Why has Britain signed up for the world’s most expensive power station?

MPs owe it to the taxpayer to throw out the Hinkley Point deal

22 February 2014

9:00 AM

22 February 2014

9:00 AM

‘As part of our plan to help Britain succeed, after months of negotiation, today we have a deal for the first nuclear power station in a generation to be built in Britain.’ That was David Cameron in October, announcing that his government had reached an agreement with the French power giant EDF over the construction of two reactors at Hinkley Point in Somerset. The Prime Minister must have a funny idea of success, because the more we learn about the Hinkley deal, the more we can see that it is one of the worst ever signed by a British government.

Even the European Union can smell a rat. Last month, the European Commission published an initial report suggesting that the contract involves illegal back-door government subsidies to EDF, and will now carry out a full investigation. But it is already obvious that Hinkley is not a good deal for Britain.

According to the Hinkley contract, EDF and its partners will construct two reactors for £16 billion — that’s £8 billion per 1,600 mega-watt plant. The reactors are supposed to be up and running around the end of 2023. Either of these two key numbers — the £8 billion per reactor or the nine-year construction period — should have been enough to kill the project. Taken together they should have made EDF’s offer unthinkable. At £5 million per MW of capacity, Hinkley will be, by my reckoning, the most expensive conventional power station in the world. By way of comparison, a new gas-fired power station costs around £0.7 million per MW and takes two years to build. The price and the time needed for Hinkley have somehow doubled. In the initial proposal, the estimate was that it would cost less than £4 billion per reactor, and take about five years.

British Government Signs A Deal For New Nuclear Power Plant
Hinkley Point Photo: Getty

Full details of the commercial terms of the contract have not been released by the government, but EDF did provide its shareholders with some key details, which mean we can estimate its probable profitability. The numbers are eyewateringly attractive for EDF and its partners; not so good for the national purse.

The government has guaranteed that EDF would be able to sell the power from Hinkley Point at a price of £92.50 per MWh, which compares to a current wholesale power price of around £50 per MWh. You might think that, given inflation, such a hike is not so terrible. Think again. The £92.50 is in 2012 money: it will be inflated by the Consumer Price Index. If we assume that CPI inflation averages 2.5 per cent over the next decade, the price EDF will be guaranteed for its output in 2023 will be more like £121 per MWh, or £130 per MWh if CPI averages 3 per cent. Amazingly, the indexing continues throughout the 35 years of the contract. So by 2030 the guaranteed price would be about £150 per MWh.

Hinkley Point should be able to generate very healthy profits for EDF and an extremely attractive dividend stream. We calculate that Hinkley Point will produce annual profits before tax of up to £2 billion in its early years, rising to £5 billion by the end of the 35-year contract. Bear in mind that the combined operating profit of all the power stations owned by the so-called ‘big six’ energy companies in 2012 was only £2.1 billion.

The contract is structured so that EDF can recover the full value of its investment over the 35 years, even though the power station is likely to have an asset life of 60 years. We calculate that EDF and its partners should be able to extract £65 billion to £80 billion in cash dividends in addition to paying off all of the debt taken on to fund construction.

Based upon the financial information released by EDF, we calculate that the project should be able to earn an average annual return on equity of between 25 per cent and 35 per cent. As the European Commission pointed out, this seems a very high return given EDF has a government guarantee that it can sell its power at twice the current market price and is receiving £10 billion of financial guarantees, also from the government.

New nuclear stations don’t have to be so expensive. Late last year, Finland announced a deal to build a reactor that will be paid a power price of ‘less than £43 per MWh’. That is a staggering £50 per MWh less than Hinkley Point will be paid.By providing both a certain power price for Hinkley and £10 billion of financial guarantees, the government is effectively reducing EDF’s construction and operating risks by transferring them to the consumer and the taxpayer. Yet EDF is being allowed to earn the sort of high returns that a private company would expect if it was bearing all of those risks. This a clear case of socialising risk and privatising profits.

Prime Minister David Cameron visits Hinkley Point Photo: AFP/Getty

So why has the UK government agreed to buy electricity at twice the current market price and twice the price that Finland will pay? The main culprit is the 2008 Climate Change Act. This requires (among many other things) that the UK reduces its greenhouse gas emissions by 60 per cent by 2030. To achieve this, the government aims to move the electricity sector at breakneck speed from one that is largely based on fossil fuels, with some nuclear and some renewables, to one that is overwhelmingly based on renewables and nuclear.

To hit this self-imposed deadline, the government has decreed that a new nuclear programme must begin as early as possible, with the first reactors coming ‘on stream’ in the early 2020s. There was only one developer that could fill the breach in time — EDF. And EDF just happened to be offering the most expensive nuclear reactor in the world. If the government could have just waited a couple of years, it could have organised an open competition between various developers and thereby achieved a price much closer to that which Finland has agreed.

To meet an arbitrary environmental target, then, the UK government seems willing to lock future UK consumers into some of the highest-priced electricity in the world. The government is betting that world gas and oil prices will more than double during the time that Hinkley Point is under construction. If they don’t, it’s going to look like financial insanity.

Parliament has been promised the chance to scrutinise the Hinkley Point contract. If MPs do their job effectively, it is almost inconceivable that they will conclude this deal provides value for money. Our politicians should throw this contract out, and put in place a new nuclear programme based on open competition between multiple developers.

Got something to add? Join the discussion and comment below.

Peter Atherton works for Liberium Capital, which sponsored the Spectator conference ‘How do we Stop the Lights Going Out?’

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Show comments
  • rtj1211

    It’s rather like Arsenal fans paying £123 a ticket to watch Arsene Wenger give a raw untested French player a second start against the European Champions.

    It’s called the British kowtowing to brazen French self-interest.

    Why we stand for it is beyond me…….

  • Perseus Slade

    You know, they should factor the cost of insurance into the equation too.
    Right now the nuclear car is running virtually un-insured.
    Unsurprisingly, insurance companies won`t barge it with a touchpole.

  • The Laughing Cavalier

    Just plain stupid. Mad. French negotiators haven’t put one over the UK like this since Ted Heath gave away the farm during the EEC negotiations. Parliament should repudiate the whole thing.

  • greggf

    Perhaps Cameron’s PPE was no competition for the French Ingénieurs.

  • Dick_Turpin

    The “strike price” for this thing is £92.50 per MWh. I saw an article a couple of weeks ago that said offshore wind got up to £155/MWh with onshore at £120, and the inference (someone please correct me if necessary) is that these rates are being paid *now*. The article was actually about tidal lagoons, whose developers also want the £155 “offshore” rate.

    In this light, Hinkley C electricity comes up significantly cheaper per unit than wind, and of course its output is also available irrespective of the weather.

    What this appears, more than anything, to demonstrate is the way that the subsidy structures implemented largely by Miliband for ‘green’ energy have distorted the market to such an extent that new investment will not occur without them.
    If MPs are going to do us a favour and cancel anything on the basis of its ruinous economics, the figures seem to suggest that wind should be the one on the chopping block first.

    • dalai guevara

      You may shout all you like – Finland gets a similar deal half price, so does France. When will this nation understand that Berlusconi Britain lives? We just don’t want to know about the firm grip of old boys clubbery in our system. The waste is immense. A society with such an attitude towards finance and morality will not succeed. Nowadays the competition/ comparator markets are just too good…
      In the meantime the prices for renewables generation are coming down, efficiency ratios are rising and decentralised energy generation is taking off in a big way. Paying over the odds for old nuclear technology is just not on.

      • Dick_Turpin

        Eh? I’m not shouting and I don’t actually disagree with you, but aside from having a good rant I don’t see you proposing any alternatives…?

        Aside from pointing out that “old nuclear” stuff appears nowhere near as expensive per watt as most of the “renewable” technologies, the point I was making was that it is totally “not on” to pay over the odds for *any* of this stuff. Yes, the waste *is* immense, but simply saying that doesn’t change anything. If we’re going to see anything serious happen, the underlying causes need to be looked at. An old boy’s network is *not* the only cause.

        If potential investors in new generation technology see that we’re legally obligated to close existing coal stations and are desperate to replace them, we are effectively over a barrel and those in a position to get us out will play their hand as strongly as they can. That’s nothing more complex than simple business sense. What is your solution for dealing with the major supply/demand problem we’re going to be dealing with in a few years time?

        As far as old boy networks are concerned, anything specific you could tell us? Cameron’s father in law is majorly into onshore wind, but nuclear, the main Government-Industry link used to be Gordon Brown, whose brother is a director at EDF. Who else?

        • dalai guevara

          You too succumb to the pressure of confusing green with corruption? Why?
          Green is green, corruption is corruption.

          You voted unanimously in the House to set targets, no one else anywhere on this planet did. Now stop moaning and deliver or if you are broke change the targets again. What is wrong with you?

          • Daniel Maris

            The greenest economies like Denmark are certainly among the least corrupt in the world.

          • dalai guevara

            I don’t know but ‘fuel poverty’ just does not seem to feature there.

          • Daniel Maris

            Odd that…do you think possibly they have sensible policies addressing fuel poverty?

          • dalai guevara

            Why but in the eyes of some senile nutter spouting his gibberish here (you know who) one would be inclined to label them ‘socialists’. Good Lord, the devil, evidently…

        • mikewaller

          I am not an engineer but did work for the CEGB. My recollection is that part of the case for building Sizewell B was that it would be the safety reference case for a sizable “fleet” of PWRs. Did it prove, in the event, that that design was flawed to the extent that we have had to look to France instead?

          • Blazenka Hudson-trograncic

            No, the politicians bottled it. We are now behind the curve where we were once way in front, i know the first generation magnox were power plus bomb fuel reactors but firms like RR and Babcock can still make safe energy for Britain.

          • Bonkim

            RR & UK Babcock are not in the nuclear business and heavy engineering capacity in the UK now is nil. Much of power plant – thermal or nuclear will now come from overseas including China.

          • Daniel Maris

            You can’t give any guarantee that a nuclear power station is safe. For one thing they can be made unsafe via terrorist action – either through internal sabotage or external attack.

    • Bonkim

      No comparison – price of anything is what someone is prepared to pay.

    • Dimitar Mirchev

      You cant be MORE wrong about the prices of renewables.

      FIRST they are set by the same government that signed the Hinkley Point contract.

      SEDOND they are inflated in order the Hinkley Point to appear more appealing

      THIRD Brazil and USA hold auctions for new wind with strike price $40-50/MWh. Yea. That’s right – $40-50/MWh.

      FORTH the renewable feed-in tariffs are not adjusted with inflation and decline every year. So in several years even the inflated government FiTs will be way below Hinkley Point’s strike price

      FIFTH roof PV will produce chealer electricity than the grid even in UK in the near future. What will happen with the market when everyone has PV on their roof?

      • Beau Jeste

        Errr… my guess (and I want to go ‘off-grid’) is that they’ll cut FITS and impose taxes on people with them…

        • Dimitar Mirchev

          They cant preserve the grid as it is when everyone goes for self-consumption. Maybe if they embrace virtual self-consumption – you own a PV system or part of a PV plant some place else ( or part of a wind farm) and the utility threats it as if its on your roof. Google : virtual net metering.

          The question is – how will they distinguish a user that has low consumption from a user with PV for self consumption? Imo they cant.

          Big changes are coming and big changes means big losers – base load, nuclear, coal – they are the biggest ones.

  • James Allen

    Because they’re idiots. Next!

    • Dan Grover

      I´d love to agree with you, but the costs of setting up new, modern design nuclear reactors is just very expensive – the legal hoops they need to jump through, the local planning permission, the tight regulation on the designs allowed and their implementation etc. This is all a very lengthy process – as it should be. I´m very pro-nuclear and recognise it as being, in the long term, cheap, reliable and clean, but this relies on it being done properly. There are a lot of areas where I think the economy is over-regulated; I don´t think the building of nuclear power stations is one of them, and unfortunately, it costs a lot to build them. I´d love for them to be totally privately funded, but the reality is …. If there are legions of companies battering down the doors to build new power stations, why did we choose one with minimum prices and subsidies? Is it really just the most overwhelming boondoggle you´ve ever seen, or is it possible that this is genuinely the best offer? I don´t think that´s impossible.

      • James Allen

        No, my point is that we should let the market decide what power generation to build. If it’s nuclear, great. If not, what’s the problem with gas?

        • Dan Grover

          Because it´s energy and there are concerns that go beyond pure economic efficiency (and short term ones, at that). For starters, gas isn´t all that clean. It´s a lot cleaner than coal and oil, but less so than nuclear. Furthermore, nuclear requires much less in the way of importing raw materials from abroad, which means a) greater levels of energy independence, less giving money to nasty people like Putin and less being able to be held hostage by cabals and b) less fluctuations in prices caused by various events on the other side of the continent (or world). What´s cheaper now may not be cheaper in the future, where as this is less likely to alter with nuclear.

          But basically, energy is a key bit of infrastructure in our country, and – like motorways and the military – there are areas of our government that shouldn´t be determined *exclusively* by the cheapest option or the best bang-for-buck, because price isn´t the only consideration.

          • James Allen

            Sorry… whoah! Stop there. Nuclear “requires much less in the way of importing raw materials”? Except for the uranium, the technology, the investors, the companies and the know-how? Whereas gas comes straight out of the north sea and into our country.

            Gas is 2-3x cheaper than nuclear; of course the price of gas is subject to change, but it’s never going to be as expensive (when you account for nuclear waste) and we can diversify supplies.

            The point is the market can decide what is the best form of generation. And it will do it more cheaply and efficiently than the government; hence the reason we’re all conservatives…. Aren’t we????!!!!! I sometimes forget we have socialists on here, trolling…

    • Tom M

      I would like to agree with that too but some things just would never add up. You are correct that subsidies distort reality and should never happen ( one of the EU’s hobby horses. The French got told off for this a couple of years ago). But they do in some form or another always for political reasons.
      However, expected market returns? Astute business men take a calculated view of their market but lunatics like the greens or Miliband’s energy price freeze how do you cater for those when they come out of left field?
      Strong regulator? Have you ever seen one of those? Anywhere?

  • allymax bruce

    rUK will be paying the highest priced energy bills in Europe; if not the world. The tax-payer is funding the building of these new power stations, and, if you think the prices quoted now, will remain the same over the 9 year construction period, you’re very misled. The prices to build these new power stations will keep the tax-payer paying for them for the next 50 years; plus paying the highest energy bills in …

    • Blazenka Hudson-trograncic

      The politics is the problem, the engineering is great, radioactivity is the ‘greenest’ fuel unless we can get a fusion Tokamak to work.

  • PCAH

    What Cameron didn’t tell us is that he only wants the two Hinkley C reactors in order to disperse Sellafield’s huge stock of plutonium in the form of MOX fuel. Previous attempts at Sellafield MOX have been proved unworkable. A new plutonium policy must repatriate foreign stocks and adopt immobilisation techniques on site at Sellafield with no UK new nuclear build.

    • Blazenka Hudson-trograncic

      No , use the stored plutonium in FBRs.
      And i’m qualified to work with ‘open’sources.

      • PCAH

        What’s an FBR? If it’s another kind of nuclear reactor, forget it. The MOX fuel will still cause more problems than the NDA claims it might solve and the reactors would cost more to build than any electricity produced, never mind about the insurance,spent fuel and waste costs.

        • stevehem

          An FBR is a Fast Breeder Reactor. This takes Plutionium-239, one of the most problematic high-level waste isotopes, as a fuel. Apart from the French (and a few other mad nuclear powers) these have been considered far too dangerous to build since the 70’s.

  • phil
  • D Whiggery

    Both nuclear and renewables are simply not viable without huge subsidies and guaranteed price fixing.

  • Derrick Rows

    I’ve found this to be a useful antidote against the superstitions of today’s liberals and progressives, formatted for smartphones: http://www.amazon.com/dp/B0094KY878

  • Blazenka Hudson-trograncic

    Wind power has always been a con by the big firms making wind turbines (and their pocketed European politicians), not as big a con as ‘carbon trading’ (dreamed up by bankers ) but still not worth the money.
    As someone who used to camp at Kilve while they were starting to build Hinkley A i have never worried . Having visited a British submarine and stood outside the reactor i realise how compact and efficient a reactor can be. We have enough useless bomb cores to build a collection of FBR power plants as well.

    • Daniel Maris

      Wind power costs about 20% that of this nuclear power station.

  • Daniel Maris

    Nuclear power is way too dangerous for a small densely populated country to contemplate. We see damage the nuclear power incident in Japan did and continues to do. But it is also hugely, hugely expensive.

    If you are looking at non-green fuels, given all the cheap gas in the world, including potentially in this country, it seems a crazy choice.

  • FrankS2

    I may well have misunderstood this but… are we stumping up the money to build this thing? If so, why don’t we actually own it?
    And if it turns out that we can buy power more cheaply from elsewhere, will we still have to buy it from Hinckley?

    Do any other energy producers have a guaranteed market and a guaranteed price?

  • Bonkim

    I have to agree – is it because the French and the Chinese need to make a profit?

    UK power industry was destroyed post-privatisation of the industry, no one is now responsible to keep the lights burning or plan new capacity ahead – dribs abd drabs policies just don’t work and private industry will only come in if you promise an arm and a leg. No surprises there. Price of anything is what someone is prepared to pay.

  • slasha666

    The whole thing is completely nuts, as I said when this was first announced.

    We seem to enjoy getting shafted by the boys from Eton, may they be politicians or businesses leaders, in the end they’re all in it together.

    Love to know who has what shares and how many?

  • R Fairless

    I never thought to say it, but David Cameron is as harmful to the UK as Gordon Brown ever was. Two successive British Prime Ministers, equally stupid, engendering loss and poverty on our country. Whatever did we do to deserve them?

  • CaptD

    It is SAD, I guess this really means the ratepayers of the UK really have no say in their choice of what kind of Energy they choose to pay for, which is just like the people of Japan… I suggest that the people of the UK demand to find out what amount of Nuclear Payback* all the Leaders that support these Nuclear Turkeys are receiving, before it is too late!

    Those that support nuclear power because nuclear power somehow supports them; no matter what the health implications or other “costs” are for others.

    This money could be far better spent installing Solar (of all flavors) which would not only start generating 100% safe energy many years sooner and produce N☢ nuclear waste. This reactor Complex will make UK Energy far more expensive than it should be and only result in making the shareholders of the Utility richer for decades to come, if not generations!

    Looked at from another viewpoint, these reactors will insure that ratepayers are held in energy slavery to their Utilities, when other Countries with far more enlightened Leaders are going Solar (of all flavors) as fast as they can.

    * http://www.urbandictionary.com/define.php?term=Nuclear+payback

  • “Last month, the European Commission published an initial report suggesting that the contract involves illegal back-door government subsidies to EDF.”

    While on another page of the Spectator you can read an article asking why African countries are so corrupt, and why they can’t be more like us.

  • Hima Layan

    Since liberty’s survival depends upon the majority of citizens making it their primary objective, liberty has a limited chance of lasting if the mere existence of democratic processes is expected to preserve it.

  • Winslow Wilson

    Mark my words. They’re going to be sorrrrrrrry. Here in the US we came close to a Fukushima at San Onfre that could have heavily dusted San Diego and Los Angeles.

    It was shut down by court order and criminal investigations were made into the negligence, false reports, and other similar things that happened at Fukushima.

    The same thing happened at Fort Calhoun nuclear about 10 miles away from Omaha with a city population of about a half million people. A 3 year cold shut down was issued because of all the violations that could have had major catastrophic consequences if it the fools had not been caught.

    One accident by this industry is all it takes to take out every other industry in the wink of an eye.

    When it happens in the UK , they will get the same answers they are still getting right now in Japan…..”There is nothing we can do to stop it.” “We offer our deep regrets.” Meanwhile Fukushima the Giant, right now this very moment is flooding the Pacific Ocean with millions of gallons of radio active waste water. Its Billions of tons per week and it’s been going on for 3 years with no end in sight.

    Hopefully the UK will have a good river or ocean nearby their plant to handle a Fukushima type event. If not, the waste water will have to go somewhere. In any event… Don’t eat the fish if it goes into a river or ocean. Hopefully people are that aware. I really have to wonder though, when people actually invite this industry into their area.

    But then again the nuclear spin doctors are very good at convincing folks that they don’t have anything to worry about even after an accident. I do notice however that they themselves stay out of the 1,000 square mile restricted zone or mutation zone or whatever the zone is called around Chernobyl.

    Hopefully there’s a thousand square miles around the UK reactor that the people could afford to give up and move away from.

    Like I said in the beginning “They’re gonna be sorrrrrrry.” Fukushima The God is still rolling.