing its discussions with EDF and CGN over final consentand government support for a second new-build nuclear power station project,this one at EDF’s Sizewell plant, based on the same EPR1 still underconstruction at Hinkley.
Subsidy Arrangements
The HinkleyPoint C project will include the developers being paid a guaranteed strike price,giving rise to a surcharge added to consumer bills. This is revised every sixmonths but in upwards-only movements, as will be discussed shortly. This directfunding part of the government support is based on the Contract for Differences(CfD). This provides for a surcharge to be added to consumer bills under the 35year term agreement, payable from the time that the plant starts to produceelectricity, a date now expected to near the end of 2025. However, the strike priceitself (£89.50/MWh in 2012 prices) is calculable from the date of the originalsigning of the heads of terms. In other words, the strike price against whichthe subsidy is calculated (vs. the wholesale market price for base-load) has alreadystarted rising, backdated to October 2012, and will continue rising forthwith everysix months.
Unusuallyit was agreed that the operative strike price be linked exclusivelyto inflation or the consumer price index (CPI). Equally unusually, it was alsoagreed for the indexation to be bi-annual rather than yearly. Consequently, ifHPC were to start generating in 2025/2026 as now expected and it fulfils its 35year contract term at or around 2060, the strike price will have increased withinflation over 95 times, in upwards-only price revisions, carrying forwardand compounding spikes in or periods of inflation along the way.
CFD – Possible cost to consumers
This articlewill not detail the various scenarios being modelled and refined just now.However, it will offer the reader a simple estimate, a ‘present valuecalculation’ if you like, of the expected minimum cost to the UK consumers, orthe direct subsidy element of the Contract for Difference contract which wasoriginally negotiated and, after a rethink, was finally signed off in 2016.
The cost estimate givenbelow is based on a provision calculation only. The figure is also basedon a comparatively limited and a ‘historically low’ period of inflation. The finalvalue of the CfD to the developers will remain sensitive to the CPI index, beforeHPC comes online as well as thereafter. Justnow, our compound inflation model and calculations currently estimate that theextra cost to bills by way of the CfD will be £80 billion, in today’s money.
The initial estimate givenlooks at direct UKfunding only. It does not consider indirect nor unquantifiable costs, such as loanguarantees backed by the Treasury or potential other ‘de facto’ contributions bythe taxpayer towards the construction costs or insurance, nuclear waste disposaland final decommissioning of the nuclear power station itself.
Secondary Costs
Ofcourse, the estimate is of the cost of CfD subsidy only. It excludes the actualcost of the electricity generated which will be traded on and repurchased offthe wholesale market in the usual way. If we wish to include the ‘final cost’ ofthe electricity volume and add that to the cost of the price support then the ‘allin’ cost of the project rises to £109 billion. In fact, this second estimate iseasier still to calculate accurately because constantly-changing electricity marketprices are now absent from the calculation. This ‘all in’ calculation is then asimple case of multiplying the inflation-adjusted strike price (in £/MWh)by the output (3,200 MW) of the power station and by total running time (inhours) of the 35 year contract, adjusted for load factor to be conservative.
TheCfD surcharge is an item that is already present in business and household electricitybills today, providing support for renewable projects generally. However, thisquotient will be a ‘step jump’ once HPC and possibly other nuclear plants startup in the years ahead.
Negotiationswith the developers had been temporarily suspended whilst the project wasreassessed in 2016 and the agreement was re-negotiated amid industry and also publicconcern about the perceived ‘overly generous’ terms afforded to the developers.However, the project was finally signed off. Most changes made to the contract werein fact only peripheral and other still not totally clear now.
Followingthe renegotiation, the strike price was reduced, from £92.50/MWh (at the 2012 basedate) to £89.50/MWh. However, it was agreed that the base date (to whichthe strike price is indexed) will remain the same, in spite of delays and muchfirmer power market, so operative strike prices will still be backdatedto the 4th quarter of 2012, rendering the headline reduction in strikeprice quite superficial in mathematical terms. More to the point, the bi-annualindexation to CPI provision also emerged from the discussions unscathed beforethe final contract was signed off.
Part II of this article will put forward a costs scenario analysing the possible costs of the arrangements set out above.
About the Author
Dominic Whittome is an economist with 25 years of commercial experience in oil & gas exploration, power generation, business development and supply & trading. Dominic has served as an analyst, contract negotiator and Head of Trading with four energy majors (Statoil, Mobil, ENI and EDF). As a consultant, Dominic has also advised government clients (including the UK Treasury, Met Office and Consumer Focus) and private entities on a range of energy origination, strategy and trading issues.
Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.
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